States must face facts about GST

WHEN Australians think of their fellow citizens living in poverty, there is sadly no surprise about who comes to mind. Yet the most wretched parts of the nation are invisible in the uneven debate under way on the GST.

Some of the neediest Australians are indigenous people in remote areas such as parts of the Northern Territory, where child poverty rates can reach 25 per cent. The unemployment rate in Wadeye, 320km southwest of Darwin, is about 80 per cent.

You might think a discussion about changing the GST would at least mention the people who could be hurt most by the change, but you would be wrong. This is just one sign of the weakness in a growing dispute over how to share tax revenue worth $50 billion a year. A more honest political debate is essential if the nation is to have any lasting fix to the enormous pressures on federal and state budgets.

This is not only about increasing the rate or the base of the GST but about how to divide it between the states.
 

A useful starting point would be for politicians to admit that changing the way the pie is sliced will be impossible without changing the size of the pie.

Leading the push for change are West Australian Liberals, who believe their state is being unfairly punished because it does not get enough GST proceeds every year.

The argument is superficially compelling. West Australians pay about $6bn a year in GST according to the state government, yet the state only gets about $2.4bn a year back. It is a paltry sum when you consider the needs of the state.

The answer is said to be a new formula for splitting the proceeds. Rather than share the $50bn according to the needs (or the “fiscal capacity”) of each state, the money would be simply divided by population.

WA would gain about $3.6bn under the per-capita division. What advocates for the change won’t talk about, however, is who would miss out.

The biggest loser would be the Northern Territory, which would have to do without $2.5bn a year. South Australia would lose $1.1bn and Tasmania would lose $735 million. These are not rough guesses but official figures from the Commonwealth Grants Commission.

It should be obvious that this sort of change would be madness for a federal government. Tony Abbott would lose three federal seats in Tasmania as well as several in South Australia if he were to entertain the idea.

More importantly, however, the change would destroy one of the foundations of the GST: the idea that everyone pays but the proceeds are shared so that each state and territory can provide the same standard of service.

WA gets less GST than it would like because it is buoyed by the mining boom. The Northern Territory gets more because it has huge pressure on services from social disadvantage.

The per-capita proposal would force the Territory to cut services or require the commonwealth to make up the $2.5bn — at a time of deep federal deficits.

A formal submission several years ago from four big states — WA, Victoria, NSW and Queensland — suggested the commonwealth take responsibility for any impact on the Territory and others. In effect, they just wanted to shift the burden on to Canberra.

A key problem in the debate is the popular description of the GST as a “state tax”, giving premiers a false sense of ownership. In reality it is a commonwealth tax and (whatever Abbott says) can be adjusted by law as federal parliament sees fit. It is distributed with the national interest in mind, not just the demands of each state.

WA Liberal senator Dean Smith is leading the call for a per-capita division but suggests this can be done separately from any increase in the rate or broadening of the base. In practice, however, any solution will have to collect more revenue before it can be shared differently.

One approach, for instance, would be to use the increase in GST revenue to put a floor under the amounts given to the Territory and others, while allowing for a shift to a per-capita distribution. This could fix some of the flaws in the “equalisation” process used by the CGC, where states that do well seem to get punished.

Victorian Liberal MP Dan Tehan has started the debate on whether to broaden the base of the consumption tax, suggesting this is a better approach than increasing the rate. The Grattan Institute says $16bn could be raised if the tax were extended to fresh food, education, health and childcare.

The kneejerk response from Labor and the Greens is to decry an increase in the GST as a hit to the poor, while many on the conservative side of politics object to any increase in taxation.

In a sign that there may be some middle ground on tax reform, the Australia Institute, whose leaders include former advisers to the Greens, suggest extending GST to private school fees and private health insurance premiums to raise about $2.3bn a year.

The scorn unleashed on anyone who advocates a broader GST — like Tehan this week — shows the difficulty of getting any change. Yet the financial pressures on Canberra and the states have to be addressed.

Tehan and the Australia Institute are at least airing proposals. The big states, meanwhile, are making a complaint without offering a real solution.

All state premiers demand free money from Canberra. This year they should have to say where the cash will come from.

 

Source: The Australian , dated 09/01/2015