Assigning State Taxes in a Federal Country: The Case of Australia

Abstract

Assigning taxes to regional governments is a major issue in all federations. Although neither the literature nor international experience provides clear guidelines on precisely what taxes should be assigned to states, we suggest that Australia should nonetheless reconsider the advisability of continuing down its current path towards total state dependency on federal finance. One efficient way to make states more openly responsible for financing the services they provide would be to permit them to tax personal income (on the same base as the existing federal tax), while continuing to have completely centralized collection. If this were done, the present state payroll taxes could be abolished. Alternatively, the GST - all the revenues of which now flow to the states through the federal transfer system - could be made a more transparent state revenue source, for which state governments were transparently politically responsible, by requiring states explicitly to impose their own rates (on the existing base). Again, collection should remain in federal hands. If either of these approaches were to be adopted, for reasons we discuss in some detail in the paper appropriate changes would also be required in the present federal-state transfer system. Even if neither of these ways of increasing state tax accountability is considered possible, the present system of state taxation needs revision. In particular, (1) the inefficient and undesirable taxes on property transfers should be abolished, (2) the system of vehicle taxation should be thoroughly re-examined and revised, and (3) the possibility of converting the payroll tax into a more general tax on factor costs should be explored.

Keywords: Australia, state taxes, intergovernmental transfers, fiscal federalism

JEL Classification: H71, H77