Australia's Future Tax System

Final Report: Detailed Analysis

Chapter F: The transfer system

F6. Transfers tied to goods and services

F6–2 Concessions — their scope and role in the transfer system

Concessions are generally provided as reductions in prices or bills and are used to provide low income groups with more affordable access to commonly used goods and services such as water, energy and transport. Concessions are also provided for government taxes and user charges. For example, certain groups of taxpayers receive concessions on local government rates (see Section G3 Local government).

Concessions play a large role in the transfer system and all levels of government in Australia deliver them. It is difficult, however, to determine the total expenditure on concessions because the value of the concession used in some transactions may not be recorded.

The Australian government's concession card system acts as a gateway to a number of concessions throughout Australia. Concession cards are broadly available to people receiving a pension or allowance, as well as people and families with low incomes and seniors. Over 5.2 million Australians (around one quarter of Australia's total population) hold one of many concession cards, principally Pensioner Concession Cards and Health Care Cards.34 Around 85 per cent of people over Age Pension age hold an Australian government concession card, either a Pensioner Concession Card, or its equivalent in Veterans' Affairs, or a Commonwealth Seniors Health Card (FaHCSIA 2009).

The Australian government plays a central role in the provision of health and related concessions, including through the Pharmaceutical Benefits Scheme, and Medicare co-payments and safety nets. There are substantial price subsidies for Pharmaceutical Benefits Scheme medicines as well as the Pharmaceutical Benefits Scheme safety net, which has a lower threshold for concession card holders. For medical costs, the Medicare safety nets limit out-of-pocket costs for medical services provided out-of-hospital — again there are lower thresholds for concession card holders.

State and local governments fund and administer a number of concessions and generally make decisions on the type and level of concessions they offer. State and local government concessions include discounts for council and other property based rates; utilities, including energy, water and sewerage; public transport; and motor vehicle registration. The forms of concessions include fixed amount discounts; percentage discounts that may also be capped at a maximum dollar amount; and rebates on or exemptions from charges. While similar concessions are available in each of the States, there is variation in the value of concessions available in each State.35

The Australian government contributes some funding towards selected State-based concessions through a national partnership payment. The partnership specifies a number of concessions the States must provide to all Pensioner Concession Card holders, and requires the States to provide public transport concessions for all Seniors Card holders, irrespective of their State of residence.

Concerns with the current approach to concessions

Current concession arrangements raise concerns in terms of incentives to work, equity and complexity.

Work disincentives

Eligibility for many concessions depends on whether a person holds a concession card. Concessions and concession cards are not withdrawn gradually like income support payments — all individuals who have the same concession card get the same concessions regardless of differences in their personal income. That is, a person receiving the maximum amount of income support will generally have the same access to concessions as a person who qualifies for only one dollar of payment. This creates a high effective tax rate on the last dollar of payment and provides strong incentives for people to gain or retain eligibility for payments (see Box F6-1).36 This is particularly relevant for people who are heavy users of their concession cards or who value their concession card highly because of the insurance it provides. Disability Support Pension recipients, for instance, may be reluctant to jeopardise the concessions they receive for health and disability goods and services by testing their ability to work.

Box F6-1: Concession cards and effective marginal tax rates

Chart F6-1 illustrates how linking eligibility for concession cards to the receipt of any amount of transfer payment can contribute to high effective marginal tax rates. The chart shows the value of transfers that a single pensioner receives from their pension (including pension supplement) as well as their pensioner concession card, assuming that the concession card provides $2,000 worth of value each year. The chart shows the total value of the transfers (pension, supplement and concessions) on the left-hand axis and the contribution to effective tax rates on the right-hand axis.

Chart F6-1: Concessions and effective tax rates

Chart F6-1: Concessions and effective tax rates

At income levels above the free area ($3,692 per annum), the pension payment for single pensioners is withdrawn at a rate of 50 per cent. The minimum rate of the pension supplement is kept until income reaches a level that would otherwise reduce total payments to zero. At this income, eligibility for the pensioner concession card is also lost. For the last dollar of payment, both the minimum rate of pension supplement and the value of the concession card are lost. While the chart shows the effective tax rate rising above 100 per cent, if the concession card provides $2,000 worth of value (and an alternative concession card is not available), the effective tax rate on the last dollar will be over 200,000 per cent.

