It's time for a kick-start

CPA Australia acknowledges that the state/territory tax reform process under the GST Agreement has delivered significant benefits.

But it is concerned the process has now stalled following the failure of all jurisdictions to agree to the abolition of stamp duties on business real property transfers. This is despite the additional assistance promised by the Commonwealth.

There is now a strong need for the reform process to be kick-started in order to secure an appropriate timetable for abolition of the remaining duties listed in the agreement.

We would also like to see more wide-ranging reform of existing state/territory tax structures, including further reforms to their remaining taxes, addressed by the Commonwealth and the states through the Council of Australian Governments (COAG).

Such reforms could include reductions in the existing inefficient taxes on general insurance, removal of payroll tax anomalies, land tax reforms and restructuring of existing motor vehicle taxes.

CPA Australia has already made submissions to the Victorian and Western Australian governments on these issues but believes that a broader approach through COAG with Commonwealth support would provide a better opportunity for further reforms to state/territorytax regimes.

Timetable 

The time period for achieving reforms to state/territory taxes along the lines described should be specified broadly but would obviously depend on the current and future financial capacity of the various jurisdictions, and be consistent with sound financial management.

The proposed transition should be incorporated into a new inter-governmental agreement (IGA) to be developed through COAG. As with the original IGA, appropriate Commonwealth assistance should be sought to facilitate the transition.

This could be incorporated into the current National Reform Agenda, which focuses on improved productivity and labour force participation.

Current state/territory tax structures and possible reforms

Although existing structures are not identical, they broadly comprise the so-called nuisance taxes (scheduled to be abolished over the next six years):

• stamp duty on business real property transfers (IGA tax)
• insurance duties
• payroll tax
• land tax
• residential conveyance duty (including rental properties)
• motor vehicle charges
• gambling taxes
• other minor imposts such as the recently introduced congestion tax and environmental levies in Victoria

Proposed reforms in line with the model outlined above could include removal of stamp duties on business real property transfers in accordance with the existing IGA, removal or reductions of stamp duties on insurance premiums under a new IGA, and introduction of a flat usage charge in addition to or in lieu of existing motor vehicle duties.

None of the states have agreed to the removal of duties on business real property transfers on the basis of public policy concerns and administrative issues. This appears to effectively reflect concern about removal of duty on business property transfers while still retaining duty on residential conveyances.

There is a good case for also abolishing duty on residential conveyances (or at least reducing it to a single low rate that would be less distortionary) if a replacement revenue source could be found.

A comprehensive land tax could provide such an opportunity to replace a tax on property transactions, with an annual tax on property values subject to appropriate transitional rules.

A proposed reformed state/territory tax structure would therefore include payroll tax (preferably with harmonisation of a broader tax base and lower rates), land tax (single rate tax on a broader base with perhaps a low threshold as now applies in NSW, or at least a flatter rate scale to minimise bracket-creep), motor vehicle usage charge and gambling taxes.

The revenue implications of the above reform approach could be significant.

However, possible funding options (in addition to Commonwealth assistance) include increased GST revenues, since GST is a broadbased growth tax, removal of some existing anomalies or tax expenditures, and tighter controls on government spending as proposed in the recent Stokes/Vertigan report to the NSW state government.

Some of the these reforms, such as broadening the base of payroll tax and land tax, could be difficult given the potential impact on small business and primary producers. Broader reforms to Commonwealth/state financial relations may be necessary to secure reforms to state taxes.

Commonwealth/state relations 

Any improvements to the current imbalance between Commonwealth and state taxing powers (known as vertical fiscal imbalance), such as increasing GST collections and/or allowing the states access to a share of Commonwealth income tax collections, would also assist the reform task.

In a paper prepared for the Centre for Independent Studies, State Taxation and Fiscal Federalism, Robert Carling has come up with a six-point blueprint designed to strengthen state powers in relation to the Commonwealth, and thereby enhance the accountability of state governments to their voters.

