Needing little encouragement from Justices Kirby and Callinan, the Henny Penny brigade are off and running over today’s Work Choices decision by the High Court. Tim Dunlop titles his post “The States are Dead” over at Rupie’s place. Meanwhile, the hard core lefties over at Lava Rodeo have convinced themselves that Satan’s Spawn Howard is about to eat the States alive, despite the fact that federalism has hardly until now been a sacred value for the left and that they’d all be cheering from the rooftops if a Labor PM had used exactly the same powers to achieve an objective more ideologically attuned to their desires.
Meanwhile, even genuine federalists like conservative constitutional lawyer Greg Craven have instantly resorted to hyperbole:
“I think the reality is that this will enable the Commonwealth to intrude into areas like health and education,” he said.
“It would certainly for example, allow the Commonwealth to pretty well take over the regulation of universities.
“Anywhere where you’ve got a corporation this decision will allow the Commonwealth to take pre-eminence.”
Which parallel universe has Craven been living in to have failed to notice that the Commonwealth took over regulation of universities years ago, without any need to rely on the corporations power?
Does the High Court’s Work Choices decision really spell the end of federalism? Right wing commentators made similar noises back in the 80s when the Hawke government was busily using the external affairs power to ride roughshod over States’ rights in a series of cases beginning with Tasmanian Dams. However, as left-leaning commenter Paul Norton observed earlier today in a comment to my primary post on the High Court’s decision, the Hawke and Keating governments actually exercised a fair degree of restraint in the extent to which they used the external affairs power to override the States:
Hawke used the power to block the Tasmanian Dam, but then resiled from using it to overrule the Bjelke-Petersen government on preserving the far north wet tropics until it became clear that the political auguries were favourable for such a move. There were a (very) few subsequent instances of Federal Labor governments invoking it against rogue States (e.g. to preserve Tasmanian forests in 1988 and to block the Port Hinchinbrook development in Queensland in 1994), but there were also examples where the power could have been invoked but wasn’t (e.g. the Tarkine wilderness dispute in 1995-96).
Howard too has exercised restraint in using both the external affairs power and the corporations power against the States. Despite being in power for over a decade, this is pretty much the first occasion he has done so to enact any significant piece of legislation which reduces State power. Moreover, he certainly wasn’t ignorant of the potentiality of both these constitutional heads of power. The Keating government’s IR legislation was upheld by the High Court in 1996, not only in reliance on the treaties aspect of the external affairs power but also on the corporations power. That is, the Keating government enacted IR legislation (albeit in a much narrower compass) and supported it in part with an argument about the scope of the corporations power that is relevantly almost indistinguishable from the one Howard used successfully to support Work Choices.
And yet until now John Howard has made no moves to capitalise on the situation and crush the States. Is this just because, like Hawke and Keating, Howard is a model of constitutional restraint who respects deeply the role of the States and doesn’t crave greater power? Or might there be other reasons for this bipartisan restraint?
Certainly one reason might be the residual federalist sentiment among true conservatives in Coalition ranks. Another may well be political constraints flowing from the range of interest groups that would be adversely affected and antagonised by an overweening exercise of Commonwealth power. Another (reminder from whyisitso) is undoubtedly the fact that Howard hasn’t until recently had control of the Senate.
But there are also inherent constitutional constraints whose very existence is frequently denied even by many constitutional lawyers who should know better. Most commentators assume that the States have been fiscal hostages of the Commonwealth ever since the First Uniform Tax Case during WWII effectively stripped then of their income taxing powers, a process exacerbated by the generous interpretation given by the High Court to the Commonwealth’s power to make tied grants to the States under Constitution section 96. Moreover, they argue, the final nail was driven into the coffin of State fiscal dependence by Ha’s Case in 1998 which removed the States’ ability to tax tobacco, liquor and petrol under the guise of “licence fees” to avoid the fact that the Commonwealth has exclusive power to levy excises (“inland taxes on the sale and distribution of goods”). Hence, so the argument goes, the States were forced to accept the GST crumb from the Commonwealth table, and Alfred Deakin’s ancient prophecy that the States would end up legally free but ”financially bound to the chariot wheels” of the Commonwealth has been fulfilled.
However, is this story of State fiscal dependence actually true? First, there is no constitutional impediment whatever preventing the States from levying taxes on services (as opposed to goods), and services are an ever-increasing proportion of any modern post-industrial economy. Secondly, the High Court expressly left open in Ha’s Case the question of whether the Commonwealth enjoyed exclusive power to levy consumption taxes on goods, that is taxes on the end consumer as opposed to taxes on manufacturers, wholesalers, distributors, retailers and others in the supply chain. Thus the idea that the States are unable constitutionally to levy their own “growth taxes” is seriously misconceived. In reality it suits the States to cry poor and ritually blame the Commonwealth every year at budget and Premiers Conference time, and it equally suits the Commonwealth to allow them to maintain the charade.
