Time for a state income tax? Federation paper’s bold look forward


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There’s a new examination ahead of the federation white paper of how to resolve the funding end of what Tony Abbott has previously called the “dog’s breakfast of divided responsibilities”.

The final issues paper in the lead-up to the Reform of the Federation White Paper — focusing on federal financial relations — raises the prospect of the states being given a greater share of revenue through changes to the tax system.

The document, released last week, puts the amelioration of the vertical fiscal imbalance (VFI) — the phenomenon of the Commonwealth collecting much of the revenue the states spend — on the agenda, arguing that Australia’s Commonwealth-state funding arrangements, in which the federal government holds most of the power, have the potential to turn co-operative federalism into “coercive federalism”:

“Many commentators consider the extent of VFI in Australia to be undesirably large and, in several important respects, leads to the imposition of constraints on the autonomy (or sovereignty) of States and Territories.”

A high level of VFI leaves states and territories reliant on the federal government to make provision for funding functions controlled by state governments, meaning that if the Commonwealth decides to cut grants to the states — as the Abbott government did in 2013 — states have little ability to replace that funding. This undermines accountability and transparency by giving the jobs of providing money and delivering services with different levels of government, as the issues paper points out:

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