Income tax for the states. Really?
Yes, really. That’s the plan Prime Minister Malcolm Turnbull is putting to the states and territories at the Council of Australian Governments meeting tomorrow in Canberra.
The Coalition has been looking ragged for much of 2016, after walking back from tax reform in the shape of a higher goods and services tax. But this latest proposal is beyond ragged. Choose your own adjective. Is it wacky? Zany? Crazy-brave?
The half-cocked nature of the plan has been particularly confusing. Exactly what is the Prime Minister proposing? No details are available. No firm proposal is on the table. No white paper has been released.
So we’re left to work out the policy details from a couple of media interviews and a doorstop at Penrith Panthers football club. When it comes to policy on the run, the Turnbull government is starting to rival the second Rudd administration.
Even if we take the plan on face value, it doesn’t make a whole lot of sense. As far as we can gauge, the idea is to reduce federal income tax by a set amount – say 10 per cent – and give that amount to the states and territories to spend as they see fit. They could then reduce or increase their share of income taxes if they needed more revenue or wanted to deliver tax cuts.
Almost immediately, economists and commentators started asking pesky questions. Will the states get an income tax power, or simply an annual hand-out from Canberra? Will the states get to set the income tax brackets? What about tax deductions, like negative gearing? What jurisdiction will get the tax from FIFO workers flying between states?
So can the states set the income tax thresholds or just tinker with the rates? #suchagoodidea #auspol
— Richard Denniss (@RDNS_TAI) March 31, 2016
As Labor’s Chris Bowen pointed out this morning: “It will be a compliance nightmare.”
Think about it for about five minutes, and the proposal gets even crazier. Complexity is supposedly a bad thing when it comes to tax, and yet here we have Turnbull creating more of it.
The whole thrust of national micro-economic policy in the past four decades has been to create a simpler and more unified national economy. COAG even has an ongoing agreement about it: the so-called “Seamless National Economy”. The idea is to remove distortions between the states and territories and make it simpler and easier for companies to do business. The push was for single, national regulations for things like transport, consumer law and personal property. The states and territories have also been trying to harmonise their payroll tax regimes. I guess we can forget about all that now.
The implications of different income tax rates for big national companies operating in all the states and territories will be significant. A Wesfarmers or a Woolworths will have to calculate eight different income tax rates for employees across the states and territories. There might be different thresholds and deductions too.
Then there is the issue of equity. Income tax favours the states with the highest incomes. There are plenty of high-rolling taxpayers in Sydney and Melbourne, and relatively few in regional Tasmania or South Australia. Nearly everyone agrees that handing the states income tax will disadvantage the smaller, poorer states. The rich will get richer, the poor poorer.
What will happen to Tasmania and South Australia if they get less income tax? They will have to cut back on vital services like schools, roads and hospitals. No wonder commentators like Greg Jericho see these reforms as a transparent attempt to force the states into cutting public spending.
As Curtin University’s Helen Hodgman noted this morning, “tax competition can also lead to a race to the bottom: if one state lowers its taxes, other states are likely to follow.”
Hodgman points out this has already happened with state death duties, which Queensland abolished in the 1970s: the other states and territories soon followed. Internationally, national governments are also racing each other to the bottom on company tax as they fight hard to stop multinational companies relocating offshore.
Then there is cost shifting. By giving the states a new source of income, the federal government gains a handy excuse to relinquish funding responsibilities in areas in like health and education.
And lo and behold: this is exactly what Turnbull appears to be proposing. Leaked documents circulated to the states and territories today revealed that Turnbull appears to want to get out of funding state public schooling altogether. The Prime Minister told ABC Radio today that “you could make a very powerful case for example that, if there was a revenue sharing, if the states had access to a portion of income tax, that they would have the resources and the money [to] have the responsibility for state schools.”
Translation: no more federal money for public schools.
Education experts and teachers unions were aghast. The idea that Canberra would abandon public schooling is the polar opposite of the Gonski reform plan, which was all about boosting the poorest and neediest schools, most of which are government schools run by the states and territories.
The sudden eruption of federal income tax reform is all the stranger because the government is supposed to have a tax white paper ready to release. The vaunted “Re:Think” tax reform white paper was apparently ready for release last year; in fact, Treasurer Scott Morrison told us it was ready way back in September.
Mind you, I’m not sure why we should take anything Scott Morrison says seriously. The Treasurer has been utterly sidelined. He clearly has no input into economic policymaking in the Turnbull government. Morrison wasn’t even told that the budget was going to be moved forward a week.
The situation has reached the farcical stage where the Prime Minister’s Office is not bothering to tell Morrison what Turnbull’s talking points are at the start of any given day.
And so yesterday we had the amazing spectacle of the Prime Minister announcing the biggest national tax changes since the GST, with no sign of Morrison or finance minister Mathias Cormann. Morrison then stumbled through a series of media appearances trying to explain an idea he had clearly not been briefed on.
If there are plenty of policy questions raised by the COAG thought bubble, there are equally pressing political dilemmas. The most acute is what the hell is going on between Turnbull and Treasurer Scott Morrison.
It sounds obvious, but the Treasurer of Australia does need to be in the loop when it comes to economic policy. The fact that he isn’t tells us that something is seriously wrong inside the Turnbull government.
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