He proposes:

• the abolition of all stamp duties
• an increase in the GST rate from 10 per cent to 12.5 per cent to offset the loss of revenue this entails
• the transfer of 60 per cent of GST revenue to the states, with the Commonwealth retaining the other 40 per cent
• a one-third reduction in Commonwealth income tax
• the abolition of most non-GST (tied specific-purpose) payments to the states
• a new system of state income tax initially set to raise the equivalent sum to that forgone by the Commonwealth

On an aggregate basis, these proposals are revenue-neutral. But they would significantly strengthen the independence and fiscal capacity of the states in relation to the Commonwealth while simultaneously replacing an array of inefficient state taxes.

All of the proposals need to be considered as an integral package, since each change involves a corresponding trade-off somewhere else. Stamp duties disappear but revenues get made up by a higher rate of GST.

A big reduction of Commonwealth income tax revenues is compensated by allowing the Commonwealth to retain a proportion of the higher GST receipts while scrapping specific-purpose state grants. The states’ move into the income tax area is balanced by heavily reduced Commonwealth income tax.

It is undoubtedly the introduction of state income taxes that marks the most radical element in this proposed new blueprint. For it is this that would enhance the fiscal autonomy of the states, which would end up funding 75 per cent of their own spending, as opposed to only 57 per cent under the current arrangements.

To avoid unnecessary duplication and administrative inefficiencies, it is suggested the states should 'piggy back' on the existing income tax base and not be allowed to tamper with the structure of rates and personal thresholds. Rather, they would levy their own percentage top-up in addition to the Commonwealth’s income tax requirements.

Both NSW and Victoria are significantly disadvantaged by the existing distribution of GST revenues to the states/territories under the horizontal fiscal equalisation principles used by the Commonwealth Grants Commission (CGC).

Consequently, the reform task might be easier if the CGC was abolished or overhauled (as previously proposed by New South Wales and Victoria) and special payments retained only for the smaller states.

User charges

User charges currently comprise about 24 per cent of states’ own revenues, and broadly comprise sales of goods and services and distributions from government business enterprises.

In a recent article in The Australian Financial Review, Tony Harris (a former NSW auditor-general and currently a member of CPA Australia’s taxation centre of excellence) argued there was considerable scope for the states to increase existing charges – particularly in the transport area – to better enable them to meet the cost of major infrastructure projects.

This would involve the introduction of higher public transport charges, as well as motor vehicle usage charges that better approximate the economic costs of road use.

Similar cost-recovery policies could arguably be extended to other utility pricing such as in energy and water usage, where governments still retain ownership of the major utilities.

This approach would enable government subsidies, along with the taxes needed to fund them, to be slashed, while user charges could fund the much-needed expansion of public transport. Major investment decisions could also be made on a more appropriate basis.

The way forward

Bringing together the elements of reform discussed could provide a way forward for a more economically efficient state tax system consistent with improved Commonwealth arrangements including greater fiscal autonomy for the states.

Reform existing state taxes:

• abolish the remaining state/territory stamp duties not currently scheduled to be abolished – namely, property transfer duty and the duties on insurance and motor vehicles
• finance the above mainly through increased GST revenues, with the balance of the cost to be covered from a restructuring of the states’ existing payroll and land taxes as broader-based, low-rate taxes

Reform Commonwealth/state relations:

• the Commonwealth to retain an appropriate proportion of an increased GST, with the balance (say about 7 per cent) going to the states
• most Commonwealth specific-purpose payments to the states to be eliminated as part of a fundamental review of the role/responsibilities of both tiers of government
• the Commonwealth to use the budgetary savings from these reforms to reduce its personal income tax collections
• the states to introduce flat state-specific personal income tax rates for their residents, initially equivalent to the proportionate withdrawal by the Commonwealth
• over time, the states would have freedom to vary their income tax rates, but only through increases or reductions in their flat rates

User charges:

• user charges for use of public-sector infrastructure facilities to be imposed on a full-cost recovery basis to enable taxes to be reduced and permit more appropriate investment decisions

These reforms would leave the states with several major tax-revenue sources under their own control that are relatively efficient and buoyant: personal income tax, payroll tax, land tax, gambling taxes and motor vehicle usage taxes. They would also continue to share in GST revenues.

The states’ self-funding ratio could rise to about 75 per cent, which would be more in line with other federations such as Canada, Germany and the US. The package aims to be revenue-neutral. It’s not designed to change the size of government, a separate issue.

Reference: April 2007, volume 77:03, p. 66-68

About the author: Garry Addison

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