Taxing Australian federalism

The Howard Government heralded its New Tax System (ANTS) and the Goods and Services Tax (GST) as a major reform of Australia's taxation system that would also enhance the financial capacity of Australia's states and territories to provide community services.

It was claimed these reforms would arrest the erosion of states' and territories' fiscal capacity, which occurred with the Commonwealth expanding its role in the social and economic affairs of the nation over the course of the 20th century. In reality, ANTS and the GST have done exactly the opposite. Furthermore, recent comments from the Federal Treasurer suggest these reforms will provide the means by which the Commonwealth strengthens its control over state and territory finances, and as a consequence, their policy and budgetary priorities.

As such, ANTS has been yet another manifestation of the “creeping centralisation” within the institutional design of the Australian federation, a dynamic which continues to be the dominant force shaping the relationship between the Commonwealth and the states and territories. For contrary to the claims of the Commonwealth, ANTS and its embedding of the GST at the core of the complex set of financial relations at the heart of Australian federalism is further diminishing the fiscal autonomy of the states and territories by making them increasingly reliant upon a revenue source over which they have no control.

The fiscal dominance of the Commonwealth

As well as enhancing the Commonwealth's budgetary position, the implementation of ANTS has reinforced the Commonwealth's fiscal dominance within the federation as the responsibility for revenue collection is being further centralised with the Commonwealth. As shown in the following table, the Commonwealth collected 77.6 per cent of total Australian taxation in 1999-2000. Since the introduction of GST, the Commonwealth share of total taxation collections has remained in the range of 81.5 per cent to 81.9 per cent. Over the same period, the proportion of total taxation collected by the states and territories slumped from 19.5 per cent to less than 16 per cent, with the share of total taxation collected by local governments remaining steady at around 3 per cent.

Australian Taxation - Proportion of Total Taxation Raised by Tier of Government 1998-2004

State and territory revenue

As the Commonwealth assumes a greater level of responsibility for raising revenue within the federation, the states and territories are becoming increasingly reliant upon Commonwealth payments to support their expenditure programs. The change in the structure of the states' and territories' revenue base since the introduction of the ANTS reforms can be clearly seen in the following graph, which shows the growing importance of grants and subsidies, overwhelmingly Commonwealth transfers to state and territory budgets.

State and Territory Governments - General Government Operating Statements (Revenue) 1999-2004

Source: ABS Government Finance Statistics 1999- 2004 Cat. No. 5512.0 

Controlling the agenda: Section 96

The increasing fiscal dependence of the states and territories on Commonwealth grants and subsidies has also been associated with a loss of state and territory government autonomy over their budget priorities. The Commonwealth has exploited its constitutional power under Section 96 to extend its policy reach into areas traditionally within the legislative and administrative responsibility of the states, such as education, health and disability services, by providing financial assistance on terms that require states and territories to contribute additional funds and comply with prescriptive administrative or policy requirements.

With the implementation of ANTS, the Commonwealth has increasingly seen distributions to the states and territories from the GST revenue pool as merely another means by which it can obtain leverage over the states' and territories' spending and revenue raising priorities. An example of this can be seen in recent statements from the Federal Treasurer indicating that the Commonwealth will make the receipt of GST revenue conditional upon state and territory compliance with the Commonwealth's desire that certain state taxes, particularly stamp duty on business transactions, be abolished.

The Commonwealth's use of Section 96 to shape states' spending remains a controversial feature of Australian federal-state financial relations, notwithstanding the fact that the exercise of this power was upheld by the High Court in the Federal Roads case almost 80 years ago. While this decision is important in the context of the Commonwealth's use of GST revenue to shape state revenue and spending priorities, it is the precedent established in the First Uniform Tax Case in 1942 that is enabling the Commonwealth to assume unprecedented influence over the fiscal destiny of the states.

Under the Uniform Taxation legislation, the Curtin Government made distributions from its expanded income tax base subject to the condition that states refrain from exercising their constitutional power to levy their own income taxes. The taxation reimbursement grants received by the states were considered “untied”, with the states determining how the funds should be spent. Although the terminology changed over the years with reimbursement grants being replaced by General Revenue Assistance and later, Financial Assistance Grants (FAGs), the untied nature of these distributions was preserved. However, with the implementation of ANTS and with FAGs subsumed into the GST pool, the untied nature of this financial assistance is being lost as the Howard Government embraces a more coercive brand of federalism in its dealings with states and territories.

A changing political landscape

Australian federalism is moving into uncharted waters. Whereas the Liberal Party once saw itself as an advocate for federalism and the Labor Party was avowedly centralist, the roles have reversed in the current political landscape where the Liberal and National Parties control both houses of the Federal Parliament and the Labor Party controls government in every state and territory. Never before has been such polarisation within the Australian federal system. Whilst there was a short period in 1969-1970 when there were conservative governments in all six states and the Commonwealth, the composition of those governments was varied with Liberals governing in their own right in some states, Liberal-led coalitions and Liberal minority governments in others and a Country Party-led coalition with Liberals in Queensland. Unlike the present situation, the coalition's control of the federal parliament in 1969-1970 was constrained by the presence of Democratic Labor Party Senators holding the balance of power in the upper house.

With the political and legislative capacity of the Commonwealth now enhanced by a parliamentary majority in the Senate and the consequential political marginalisation of both the Labor Opposition and senators from minor parties, the Howard Government has the opportunity to press forward with the more controversial aspects of its policy agenda. This may include revisiting its tax reform agenda and the legislative compromises it made in 1999 to secure Australian Democrat support for ANTS in the Senate.

All of this has major implications for the future of the Australian federation. As fiscal capability is a critical contributor to state capacity, a scenario in which the Commonwealth coerces the states and territories to vacate their already limited revenue base to rely on GST and other Commonwealth grants to fund their programs strikes at the fundamentals of a federal system of government. In the absence of fundamental change to Australia's constitutional framework, and in an environment in which the conduct of Australian federalism is characterised by coercion rather than co-operation, the increasing financial dependence of states and territories on Commonwealth munificence will not only render them increasingly vulnerable to the dictates of the central government, but remove such policy and spending autonomy that distinguishes them from being simply another category of service provider for the Commonwealth.