FEDERATION REFORM # 3.3 – REVENUE CONCLUSIONS
This essay proposes these changes in Commonwealth revenue:
Federal government becomes primarily reliant on GST along with corporate income tax. Federal government ‘holds onto its own money (GST)’ enabling ‘as-low-as-possible’ rates for personal income tax (albeit with ‘equity’ of a progressive tax scale). Budget numbers in this essay halve personal income tax.
State governments become primarily reliant on land taxes. Federal government merely adds transparent top-ups for ‘equity’ across different states.
Royalties and other natural resource revenues are ‘banked’ into a single Australian sovereign wealth fund maintained by the federal government.
State ‘behavioural’ taxes and fines (in theory, not implemented to raise revenue) could also be ‘banked’ to sovereign wealth funds maintained by each state.
These proposals for federation reform require no change to the GST base or the GST rate (but enable federal reform of GST, unfettered by state interests).
Benefits of federation reform should not be difficult for competent politicians to convey. Delivery of government services was addressed in Essay 7.
Opportunity to energise a nation by ‘halving personal income tax’ (as part of federation reform) can motivate votes for change (including new land tax).
First (as proposed in earlier essays):
The federal government exercises its power under Section 51(iv) of the Australian Constitution, requiring all state and territory governments to (broadly) balance their annual budgets.
Budgets would transparently differentiate between recurrent and true capital spending. Budgets would include full breakdown of amortisatisation of all capital spending – say over a nominal period of 30 years (Note 1) – from the date of expenditure on a project (not from the date of completion of a project).
The federal government ceases to distribute any grants to state governments (of GST or otherwise) excepting its “using section 96 tied grants sparingly for genuine purposes of assisting smaller states and for addressing genuine issues of national interest” (Note 2).
Once state politicians are no longer able-to-play-blame-games with the Federal Government, they have to deliver.
State and territory governments displace all their existing revenues (federal grants, payroll tax, stamp duty, mining royalties) with broad-based land taxes. Unlike stamp duty and mining royalties, land taxes provide a steady income stream which enable proper discipline in government fiscal planning. Land taxes would be ‘painfully obvious’ to all voters (both home owners and renters), encouraging a strong culture of requiring ‘real value for money’ in all realms of state government.
The federal government would provide modest ‘section 96 revenue equalisation grants’ for most states, based on transparent variations in state-average-personal-incomes. This would involve adjustments paid to all states, excepting the state whose population enjoys the highest-state-average-personal-income. The grants would be based on the percentages, by which the highest-state-average-personal-incomes, exceeds average-personal-incomes in each other state. The relevant percentage would be applied to the total land tax, which each other state determines to impose on its own voters, to determine its simple ‘equalisation’ top-up from the federal government.
The federal government reduces personal income tax revenues by a factor of 50%.
Half of the $234.1 Billion personal income tax received by the federal government in 2019-2020 would be $117.0 Billion.
(initial figure sourced from Federal Budget 2019-2020 Overview page 32, see Note 3 below)
A reduction in personal income tax receipts by $117 Billion very closely approximates the $116 Billion which the federal government would have saved, by holding onto both all the GST ($69.1B) and 80% of the ‘tied’ grants which the federal government distributed to the states in 2019-2020 ($46.6B, leaving say a ‘net 20%’ – $11.7B – of ‘total tied grants’ of $58.3B in place).
(figures sourced from Federal Budget 2019-2020 Paper No.4 page 1, see Note 3 below)
How such a major reduction in overall personal income tax revenue, would match up against Australia’s existing personal income tax scales, is beyond the scope of this essay. Some conceptual ideals (for both personal and corporate income tax rates) will appear in Essay 12 and Essay 13 respectively.
Alternatives (to Fourth above):
According to Commonwealth estimates cited in NSW Review of Federal Financial Relations (see Note 5 below, page 37) a ‘broad-based’ GST would have generated an additional $27.4 Billion in the same 2019-2020 year. There is obviously a spectrum of further possible options, ranging across (a) broadening the GST base and/or increasing its rate, with a commensurate greater reductions in federal reliance on personal income tax; to (b) continuing to distribute a GST share to the states (with or without a broader GST base and/or increase in GST rate), with commensurate reductions in state revenue required from land taxes.
