The practical wherewithal is the capacity to increase and/or broaden the GST. The tax summit in 2011 provides a second chance to reform our inefficient state taxes. On the day Julia Gillard became Prime Minister, the Financial Services Council called on the Government to consider this solution. Since then a broad range of Australian business representatives have expressed the same view. The IMF recently recommended Australia increase its reliance on taxes on consumption. The removal of state taxes and review of the rate of GST must be the focus of the 2011 tax summit. Modelling done for the Henry Review shows that six of the 10 taxes that have the highest marginal cost on society are state taxes.
Taxes on insurance, payroll, motor vehicles, real estate and stamp duties are among the most distortionary and inefficient in the economy. Abolishing these taxes is an investment imperative. It will remove distortions which affect investment decisions – such as how assets are purchased, how long they are held and how they are structured. This will improve the returns to shareholders by increasing the efficiency of business. This is a difficult issue that poses significant political challenges, but just as the Howard Government forged ahead in 1998 and 2000, the States and Commonwealth must now acknowledge that the GST is the next step in the ongoing tax reform journey. Whereas many state taxes have high economic costs, the GST has a low economic cost. By virtue of its broad base, it does not distort consumer decisions away from one product to another. Lifting and/or broadening the GST to replace inefficient state taxes is the unfinished business of Australian tax reform.
However if this reform is to work, the process and methodology for distributing GST revenue to the states also needs to be reviewed and improved. GST revenue is currently collected by the Commonwealth and distributed to the States based on need according to a methodology determined by the Commonwealth Grants Commission (CGC). This means that some states pay more into the GST revenue pool than they get out, effectively crosssubsidising the “needier” states. This causes considerable angst and recrimination from the states that pay in more than they get out. The process of redistribution is a black box that few understand. Replacing state taxes with an increased GST means more state revenue will be subjected to this process, exacerbating the view that some states are treated unfairly. Next year’s tax summit should be held in conjunction with a special meeting of Council of Australian Governments to identify solutions to these concerns.