Ideas@TheCentre
Paying for the floods
The federal government's proposed flood levy comes just two weeks after the Brisbane River peaked. The kindest thing that can be said about the levy is that it is premature when the cost of the floods can only be guessed. More bluntly, it is a politically opportunistic tax. Despite its beguiling label, the levy is a tax increase like any other tax increase.
The government knows there is a political imperative to act immediately to create a plausible link between the floods and a tax increase. The federal proposal stands in contrast to statements by Brisbane’s Lord Mayor that he will not put a levy on council rates and by the Queensland Treasurer that he will not increase state taxes. There is another way of paying for the floods: cut or defer other government spending. The Gillard government is doing some of this, but only enough to cover two-thirds the estimated cost.
Gillard and Swan stress the need to achieve a budget surplus by 2012–13. This is a political necessity as much as an economic one but in any case, the levy has little to do with 2012–13. It applies for one year, 2011–12, and will raise most of the estimated $1.8 billion in revenue in that year. Likewise, flood-related Commonwealth outlays are one-off, and most of the money will be spent before 2012–13. The levy actually affects 2011–12, when no surplus was promised anyway. The total Commonwealth budget for 2011–12 will be more than $350 billion. Surely, within this envelope, the government can manage the cost of the floods without increasing its revenue by another 0.5%.
The real issue is that even before the floods came along, the Gillard government had to exercise fiscal discipline, which it knew and still knows will be needed to accommodate the resources investment boom. Getting away with any tax increase will make that task easier. This is the true purpose of the flood levy.
There is a track record of opportunistic 'levies' imposed by the Howard government, but that doesn’t make them good tax policy. Such levies – usually spuriously linked to popular causes – are a political device to increase taxes while pretending not to, and to, avoid the harder work of curbing government spending. I have written chapter and verse on what is wrong with these levies in CIS Policy Monograph 75, Tax Earmarking – Is It Good Practice?
The flood levy will discourage private donations and many people will see it, rightly or wrongly, as a tax to bail out the uninsured. Gillard and Swan can go on all they like that the levy is only for public infrastructure, but this is jam-jar accounting. A tax dollar is the same as any other.
Instead, the government should shelve this tax increase and concentrate on achieving fiscal discipline by curbing expenditure in the May budget.
Robert Carling is a Senior Fellow at The Centre for Independent Studies.