Federal government maintains a sovereign wealth fund to bank mineral royalties and natural resource rents. State governments maintain similar funds for behavioural taxes. These revenues are invested (no longer used for recurrent spending). Monies released from the funds, are limited to income and realised net capital gains.
The federal government offers to collect, on behalf of any state, a flat personal income tax levy nominated by the state of between 1% to 5%. The offer would only be made in the context of a rolling [two] year period arising, in respect of which a particular state will fail, or has failed, to balance its finances.
New broad-based land taxes pose equity issues for most recent buyers of property. The simplest compensation for these buyers (recent payers of stamp duty) is to defer the application of new elements of broad-based land taxes to their property until – say – the 5th anniversary of the date of purchase. This approach of nominal compensation is preferrable to ‘credit for stamp duty paid’ (impressions of which, are likely to tend not to consider, reductions in income tax).
A complication upon implementation, is that the new land taxes (intended as a steady and reliable income for the states) will initially be reduced, by the ‘length’ of any ‘compensation period for recent buyers’ (see above). This temporary shortfall could be funded by federal government section 96 grants, for – say – the first two years (being the most costly) of the transition period.
This essay favours property taxes based on ‘unimproved’ land values. ‘Improved’ land values offer greater risk of undue incidence of valuation disputations.
Specifics of land taxes could be left to each state. In theory, land taxes should involve as few ‘category exemptions’ as possible; and a ‘zero-dollar-threshold’ for land tax status. Consideration would need to be given to the best approach to strata and company title residential buildings: Whether to make zero adjustment to land value of a multi-storey building; or to multiply it by the total number of floor levels with different titles.
Counter arguments / Compensation offsets
Envisaged changes are not intended as ideological. They are envisaged as a compact of potential bipartisan political reform.
Changes of the massive scale envisaged in this essay cannot be achieved through the political line (lie) that ‘nobody will be worse off’.
Three clearly identifiable categories of persons impacted by any trade-off of ‘less personal income tax for more land tax’ are:
(a) Active Income Earners;
(b) Recipients of Social Security; and
Active Income Earners
Active income earners will benefit from reduced personal income tax reductions. Of these earners, many residential tenants (to one degree or another) already subsidise their landlord’s land tax exposure. To that extent, in theory, there is less immediate impact on renters than homeowners.
Net impact of the trade-off of less personal income tax for land tax will vary from voter to voter.
Social Security Recipients
Like everyone, social security recipients will be subject to land tax either directly (on their own home) or indirectly (through payments of rent). The impacts of land tax on tenants are impractical to assess, as the flow-on rental increase for each property (if any), will vary according to their landlord’s circumstances (namely what land tax is already paid on the property).
One option, is for states to temporarily preclude or limit residential rent increases, following changes in land tax. Any change then initially falls on landlords.
Most self-funded retirees own their own home. Many will incur a new land tax expense, for which they are unlikely to be fully compensated through reductions in personal income tax. One solution, is to simply exempt owner-occupiers over a certain age, from land tax on their principal place of residence.
A less popular alternative would be for states to provide retirees with the option, of deferring payment of land tax during their retirement, by permitting it to accrue as a charge against their property (in favour of the state government). The burden of the tax then falls on their estate. In theory the deferral could also apply to any investment properties held by retirees.
For and on behalf of Common Sense for Australia Inc
Authorised for publication, 20 January 2022
Note 1: Smaller Government is a core principle of Common Sense for Australia Inc, inclusive of the principle that government borrowing “for capital spending should be matched to projects and repaid with 30 years (within one generation)”.
Note 2: Words of Professor Brian Gallaghan, https://theconversation.com/renewing-federalism-what-are-the-solutions-to-vertical-fiscal-imbalance-31422