Australia's Future Tax System

Consultation Paper Summary

9. State and local taxes and transfers in the Australian federation

Overview

A well functioning federal tax‑transfer system is necessary if Australia is to meet the challenges of the coming century and make the most of future opportunities. Through a lack of coordination in policy and administration, the federation's tax‑transfer system has become disjointed and complex, imposing unnecessary costs on all Australians.

Reforms which enhance the accountabilities, integration and efficiency of the federation's tax‑transfer system can improve the functioning of the federation by reducing costs, removing complexity and improving resource allocation.

There are many issues that need to be taken into account when considering possible reforms to the way the tax‑transfer system operates across the federation. Central to this is the trade‑off that may occur in relation to the accountability (and other benefits) of State governments for raising their own revenue and the complexity and efficiency of the federal system. In addition, having different transfer policies in different States as well as multiple administering agencies for both taxes and transfers is a source of further complexity and possible inequities.

Consultation questions

Q9.1 Noting the overall structure of Australia's federal financial arrangements, what changes, if any, should be made to the assignment of revenue raising powers and intergovernmental transfers in Australia?

Q9.2 Given the widely held view in submissions that the current state tax arrangements need to be reformed, what changes should be made to state and local government own source revenue instruments? What scope is there for greater use of user charging to bring social, environmental or economic benefits?

Q9.3 What is the appropriate allocation of the roles of the Australian and state governments in income redistribution?

Q9.4 What opportunities could be pursued to deliver more seamless administrative arrangements of the tax‑transfer system across the federation?

Key messages in submissions

Many submissions note the complexity that arises from multiple levels of government being involved in the tax‑transfer system. A number suggest abolishing some state and local taxes and funding the reduced revenue by increasing grants from the Australian government.

Other submissions express concern that vertical fiscal imbalance weakens accountability for spending decisions at the State level and suggest that it be addressed by transferring state spending functions to the Australian government or by increasing States' own source revenues, for example, by allowing the States to share the income tax base with the Australian government.

A number of submissions note that the mix of taxes currently levied by the States (and, to a lesser extent, local government) is inefficient and inequitable. Business groups note complexity and compliance costs arising from the different structure and administration of taxes across States.

Many submissions call for the abolition of payroll tax. Others suggest broadening and harmonising payroll tax at a lower rate as an interim position. Submissions that present efficiency analysis of state taxes, however, suggest that payroll tax is one of the more efficient state taxes.

Some submissions believe land tax should be abolished, others that it should be broadened by removing exemptions and concessions. A few think that land tax should be harmonised across the States or become a federal tax. There is general agreement that stamp duty on conveyances should be abolished. Several submissions express concerns with the impact that housing related taxes and charges imposed by state and local governments have on housing prices.

Several submissions propose that insurance duty and Fire Services Levy be abolished, arguing that this is multiple taxation of insurance products. Many submissions propose changes to state motor vehicle taxes, so that the rate of tax depends on the carbon emitted from the car. One submission argues that gambling should be taxed the same as other industries.

Some submissions note the interaction between federal transfer payments and state concessions for services such as public transport, as well as concessional tax rates, most notably local government rates. There is concern that the interaction of transfer payments and concessions can create stronger attachment to (means‑tested) transfer payments and this can have implications for labour force participation. Some submissions propose that, to address this complexity, only the Australian government should be involved in redistributing economic resources.

Submissions consider that efficiency and simplicity could be improved if a central agency (such as the Australian Taxation Office) administers either individual state taxes (such as payroll tax) or the States' entire tax system.