States wide awake to Canberra’s tax raiders

by Scott Ryan

Articles about federal financial arrangements can be a great cure for insomnia. Complex and opaque, they have led to endless quarrelling for decades.

Yet while this issue might send some to sleep, it prompts restless nights for state premiers and treasurers. These arrangements decide how much each state receives from GST receipts collected across Australia. These receipts are the states’ largest revenue source, so they determine how much can be spent on everything from schools and hospitals to emergency services and infrastructure. While states collect taxes, too, not all collect substantial resource royalties. These arrangements ensure every state benefits from resource royalties collected in mining states.

GST revenues are basically distributed among the states following two criteria.

The first is based on the cost of providing services across the states. This tries to ensure all Australians can access a similar level of services and infrastructure. While not a perfect example, it costs less to build and maintain roads across more densely populated Victoria than Queensland. So Queensland is compensated for this with higher funding.

But this only seeks to compensate for insurmountable differences, not ones imposed by the states themselves. If, for example, Queensland builds roads less efficiently than Victoria, Queensland is not compensated for that higher cost.

In effect, the cost of equalised service delivery is averaged. Some states subsidise those with greater challenges by being paid less in GST grants, after taking population into account.

The second criterion assesses the ability of a state to raise its own revenue. As well as accessing similar services across the states, a rough equalisation of the state tax burden is also sought. In this example, densely populated Victoria has a greater capacity to raise land tax than Queensland.

So the tax base of states is also considered collectively. Those states that have the capacity to raise revenue are expected to do so. Accordingly, they receive less from the GST pool, as they are deemed to have raised it. Effectively, most state revenues and the GST are pooled when GST distributions are considered.

This is why proposals to transfer mining royalties from the states to the Commonwealth via a mining tax are a real threat to all states, not just the mining ones. As Western Australia’s revenue grows through increased iron ore royalties, over time this is effectively added to the revenue and GST pool that is distributed. WA’s concerns about declining GST distributions due to increasing resource royalties illustrates this point.

If a federal resources tax replaced royalties, then this loss of royalties paid to the mining states would simply ensure less funds for all state budgets.

Labor and the Greens are campaigning in the non-mining states by saying they want to spread the boom. But our federal financial arrangements already do that. Their real problem is that Canberra doesn’t control this revenue and it goes to the states without federal strings attached.

Right now, mining royalties are directed to the level of government that actually provides services. Remember, while the Commonwealth employs thousands of education and health bureaucrats, it’s the states that employ the teachers in public schools and the doctors and nurses in public hospitals.

So, soporific details notwithstanding, it’s important you don’t snooze through this threat to every state budget.

The Australian Financial Review