State Tax Reform: Progress and Prospects

State Tax Reform: Progress and Prospects

The Labor Government has set reform of federalism as one of its top priorities, arousing new interest in federal–state financial relations. At the same time, the government is eager to expand the economy’s productive capacity and cut red tape for business. Robert Carling argues that state tax reform would further each of these objectives. 

In a paper released by The Centre for Independent Studies today State Tax Reform: Progress and Prospects, Robert Carling outlines what a much improved state tax system would look like.

‘Most state taxes exhibit one or more of the classic characteristics of “bad taxation”. The major issues with the roughly $50 billion of state taxes that remain after the GST reforms include their narrow and highly selective bases, complex structures, taxation of transactions rather than value added, impact on business costs, and the proliferation of small ‘nuisance’ taxes that raise little revenue relative to the costs involved in complying with them.’

‘No taxes are popular, but state taxes are probably more unpopular than others.’

Carling sets out a proposal to reform the two major issues in current state taxation: vertical fiscal imbalance, whereby the states’ expenditure responsibilities far exceed their own revenue-raising powers, and deficiencies within the shrunken range of taxes that the states still have under their control.

Carling offers proposals for modest reforms that essentially serve COAG’s business deregulation objective, including harmonising tax bases and administrative practices across the states, simplifying tax rate scales, and phasing out ‘nuisance’ taxes such as parking space levies.

He also sets out a plan for more ambitious tax reforms to go on from where the GST reforms ended, such as abolishing stamp duty on property transfers, insurance and motor vehicles, and restructuring payroll and land taxes.

 ‘One of the enduring myths surrounding the GST and the ANTS (A New Tax System) reforms implemented in 2000 is that once the GST was introduced, most or all state taxes would disappear. In fact they accounted for only around 10% of total state tax revenue.’

‘Abolishing and reducing taxes would involve a large revenue cost to state governments, which could in part be absorbed by state and Commonwealth budgets over a period of years, as well as requiring the states to develop new sources of revenue, such as wider use of road user charges.’ 

Carling warns that the federal Labor government may not be as vigilant as its predecessor in holding the States to the GST reforms that require them to remove some existing taxes in the future.

Robert Carling is a Senior Fellow at the Centre for Independent Studies. He was Executive Director, Economic and Fiscal at the New South Wales Treasury from 1998 to 2006, and prior to that a Commonwealth Treasury official.

Robert Carling is available for comment.

State Tax Reform: Progress and Prospects is available online: www.cis.org.au
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