Australian business must not shy away from discussing state taxes and the goods and services tax at the Tax Forum in Canberra this month, writes James Bond, chief economist at the FSC.

Businesses should take courage from the breadth and depth of support in Australia for removing state taxes and use the Tax Forum in early October to push hard for this reform. Notwithstanding the tax changes of the past 15 years, further structural reform is needed. The original Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations (IGA), signed by Premiers and John Howard in 1999, introduced the goods and services Tax (GST) and abolished some – indeed, too few – state taxes. At the time it was rightly described as ‘a gigantic step’ forward for our tax system and Commonwealth-State financial relations. However, the IGA listed a number of state taxes to be reviewed at a later date. These taxes still remain, despite the fact that the GST was the mechanism to fund the states’ expenditure into the future. The Government had the opportunity to put the GST into the mix during the Henry Review. Its decision to specifically exclude it from the Review was a mistake.

Lifting or broadening the GST, or doing both, is the unfinished business of Australian tax reform. Australia cannot miss the opportunity again. 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 and real estate, as well as stamp duties, are among the most distortionary and inefficient in the economy. One obvious example is stamp duty paid on life insurance premiums. The Henry Review estimates that for every $1 of insurance tax collected, society loses close to 70 cents. The 2009 Johnson Report, looking at where Australia sits as a financial centre, makes the same point: “State taxes add significantly to the cost of insurance [and]…they are undoubtedly a factor contributing to underinsurance, with consequent increased demands on the public purse…they also act as a barrier to new entrants to our insurance sector.” These are not just taxes on businesses, as the Treasurer recently suggested.

Most are paid by consumers. The point is that if the GST were increased and state taxes abolished, consumers and businesses would pay less for a whole host of other taxes. Abolishing inefficient state taxes is an investment imperative. It will remove distortions that affect investment decisions – such as how assets are purchased, how long they are held and how they are structured. It will also improve the returns of shareholders by increasing the efficiency of business, which will no longer be saddled with a myriad of different taxes across eight jurisdictions. Taxing consumption rather than income will also assist in dealing with our ageing population by encouraging participation in the labour market and increasing the incentive to save for retirement. To ensure economic growth is maximised – and that governments raise the revenue required to deal with the challenge of an ageing population – we need to ensure that our tax system is as efficient and effective as it can be.

Leave a comment