Taxing times for the States

In a post a week or so ago I lamented the seemingly imminent terminal dismemberment of Australian federalism at the hands of an arrogant fourth term Howard government with apparently little or no understanding or respect for the fundamental principles of liberal democratic constitutionalism and the checks and balances that help ensure a free society.

But what would you do if you were a State Premier facing the imminent prospect of being reduced to the status of a large municipal council acting at the direction and behest of an omnipotent federal behemoth? Would you complain impotently but do nothing? Hope that Howard and his minions come to their senses, or that State Liberal politicians miraculously acquire some backbone and begin fighting proposals that equally threaten their own political survival? Shrug your shoulders philosophically and accept the inevitability of political oblivion? Hope that the High Court realises in a blinding flash of insight that it has prostituted its constitutional role for much of the last century and decides belatedly to reverse a slew of appalling and unprincipled anti-federalist decisions?

None of those options strike me as even slightly attractive or effective. But is there anything effective the States can actually do? I reckon the answer is in the affirmative, although it’s a high risk strategy. The Premiers should immediately start planning to sieze back their powers to tax income and services.

They should certainly make it clear that it’s very much a desperate last resort, that they would greatly prefer to leave taxation in federal hands as long as the revenue is fairly distributed, and would instantly reverse their plans if the Howard government came to its sense and backed off its wholesale centralisation plans. But they should nevertheless make it uncompromisingly clear that they will follow that path if given no choice. That way the Commonwealth too faces a real risk: that by over-reaching itself it will end up sacrificing much of the power it has accumulated over the century since Federation. Although that power has several sources, control of the purse strings is by far the most important.

I suspect many readers assume that the Great Commonwealth Tax Grab of the 1940s is somehow constitutionally-based and irreversible. That simply isn’t the case. The taxation power is a concurrent one. The Commonwealth scheme relied in considerable part on the defence power in wartime conditions to allow it to confiscate State tax office personnel and premises to make it effectively impossible for the States to continue collecting their own income taxes. That power wouldn’t be available today.

There is nothing in the Constitution to prevent the States collecting their own income taxes (or taxes on services). The reality is that, despite a lot of conspicuous, confected indignation, it has mostly suited the States quite nicely to allow the Comonwealth to be the central tax collector. But there’s been a tacit federal compact whereby the States cede that role to the Commonwealth as long as it hands sufficient revenue back in a transparent and fair manner (either through Commonwealth Grants Commision or GST formulae), and as long as the Commonwealth doesn’t use its power to make tied grants under section 96 so oppressively as to utterly deny the States roles as even vaguely co-equal and sovereign federal partners. The Howard government appears about to comprehensively breach that tacit federal compact, so the States really don’t have any choice but to re-visit their willingness to continue allowing the Commonwealth to be the unchallenged central tax collector.

The States should all agree to set up a Joint State Tax Office that would levy a uniform state income tax on all Australian individuals and companies. The rate should be set so that it covers all state spending needs, so that the States can afford to tell the Commonwealth to shove its GST revenue and section 96 tied grants where the sun don’t shine. The Commonwealth would then be under intolerable pressure to reduce its own tax take back to the level required to fund only it own spending needs. It should be fairly easy for people to see which polity was guilty of greed and duplicity in that situation, and it wouldn’t be the States.

Of course, there are two major practical problems. First, would State Premiers be able to agree on a Grants Commission-style formula whereby tax receipts were remitted to smaller States at higher per capita rates so that all Australians could enjoy roughly the same level of government services? And would State Liberal leaders simply use the opportunity to campaign cynically against State ALP administrations in the same way Paul Keating did against Hewson’s GST?

On the first issue, I suspect the situation is now so dire that State Premiers will be able to reach agreement on a fair division of the revenue pot. What is the practical alternative? In fact they could do a lot worse than simply adopt current Grants Commission formulae. The likely opposition of state Liberal leaders is much more problematic. One would be naive to imagine that some if not all of them wouldn’t use the opportunity to run a fear and loathing campaign that presented Labor as evil tax grabbers. But at least some of the impact could be diminished by:

(a) enacting the legislation rapidly and pre-emptively, but postponing its actual implementation date to give the Commonwealth an opportunity either to back off its own centralist plans or abolish its own excessive tax grab; and
(b) enacting the new tax legislation with entrenching provisions requiring a super-majority of (say) 80% for repeal. That would effectively be signalling that the new tax regime is here to stay unless the Commonwealth comes to its senses and reverts to some reasonable facsimile of good faith adherence to the federal bargain on which Australia’s constitutional sysem is based.

In any event, quite frankly there would be little or no point in being a State Premier or Minister if the Howard government gets away with implementing all or most of its threatened centralising measures. Now is the time for a “crash through or crash” strategy. State Labor politicians could perfectly reasonably take the view that the Libs are welcome to the spoils of state government, such as they would be, if they fancy the prospect of poncing around State Parliament House with only the trappings of power and none of the reality.

Sadly, I’m not so naive as to really expect they will actually take such risks. Far too many will no doubt quietly decide to hang onto the cushy salary, super and travel perks that come with state government Ministerial office, and conclude that it’s a very comfortable, well-paid if powerless municipal council position, and use any plausible excuse to avoid taking a principled stand against the centralist power grab. But I really do hope I’m wrong, because federalism is a constitutional value worth fighting to preserve.

