Another day, another tax thought bubble

You would have thought the government had learned by now how to promote a tax policy. Yet they’re at it again, with Malcolm Turnbull raising, without warning, a proposal to put a floor on the GST distribution formula.

Currently, some states (such as Western Australia) get much less than a per capita distribution of GST, while other states (such as Tasmania) get much more.  The proposal would mean that states get at least a minimum proportion of the per capita amount: it appears that the floor will be well above the distribution currently provided to Western Australia of 30% of the per person amount.

There are similarities between this thought bubble and another: the proposal for a state income tax levy, which was raised earlier this year.

First, the more mendicant states climbed over themselves to criticise both ideas. In particular, Tasmania envisages a potential loss of government income under both thought bubbles, so politicians from Tasmania unsurprisingly disliked both.

Second, both proposals were sprung without warning, with the federal government seemingly unprepared for a potential backlash from the states. The government is again showing a lack of finesse in how to raise important policy issues.

Third, both proposals were caused by concerns over weak state budgets. There was little discussion over state budget mismanagement — for example, West Australia was rolling in money during the mining boom, squandered this fiscal dividend, and now wants other states to prop it up. A change to the GST distribution formula will actually discourage Western Australia from fixing this problem that they created for themselves.

Finally, both proposals have some merit. A state income tax has many benefits, as argued by the CIS for many years. The case for a floor on GST distributions is less clear, but it has yet again drawn attention to the substantial flaws of the distribution system, including the penalties it imposes on worthwhile economic reform.

Hopefully, the government’s tactical errors in raising the GST distribution and the state income tax ideas won’t discourage ongoing discussion about these important issues.