Equity

If a concession card is widely available, its value as an indicator of financial need can be diminished. In particular, as the number of card holders rises, the need for a concession card may lose acceptance among service providers and the general population. For example, the Pension Review's consultation process found that some general practitioners have become less willing to bulk bill concession card holders, as not only do they represent a very high proportion of their patients but some card holders have significant private income (FaHCSIA 2009).

In some cases concessions may operate regressively. For example, concessions for local government rates can be regressive with respect to wealth holdings because the dollar value of the concession is often greater for people with higher-value properties. Additionally, renters may effectively pay rates in the form of higher rental payments and get no assistance. Although the value of concessions for local government rates is generally capped, these concessions can still be worth significant amounts of money over time.

Further inequities can arise if higher-income concession card holders live in areas where there is better access to services (such as transport), so they benefit more from their concession card.

Complexity

All three levels of government are involved in the delivery of concessions and there are a large number of concessions available. It can therefore be difficult for people to determine what concessions are available, the level of government responsible for the delivery of the concession and how much governments are spending on concessions. For governments, it can be difficult to identify the outcomes from providing concessions and hence whether they give value for money. This is further complicated when there are other types of transfers with similar policy objectives (see Box F6-2).

Box F6-2: Different forms of assistance provided by different governments — but with a similar purpose

The Australian government and State governments provide different forms of assistance for accessing transport services. The Australian government provides assistance through Mobility Allowance — a payment available to people with a disability aged 16 and over who are unable to use public transport without substantial assistance and are required to undertake work, training or job seeking activities. A number of State governments also provide taxi subsidies to people who cannot use public transport. For example, in NSW, the Taxi Transport Subsidy Scheme allows eligible applicants with a permanent disability to travel by taxi at half fare up to a maximum of $30 per trip. A similar scheme operates in Victoria (the Multi-purpose taxi program) where the maximum per trip subsidy is $60. For both programs, the subsidy may be used for taxi travel in other States.

Differences in concessions for local government rates may also be seen as a source of complexity. The current arrangements allow the States to set their own levels of concessions: some provide concessions as a flat amount, while others provide a percentage reduction. Further, some States increase the value of the concession on an annual basis, while in other States the value of the concession has not changed for many years.

Findings

The use of concession cards as a gateway to a number of concessions provided by the Australian, State and local governments creates strong incentives for people to gain eligibility for concession cards.

While eligibility for concession cards is targeted, some concessions are regressive because they provide higher value transfers to people with higher means.

The interaction of concessions with other types of transfers provided by different levels of government makes it difficult to determine whether concessions provide value for money.

Reform directions

Recommendation 107:

The Productivity Commission, constituted to include an appropriately qualified and experienced member, should review concessions across all levels of government and provide recommendations for consideration by COAG.

While some concessions complement other forms of assistance in the tax and transfer system, a number of current concessions have questionable objectives and equity outcomes. Further, continuing to provide concessions under the existing arrangements may not be sustainable as the population ages, particularly considering the number of people who have access to concession cards at the moment.

There is a strong case for rationalising a number of concessions as well as converting some into cash transfers or tax reductions. Concessions that provide relatively more value to people with greater means should be priorities for reform. There is also a case for greater coordination across the federation to ensure equity and consistency in the way concessions are funded and delivered.

Because of the number of concessions in the current system and because reform to concessions would affect funding across all levels of government, the Productivity Commission should review concessions across all levels of government and provide recommendations for consideration by COAG. To assist the Productivity Commission, an Associate Commissioner with appropriate knowledge and expertise should be appointed to the review. Reforms could then be implemented through an intergovernmental agreement (for more detail, see Section G2 State tax reform).

In the long term, technology may also allow for alternative ways to deliver assistance currently provided as concessions. This could come from a combination of a single customer account that could be viewed and managed online, and the use of smart card technology that would allow concessions to be granted at the point of sale. Point-of-sale information could be brought together to help governments determine the particular needs of different people, based on their characteristics (for example, disability, age or location).

Such a system offers the potential to facilitate better income management, as the assistance provided by governments would be more transparent. It may also allow governments to tailor assistance to those with diverse needs, rather than issuing a concession card that gives all holders access to the same level of assistance.


34 There are also approximately 2 million dependants listed on concession cards who have access to some concessions.

35 Tables 2.27 to 2.34 of the Australia's Future Tax System Architecture Paper provides information on the range of concessions available in each State.

36 Once people no longer qualify for relevant payments, they must generally stop using their concession cards. However, in some circumstances, people can retain their concession cards for a short period of time after returning to work. These provisions are designed to assist people to make the transition from income support to work.