Taxing Time For The States
Sydney Morning Herald
Thursday August 7, 1997
The High Court decision on States' tax rights is another chapter in the enduring war between Canberra and the former colonies over finances.
"THROUGH the passage of time, the High Court ... has altered the power balance between the States and the Commonwealth. As we in NSW see the position, if the States are to endure as viable political organs in the service of the people, it is imperative that they have greater financial powers. Without statesmanship an impasse seems imminent".
Strong words. They could have emanated from Bob Carr, struggling this week to contain his frustration at the practical effects of the High Court's decision on Tuesday to outlaw State imposts on alcohol, tobacco and petrol.
In fact, they come from one of his predecessors, the NSW Liberal premier Sir Robert Askin, who railed in 1973 at the centralist approach of the High Court and its ruinous effects on the ability of the States to manage their own affairs.
The easy interchange of the Askin-Carr positions highlights the enduring nature of the war between Canberra and the States over finances. It has been a war that has been waged - and largely lost by the States - ever since Federation, when Alfred Deakin warned that the Constitution had left the former colonies "legally free, but financially bound to the chariot wheels of the central Government".
One reading of this week's 4-3 judgment is that all the High Court has done, as it has so often before, is lash the cords a little tighter. The States, led by NSW, went into the case knowing they faced a good chance of having their business franchise fees tossed out as an illegal ruse to evade the constraints of section 90 of the Constitution. The section gives the Commonwealth exclusivity over "duties of excise".
Shelving, momentarily, their traditional abhorrence of High Court adventurism, the States sought the narrowest possible definition of the term, opening the way to broad-based State taxes. They gambled and lost, with the court deciding, albeit by the narrowest of margins, it could no longer turn a blind eye to the State attempts to disguise their imposts.
But does this mark just another lost battle for the States, with the power balance sliding even more towards Canberra in the "natural" evolution of federalism? The States have cried "Enough!" countless times before, without any indication of being able to coerce or persuade the Commonwealth into accepting a realignment of financial responsibilities.
Malcolm Fraser relented slightly during his time, virtually daring the States to put their money before their mouths. His "New Federalism" arrangements including legislation allowing the States to top-up the national income tax rates with their own surcharges. They baulked, not willing to accept the political flak of lumping voters with extra taxes.
In 1991, the States and Territories proposed a shared income tax scheme, capitalising on signs by then Prime Minister Hawke of a willingness to embrace reform. The move collapsed, falling victim to Labor's internal leadership struggle.
Still, there are several forces at work which suggest this week's judgment may become pivotal in the future development of Federal-State relations.
As the States clearly envisaged in waging the court fight, the judgment sharpens the focus on the extent of the power imbalance in Australian federalism. This gives the States important leverage in widening the looming debate over tax reform to include an overhaul of Federal-State financial relations.
And the issue inevitably collides with the still unresolved question of constitutional reform in the lead-up to 2000.
The State strategy will now be to push reforms which address vertical fiscal imbalance (VFI) - that ugly term which describes the yawning gap between the demands placed on the States to provide services and the revenue available to them to fund those activities.
There is no doubt the lack of action on this front is pushing federalism towards straining point. Even before this week's decision, Australia was shown as having "by far the highest degree of VFI among the major federations in the Western world" - in the view of most tax experts, a major impediment to economic efficiency.
The States, denied by a combination of the High Court and the Commonwealth's control over major tax revenue, have been forced to scrounge around for alternative sources of money. This has led to elaborate legal ruses, a reliance on "ebb and flow" revenue streams like stamp duties and in the search for new growth taxes, a fascination with gambling.
Even if the moral issues are laid aside, the imbalance encourages wasteful competition between the states, such as the risky gambit of "picking winners", makes it difficult for them to reward their constituencies when implementing painful efficiency reforms and promotes political buck-passing.
John Howard made some promising noises before the election about tackling Commonwealth-State financial relations. Since then he has steadfastly resisted State entreaties to put it on the table, a stance shaped by his centralist instincts and an acknowledgment of the political risks entailed in a broader reform agenda.
Selling tax reform is going to be hard enough without roping in complex issues like VFI. Yet in one way, the court decision is already working in the Commonwealth's favour. The farcical efforts being made to circumvent the court decision demonstrate the overriding need for a "clean" indirect tax system (read a GST).
But as State officials have said, a GST will do little to assist the States in the long term. The cost of replacing the Commonwealth's ramshackle net of wholesale sales taxes, over-compensating those at the bottom of the system and delivering tax cuts to the middle to buy voter support leave precious little for addressing State needs.
A GST also effectively wipes out any State plans to move further into the constitutionally safe, but politically risky, area of taxing services. That leaves some stark options. The States can turn to other parts of their existing tax base, such as payroll taxes, to draw in extra revenue. Or they could shoot for the safest ground, simply seeking a guaranteed share of Commonwealth tax revenue to lock in certainty.
Another option pushed by reformers is the adoption of State income taxes, with the Commonwealth cutting its own personal tax rates (and reducing grants accordingly) to allow the States to re-enter the field. It would be up to the States to decide their own rates, encouraging competition - although at a direct risk of reducing Canberra's control over the national economy.
Another option, directly addressing the High Court decision, is a referendum on Constitutional change, allowing the States to set up their own broad-based indirect taxes.
These are heady items to be throwing into the tax debate, particularly at this early stage. The onus is going to be on the State leaders, notably Jeff Kennett who takes the running on these issues both publicly and in internal forums, to come up with a political strategy to get the Howard administration to move on the issue. It's a struggle between short-term political motivations and the interests of long-term policy reform. Statesmanship is definitely going to be a necessary ingredient in breaking the "impasse".
© 1997 Sydney Morning Herald