Taxing Australian federalism

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.