A federation fit for purpose

So reform of payroll tax and GST could substitute for each other. Payroll tax could be replaced by a broader GST (or vice versa). There are arguments for and against each tax - for example, payroll taxes magnify any inefficiencies in the labour market, particularly if wages can’t adapt to the tax, while GST exemptions create distortions which aren’t usually mirrored in payroll taxes. Whatever the case, there is scope for new thinking. There could also be substantial simplification from the Commonwealth collecting payroll tax through the BAS system. The States could nominate their own payroll rate (the tax base would be agreed between the States) and the Commonwealth would merely return all tax collected to the relevant State and independently of the Grants Commission process.

But another option is for the Federal Government to cut income taxes and State governments to levy a replacement income tax surcharge (given the economic costs of income taxes, overall increases in these taxes shouldn’t be on the agenda). This proposal was given some consideration in the early 90s and has recently been resuscitated by Dr Peter Hendy, formerly of ACCI and now a Federal MP. Irrespective of whether it is income tax surcharges or reform of payroll taxes, the task for the Commonwealth and the States is to make better use of tax bases beyond the GST and to use the available administrative arrangements to ease into that change. 

There are other things the States could do such asmake better use of user charging. In particular, better road user charging would bring a multitude of benefits including reducing congestion, encouraging public transport use and reducing the need for it to be subsidised, improving signals for road investment, encouraging teleworking, encouraging more efficient use of land and reducing adverse environmental impacts. Technology could also be applied to the pricing of parking spaces and transit lanes. The States can give a jolt to productivity through structural reforms in markets (potato marketing boards, anyone?) and retail trading hours. And of course, the States could alleviate their revenue requirements by operating their budgets more efficiently or better still, removing themselves entirely from services available in private markets.

What all these solutions share in common is that they offer superior benefits to merely increasing GST revenue.  They are a hand up not a hand out. And if States care about their own sovereignty (which frankly all Premiers should), then the importantly reduce the dependence of State governments on the Federal Government.

Now that would be a plan.