PM plan no April Fool’s joke

The Council of Australian Governments (COAG) will be discussing Malcolm Turnbull’s new vision for federalism on April Fool’s day. Some premiers may wish it was a joke, but it warrants serious study.

Turnbull is proposing to hand over a component of the existing Commonwealth personal income tax to the states, but his plan goes further than revenue sharing because it envisages the states (eventually) being free to set and vary their own income tax rates.

Unlike revenue sharing, this would strengthen accountability in the federation by better aligning states’ revenue raising powers with their expenditure responsibilities and reducing their dependence on the Commonwealth; and it would strengthen competitive federalism by giving the states another tax instrument with which to compete among themselves.

Turnbull’s approach will only work, however, if the Commonwealth is willing to withdraw from the funding and policy role it has built up in areas of state responsibility such as health and education through massive growth in conditional grants over many decades. As long as the states believe they can go to the Commonwealth for more grants, they will not exercise whatever revenue powers they have responsibly.

The Turnbull plan has already come under fire on the grounds that it will increase the overall personal tax burden and add to complexity. A proper assessment must await the details, but carving a component out of existing personal income tax and handing it to the states does not in itself increase tax — it’s what happens over time that counts. Competitive pressure keeps a lid on state taxes, and in overall terms they may be no more likely to go up than if the Commonwealth retains its income tax monopoly.

As for complexity, policy diversity among states should be seen as the essence of competitive federalism, not an administrative nuisance.

If adherence to the principles of federalism is the test, the Turnbull plan unveiled this week has more merit than the many other ‘new federalism’ plans that preceded it.