Moreover, it’s equally a charade in relation to income tax. The States and the Commonwealth enjoy concurrent legislative powers in relation to income taxes. The Commonwealth was able effectively to exclude the States from the income tax field during WWII, by the cynical manoeuvre of using the carrot of section 96 tied grants and the stick of the Constitution’s defence power during wartime to compulsorily transfer State Tax Office public servants and the buildings in which they worked to Commonwealth control!
However the Commonwealth would not be able to use the defence power to do this again today during peacetime, if the States decided again to levy their own income taxes. Moreover, if threatened with withholding of section 96 grants, the States could simply set their income tax rates at a high enough level to raise all the revenue they need for their own spending purposes.
There is nothing either in constitutional law or practical reality stopping the States from doing this other than the fact that they don’t want to collect their own income taxes. It’s both more expedient and more efficient to allow the Commonwealth to collect the taxes and then ritually whinge about being shortchanged.
I’m certainly not suggesting that the States should revert to collecting their own income taxes (or partial GST), nor that they would do so in any but a very drastic situation of almost terminal erosion of State sovereign power. Apart from the efficiency of a single national tax agency, the Commonwealth’s role also permits the federal Grants Commission to exercise its benevolently pro-federalism role of distributing revenue to the smaller States to allow them to provide their citizens with a level of government services and infrastructure approximately equal to the larger and more densely populated ones. More than any diminution of the Federal Balance engendered by any High Court decision including today’s, the Grants Commission structure ensures that Australian federalism remains strong.
Nevertheless, both the Commonwealth and the States (or at least their more canny advisers) are well aware that the States could pull the pin on this cosy and mutually desirable arrangement tomorrow, if the Commonwealth overplays its hand badly enough in the way it uses the other constitutional trump cards it holds as a result of the Engineers’ Case and succeeding decisions that have progressively expanded the reach of Commonwealth legislative power. More than anything else, I suggest, these much misunderstood aspects of federal fiscal relations go a long way towards explaining why Hawke, Keating and now Howard have all exercised considerable restraint in using the external affairs and corporations powers to enlarge the Commonwealth’s legislative reach to an extent that would force the States to seriously consider taking drastic action and reclaiming their constitutional taxing powers. It also explains why Howard was quick to reassure the States today in the wake of the Work Choices decision, and why his reassurance was anything but “meaningless” in the constitutional context:
PRIME Minister John Howard says his Government will not use today’s High Court victory on workplace relations as a mandate to massively extend the powers of the Commonwealth.
Despite the comments of Justices Kirby and Callinan, there is quite limited scope for the Commonwealth to use the corporations power to encroach on the major traditional State areas of health, education and policing/justice. The State police and courts systems are not run by corporations, nor are most schools and hospitals.
The Commonwealth already exercises a degree of policy influence over health and education through its use of section 96 tied grants, however, and may seek to encroach still further through imposition of a national curriculum. But that’s not necessarily a bad thing, as long as some curriculum choice is permitted through the International Baccalaureate and other well recognised curricula.
In other “traditional” State areas too, like roads, power, water, sewerage, local government, building, planning and development regulation and the like, the corporations power also has quite limited potential to increase Commonwealth power. In these areas too, the Commonwealth grants power is sometimes already used strategically to achieve national goals. Moreover, many of the left-leaning commentators screaming most loudly about the Work Choices decision would rightly be very happy to see the Commonwealth intervene to impose a responsible national water policy in a crucial area where manifestly parochial State interests are operating against the greater public interest.
And that’s really the point. If you step back from immediate partisan reactions to particular exercises of Commonwealth power, the picture is mostly one of restraint, with the Commonwealth (under both Labor and the Coalition) sometimes stepping in to provide national leadership in critical areas either to the economy or the environment, but with the States remaining predominant in areas that are genuinely of more local concern. Certainly the range of matters of national concern has expanded as the world’s economy has grown exponentially and become ever more complex and interlocked, and as global warming and other issues have revealed a pressing need for national and international co-operation on the world environment that could not have been imagined by Australia’s Founding Fathers.
I think Australians too often sell our Constitution short. We consistently exhibit a largely unjustified constitutional cringe. Our constitutional system is far from perfect, but continues to show a remarkable capacity to be shaped by the High Court and the political process to meet the needs of a rapidly changing world. Certainly the process of change is messy and characterised not by neat central planning but by “bottom up” contestation and dynamic tension between competing loci of political and legal power. However, that’s not only almost inevitable, it’s also what key Founding Fathers like Andrew Inglis Clark avowedly intended. Australia’s Constitution continues to meet the challenges of the 21st century. It will again show itself capable of accommodating even more vital changes if/when a Coalition or Labor government gets around to tackling climate change through implementing a system of tradeable carbon emissions permits and other measures that will certainly require a strong role for national government.