Turnbull’s State Income Tax Still Afloat

When Malcolm Turnbull announced that he would offer the States the opportunity to impose an income tax, he described it as one of the greatest potential reforms to Federation in ‘generations’… “this, we believe, is the only way that we can genuinely reform our Federation… It will give the states real financial autonomy”.

But when the States rejected the offer, Turnbull initially described it as being “not there” now. Soon however it reappeared, first in the COAG Communique and then in Turnbull’s explanation (sic) of the reason for the rejection and the implication as he sees it.

I suspect that the Communique itself went further than the Premiers really agreed on the State income tax, viz

“COAG welcomed the Commonwealth’s initiative to help resolve the longstanding problem of vertical fiscal imbalance and improve state autonomy. There was not a consensus among states and territories (states) to support further consideration of the proposal to levy income tax on their own behalf. Leaders agreed to consider proposals to share personal income tax revenue with the states to:

  • provide them access to a broad revenue base that grows in line with the economy;
  • reduce the number of tied Commonwealth grants to the states, providing them with greater autonomy and reducing administrative burden; and
  • create flexibility for states to meet their ongoing expenditure needs.

COAG further agreed to continue pursuing initiatives that will enhance transparency by providing Australian citizens with a greater level of real time data on how government money is spent and on the outcomes and performance of government initiatives. COAG agreed that this work, along with the work on broader opportunities for tax reform, including state tax reform, will be progressed by the Council on Federal Financial Relations, with a progress report to COAG at its next meeting”.

Despite the insertion at the request of one or two Premiers that  “There was not a consensus among states and territories (states) to support further consideration of the proposal to levy income tax on their own behalf”, the rest of this section of the Communique appears to have been “managed” so as to leave further considerations open.In addition, Turnbull has attempted to put his State income tax initiative in a favourable light publicly and to put the States in the position where they cannot politically now ask the Commonwealth to increase taxes when they are refusing  to contemplate it themselves (see Turnbull After COAG).

This skates over a whole range of questions which Turnbull has not attempted to address by issuing a discussion paper let alone  having a serious oral discussion with individual Premiers before COAG. One which appears overlooked is that one version of the State income tax would have been accompanied by a commensurate reduction in Commonwealth grants. There is an old rule that one doesn’t announce a new policy without first finding out if it is likely to be reasonably well-received.

As I suggested in my previous Commentary, Turnbull’s main objective was probably to float a “new” idea that would be well-received in general terms and which would be based on a well-recognised need to reduce the vertical fiscal imbalance. Never mind about the detail and the political difficulty of negotiating substantive change.

I cannot help feeling that Turnbull is behaving a bit like the late Ronnie Corbett in his famous blackberry sketch. Ronnie’s main problem  was in trying unsuccessfully various possible solutions to making the blackberry work only, in the end, to find that “Well, I’m trying to put my dongle in it and it won’t fit” (see Turnbull the new Corbett?).

Turnbull’s search for the economic  policy dongle is certainly not fitting.

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