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No Agreement on Australian State Tax Devolution

The leaders of Australia’s federal, state, and territory governments have failed to reach an agreement on a proposal to enable the states to levy income tax.

The Council of Australian Governments (COAG) met on April 1. Ahead of the meeting, Federal Prime Minister Malcolm Turnbull had proposed that the federal Government would “reduce our income tax by an agreed percentage and allow state governments to levy an income tax equal to that amount that we have withdrawn from.” He had advocated the reform on the basis that it would provide the states with “an additional source of revenue so that they will have a tax base that includes personal income tax.”

The proposal was however rejected in advance of the summit by Tasmania and South Australia as impractical and unworkable, and condemned by the Victorian Premier. It received support from the Western Australian government and was described as worth considering by the Chief Minister of the Australian Capital Territory.

According to a communique published by COAG following the summit, “There was not a consensus among states and territories to support further consideration of the proposal to levy income tax on their behalf.”

The leaders did nevertheless agree “to consider proposals to share personal income tax revenues with the states.” The communique stated that, if implemented, this would provide state access to “a broad revenue base that grows in line with the economy,” reduce the number of tied Commonwealth grants to the states, and “create flexibility for states to meet their ongoing expenditure needs.”

Under the existing arrangements, the federal administration collects taxes and provides the states and territories with almost AUD50bn a year in tied grants.

Turnbull said that the current system “results in ongoing arguments, negotiations, and duplications in administration.” In a statement, he argued that “a way to solve this problem would be to give the states and territories a proportion of personal income tax – rather than demanding money from Canberra they would be raising money themselves and be accountable to their own voters.”

He explained: “The key principles will be that this is not about increasing the total tax take – any income tax surrendered by the Commonwealth to the states would be offset by a reduction in Commonwealth grants to the states. Taxpayers would not notice any administrative change – the Australian Taxation Office would continue to manage the collection of income tax.”

Turnbull was nevertheless forced to deny that the proposal, if implemented, would result in double taxation. Speaking at a COAG press conference, he stressed that “it would simply mean that one tax rate in another state was somewhat different from another – but that applies now in a whole range of areas.” He emphasised that “it’s not a question of double taxation, it’s a question of whether you want to allow states to actually take greater responsibility for raising the money they spend and so this is a question of responsibility.”

Turnbull went on to point out that “this is the first time in many, many years that a federal Government has said we are prepared to vacate a portion of the income tax schedule, if you like, and make that available to the states … [and] give them the fastest access to some of the fastest growing tax.”

The federal Government would need to secure the agreement of all the states and territories to implement a reform of this nature.

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