Reports of the death of federalism are much exaggerated

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.    

About Ken Parish

Ken Parish is a legal academic at Charles Darwin University, with research areas in public law (constitutional and administrative law) and teaching & learning theory and practice. He has been a legal academic for almost 12 years. Before that he ran a legal practice in Darwin for 15 years and was a Member of the NT Legislative Assembly for almost 4 years in he early 1990s.
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18 Responses to Reports of the death of federalism are much exaggerated

  1. Patrick says:

    Fantastic post Ken.

  2. lisa says:

    That’s a kind of funny thing for Howard to say before the opposition even suggested that the Commonwealth was encroaching on the power of the states… Phrasing the statement this way like a “pre-emptive attack” makes it sound like today’s High Court victory WILL be considered a mandate to massively extend the powers of the Commonwealth!

  3. SJ says:

    I understand and agree with what you’ve said, Ken.

    Neverthless, it has troubling aspects. The implication is that the Labor controlled state governments could bring the whole charade to an end, if they chose to, but choose not to.

    State Labor, particularly in NSW, has been shifting ever rightward, and not in the Nick Greiner style efficient sense. They’re going for the lazy corrupt and stupid style ala Bush. People don’t like this very much. The NSW opposition is trying to outflank them on the right, which is politically untenable, and which means that there’s no viable opposition.

    It’s convenient for the state Labor governments to let Howard do what he wants, because it makes them the “reasonable” alternative to him.

  4. Vee says:

    I know I’m daft but I don’t see how the income tax case is relevant at all.

    As for Howard saying it wont use something as a mandate, he said the same thing about the Senate which turned out to be a lie.

    I see you have fallen for the Catallaxist and Larvatusprodean trap of categorising things in left and right.

    The difference with University takeover, it appears to have been a good decision.

    Recent VSU legislation withstanding.

    This may be the correct legal precedent finding on federalism and the corporations power found by the highest judiciary body but that does not remove the fact parts of the WorkChoices laws are unjust quashing what faith I had in the Judicial system. Any other court and it wouldn’t have mattered.

  5. Ken Parish says:

    Vee

    I’m not arguing the Work Choices law is substantively just. In fact I have very significant reservations about it. That isn’t the point of these posts. I’m simply arguing that this decision’s effect on federalism is being greatly exaggerated.

  6. Jacques Chester says:

    Constitutional law, and the policy questions surrounding it, are probably the only subject in my law studies that I ever really warmed to, Ken.

    An excellent post in general, and of course this demonstrates the pitfalls of drafting constitutions. The shorter they are, the harder it is to be categorical. The longer they are, the easier it is to find phrases which provide comfort to some particular interpretation.

    I think that the most damning thing about post-Engineers decisions is the makeup of the court before Engineers: the Justices were to a man all drafters of the document. It held no puzzles to them, and intentionalism was the quite natural method of interpretation for judges who could simply cast their mind back to what they were thinking at the time.

    While I agree that the States will reserve resumptions of latent taxing powers for some dramatic circumstances, I also think that this is not the whole extent of the problem. It is not as though anyone other than Augustus Gough II is going to leap into dozens of new legislative areas. What will happen is a pitter-patter of erosion: a program here, a new department there, and before you know it the States are even more completely hollowed out.

    Which is, incidentally, what’s been happening for the past 80 years.

  7. Bill Posters says:

    Ken,

    Did you actually read what Kirby and Callinan wrote? They certainly seem to believe this is the end of federalism. Kirby in particular is scathing.

  8. Ken Parish says:

    Bill, if you had read the post immediately below this one, you might have noticed that I discussed the Work Choices decision itself at some length, including especially the judgments of Callinan and Kirby JJ.

  9. whyisitso says:

    “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”

    While I generally agree with Ken’s fairly moderate comments on Howard’s approach, the fact is he hasn’t been “in power” for over a decade. As PM he had control of the Reps and was able to set a legislative agenda but only to the extent that it didn’t run up against firm opposition from the ALP. He only got his (amended) GST through by using patient negotiation with Meg Lees even after winning an election in which GST was the major issue. Reith managed some IR reforms by negotiation with the left-wing Kernot. These hardly constitute “power” to carry out his desired agenda. Even his so-called control of the Senate since the last election is severly circumscribed by independent-minded senators of whom Joyce is but one.

    Nevertheless Ken is right – John Howard is a very patient man and IR reform has been close to the top of his list of reform for many years. He’s not likely to go out on an anti-State binge.

  10. whyisitso says:

    Paddy McGuiness is much more concerned about opening the door for a future LarvatusProdeo type government in this morning’s Oz.

