Federalism is a dead idea. So what now?

The advantages for the states are that it would be their own revenue source and it would grow significantly faster than the GST. There is nothing radical about this proposal: Australia is the only federation among developed countries in which the central government takes all income tax.

The states have the constitutional power to levy income tax and the Fraser government legislated in the 1970s to enable them to impose an income tax surcharge or give a rebate.

Spooked by the politics, none of the states moved to do so, instead finding it easier to keep holding out the begging bowl to Canberra and blame it for deficiencies in services.

The states' situation now is much more dire. Still, the commonwealth may have to ease the way by reducing its income taxes to leave room for the states -- something it could readily do if it regained all the GST revenue.

Henry has raised the possibility of a state-based income tax, as well as alternatives such as Canberra setting a base rate for payroll tax and land tax and allowing the states to vary the rate.

This would stop the states competing against each other to give exemptions from the tax, as they have done with payroll tax and land tax, leaving them to rely again on Canberra.

Those who believe the federal government's taking over 60 per cent of hospital funding will solve the states' problems should think again.

Although health and education are the biggest items in the states' budgets, the Council of the Australian Federation's submission says spending on law and order, housing and welfare has been growing almost as fast.

Of course, the states always can look at ways to save money in these areas.

But they are likelier to do so if they are the ones that have to raise the revenue to pay for them.

As long as we are stuck with the states, we may as well try to make them work.