Australia's Future Tax System

Architecture of Australia's tax and transfer system

10.2 State taxes have changed over time

Since federation, there have been a number of changes in the taxes that have been available to the States. This largely reflects policy developments and the High Court's interpretation of the Constitution, particularly in relation to the definition of excise taxes. These changes include: the agreed handover of customs and excise duties to the Australian government at the time of federation; the takeover of income tax by the Australian government during the Second World War; the handover of payroll tax to the States in 1971; and a series of High Court cases through to the late 1990s where a progressively broader interpretation of excise duties effectively narrowed the range of taxes that the States can impose. Interstate competition has also affected how the States have applied taxes. For example, the abolition of estate taxes in Queensland in 1977 led to all States abolishing their estate taxes by the early 1980s. This has also occurred, albeit less dramatically, with payroll tax, where the States began with uniform legislation when they took over the tax in 1971, but have since eroded their tax bases through changes in their thresholds and other exemptions. The form of several other taxes has also changed over time. Several States used to include land used for primary production and principal places of residence in their base for land tax. Section 4 provides further detail on the history of the Australian tax system.

The current array of state taxes includes taxes which are transaction based or are levied on narrow tax bases. The opportunities for the States to introduce new forms of taxation are limited. Where States have sought to increase their taxation revenue, they have often resorted to taxes which are narrowly based or designed to realise some gain from rapidly growing areas of the economy. Other taxes such as conveyance duties have delivered increasing amounts of revenue to the States in recent years, but the tax base can be subject to fluctuations in line with the property market.

Changes to state tax arrangements can have significant implications for financial relations between the Australian government and the States (discussed further in Section 10.6). This implies that any significant reform of state taxation has broader implications for federal fiscal relations and would require cooperation between the Australian government and the States. The provision of GST revenue to the States and the abolition of a number of inefficient state taxes through the Intergovernmental Agreement on the Reform of Commonwealth‑State Financial Relations (Intergovernmental Agreement) is a good example of this.