  11. Paul Norton says:

    Apart from the issues raised by Ken, Federal governments will also be restrained (or, more likely, selective) in their use of their new-found power by two important considerations:

    1. It will often not be politically advantageous for Federal governments to assume ongoing “ownership” of entire areas of policymaking, as distinct from selective, politically popular interventions such as blocking the Franklin Dam.

    2. There is also the practical consideration that if the Feds were to assume responsibilities currently exercised by the States in relation to schools, hospitals, natural resources, etc., they would need to create and finance an elaborate machinery of government of similar scale and complexity to the existing State bureaucracies currently dealing with these issues.

  12. Robert says:

    Ken, you’re only partly correct about universities. The Federal Government pulls the funding strings, but the States still have a fair bit of input. It seems pretty likely that Howard will press for more direct control over universities, in reliance on the corporations power (though they still won’t control everything). See the other Norton.

  13. derrida derider says:

    That past governments or this government have used and promise to use their powers with restraint is beside the point. An important constitutional check has been abandoned. Abandoning such a check will have long term implications.

    It’s as though the Court decided that holding goverment required the confidence of the Senate, not the House, and Steve Fielding then promised not to bring down the government. Such a promise is beside the point – there has been a long term change in power relationships.

  14. whyisitso says:

    Allowing the federal government to make virtually any regulation under the guise of its foreign affairs power is a far more blatant overriding of State preregotives than this one.

    The Franklin Dam decision may well have been a good one on its intrinsic merits, but it had nothing at all to do with the exercise of foreign affairs.

    At least this one has a logical connect with corporations law.

    Unfortunately previous decisions had the effect of opening pandora’s box and you just can’t put the lid back on.

  15. Jacques Chester says:

    whyisitso;

    The reason that both the Foreign Affairs and Corporations powers are so broad and powerful is because of the doctrine which grew out of Engineers: that each power should be read as widely as possible in isolation from the others. Whatever is left after this process is still within the orbit of the States.

    When you take this line, then the High Court’s decisions in the Franklin Dam case and this latest round are perfectly valid. They might do horrible violence to the intended functioning of the Constitution, but it’s legal.

  16. Ken Parish says:

    Jacques

    Exactly. That’s one of the points I’m making in these two posts. Callinan and Kirby’s judgments in Work Choices demonstrate that you can’t cogently mount an argument for reading heads of power in an interconnected, federal way without first demolishing and rejecting Engineers. There’s no sign of that occurring, although Callinan flirts with the idea in his Work Choices judgment. It seems fairly unlikely that a judicial or even academic groundswell against Engineers will ever develop, though.

    My other point was essentially that the States aren’t as helpless as most commentators assume. They COULD mount a counter-attack if they chose, especially while all of them are Labor-controlled. A Convention as Rann suggests might not be a bad idea, but it could actually be done by State governments themselves reaching a common position and then putting a proposal to the Federal government involving referral of powers in return for the Commonwealth vacating fields agreed as wholly State responsibilities. The aim would be to re-allocate responsibilities in a rational manner so that functions that require high levels of national co-ordination would be Commonwealth and those more naturally local would remain State responsibilities. The States should also reclaim their taxing functions as part of this federal radical renovation. There would be no reason why State laws could not vest tax their actual tax collection functions in the federal ATO, just as the States currently vest corporate regulation functions in ASIC. Thus there wouldn’t need to be any effective difference from the current situation – to all intents and purposes people would still pay the same amount of tax to the same agency, but constitutional control would have reverted to the originally intended situation of federal division. As I say, all this could be achieved by the States themselves treating with the Commonwealth using the constitutional cards they possess and taking a strong joint position. It doesn’t require either a Constitutional Convention or any constitutional amendment at all; merely the requisite will.

  17. Jacques Chester says:

    I’m glad that some of my law studies stuck.

    Honestly though, what are the odds of a states-led discussion on State-Commonwealth allocations of the nature you’ve proposed?

    I for one would support at least the process. Perhaps you should lean on your ALP history and call the Chief Minister’s office, Ken?

  18. Grace Kelly says:

    While I agree with Ken that the implications for this decision are far less than the commentariat (of the left and the right) would have us believe, I think that’s leaving aside a crucial question: are the states redundant regardless of the most recent High Court decision?

    I think the answer is yes. Certainly, there are local concerns that a national government wouldn’t be in a position to deal with adequately. But the same could be said of state governments. How effective is a government based in Perth at understanding the issues of the far north west? Furthermore the state boundaries are so arbitrary and anachronistic. They make absolutely no sense. They’re based on a model of major city plus hinterland. Not exactly a recipe for taking into account the local concerns of rural and regional areas. A model based on enlarged regional governments and one national government make much more sense.

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