As the late former Labor Minister Peter Walsh said in 1997, a ‘fundamental principle of responsible government in any system is that each government must raise the money that it spends.’ However, for a long time now, states in Australia, which have the most responsibility for public expenditure, are dependent on the federal government, which have the most powerful tools for levying taxes.
Accounting for approximately 45% of total Commonwealth government revenue, income taxes are the biggest taxation tool at the Commonwealth’s disposal. It is this tax power, which, if returned to the states, would do more than anything else to address the gross imbalances in the Australian federation.
This is why it was so encouraging to see a government backbencher include a proposal for an income tax sharing arrangement between the federal and state governments in this IPA Review article. Liberal MP Dr Peter Hendy’s bold plan would split the $37,000-$80,000 tax bracket between the commonwealth and the state of the taxpayer:
Currently that tax bracket attracts a tax rate of 32.5%. So a change would mean that for taxpayers in that bracket they would actually have a 22.5% federal income tax and a 10% [state] income tax.
Treasury calculated that this 10% state income tax would raise $25 billion. The NCA shows that this would allow the federal government to completely withdraw from all education funding, public housing projects and a large number of National Partnership Agreements.
Dr Hendy’s essay forms a compelling argument for reforming the federation, and a forceful reminder that the problems of the states can be solved without raising the tax burdens of individuals.