About Ken Parish

Ken Parish is a legal academic, with research areas in public law (constitutional and administrative law), civil procedure and teaching & learning theory and practice. He has been a legal academic for almost 20 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 the early 1990s.
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James Hamilton
James Hamilton
2022 years ago

One option is to agree to Peter Costello’s very reasonable request to reduce state taxes in the face of bucketloads of GST. I like most fellow western hicks am all for States Rights but it would be nice if just for once it was about something other than the States right to pay more tax.

States Rights in current debate is a red herring. It’s about taxes. I choose to support the side that says I pay less against the side that says I shouldn’t.

jen
jen
2022 years ago

‘Sadly, I’m not so naive as to really expect…..’

I don’t know.
There might be a bright, energetic principled pollie out there who adores the federal system as much as you do. She might also be a great advocate,so she might get everyone who matters on side to champion decentralisation.

You are such a cynic!
Such an Eyeore. (Luv you pooh bear. OUCH!)

It MIGHT happen next week.

Ken Parish
Ken Parish
2022 years ago

James

But Costello ISN’T saying you should pay less. He’s saying the States should abolish taxes that they NEVER agreed to abolish (only to review), so that they can be even more helplessly dependent on Commonwealth largesse, at the same time the Commonwealth is threatening to use a variety of powers to take over industrial relations, hospitals, education etc etc. It’s like Jack the Ripper urging prostitutes to trust him.

But your point leads to another one. It might well make sense politically for the States to pitch their new income tax rate at a level that allows them to raise ALL necessary state revenue in that way, so that all other state taxes could be abolished. That would be doing exactly what Costello is demanding, and if he then thinks the total tax take is still too high he can reduce Commonwealth taxes and spending instead of demanding that someone else take the hard decisions he isn’t prepared to make himself. The enormous virtue of this scheme would be that the government that spends the money would be directly responsible for raising it, and no-one would be able to get away with the cynical posturing and blame-shifting that is such a central part of the current system.

Scott Wickstein
2022 years ago

The other point is, federalism is not exactly a core ALP value anyway- I would have thought it was Howard that is doing what the ALP would have wanted to do anyhow? So I can hardly see the State Premiers kicking up that much of a stink about it, even if they had the courage to implement such a reform of this nature.

Dave Ricardo
Dave Ricardo
2022 years ago

I’m not so sure that the states could do this constitutionally. The High Court said in ’97 that they couldn’t levy excise taxes. That could easily be interpreted to mean any tax on any production, which is what an income tax is, arguably.

Yes I know they used to levy income taxes but I’m not aware that anyone ever challenged their ability to do so. (memo to constitutional lawyers: Doesn’t mean it didn’t happen. I’m not just aware of it.)

Who is to say what the Howard appointed judges will do if they asked this question? These are the same people who said the Howard governmnent was well within its rights to lock away someone forever who has been convicted of no crime. Their willingness to do Howard’s bidding has shown no bounds so far. When was the last time Howard suffered a significant defeat in the High Court?

Ken Parish
Ken Parish
2022 years ago

Dave

I’d be prepared to bet that not even the current High Court would rule that taxes on income were taxes on goods. They’re not, and to rule otherwise would fly in the face of a century of jurisprudence both here and in the US and elsewhere.

No, the reasons why my suggestion is almost certainly just a federalist fantasy are purely political and not legal or constitutional.

Kim
Kim
2022 years ago

James, I don’t know if you run a small business or not:

“It’s about taxes. I choose to support the side that says I pay less against the side that says I shouldn’t.”

The taxes being discussed are business taxes. It’s interesting how the government abandoned the rhetoric last year that the states should spend the GST revenue on services.

I think it’s partly arrogance and partly Costello trying to thump his chest and make himself look “tough”.

Dave Ricardo
Dave Ricardo
2022 years ago

Ken, maybe we’ll see. Income is what you get from producing goods. The leap in reasoning is not as large as you might think.

Good article on Howard’s power grab by Greg Craven, who is perhaps the last principled conservative in the country in today’s AFR.

jen
jen
2022 years ago

So if States can raise their own revenue and decide how they will spend it, and be accountable for the result, that pretty much excludes the need for federal government in state business.

I’m wondering what all the federal government employees who duplicate and obfuscate the delivery of services will think about that.

They might think they have no job anymore.

Ken Parish
Ken Parish
2022 years ago

Dave

It’s a very large leap indeed if you read the reasoning in just about every single tax judgment the High Court has ever handed down. A tax must be calculated directly on the quantity or value of goods produced, distibuted or sold in order to be an excise. The States tried to get around that with their various franchise fees on petrol, beer, cigarettes etc, but the tax still bore a direct relationship to the quantity or value of the goods themselves (albeit to the goods sold in a previous financial year). A tax on income is qualitatively different. Income doesn’t bear a direct or necessary relationship to the quantity of goods produced. It varies depending on a range of other factors including other deductions, wage costs etc etc. Two separate companies could produce identical quantities of goods, with one earning taxable income of several million dollars and the other zero i.e. taxes on income and taxes on goods are two different things.

The High Court simply isn’t going to throw its entire tax jurisprudence overboard in order to find the to the contrary. Law just isn’t that indeterminate or unprincipled, although the rantings of the RWDBs about “judicial activism” might lead one to a different but quite erroneous conclusion. This is one reason why I dismiss out of hand the prospect of the High Court reversing its longstanding jurisprudence on federalism, even though I strongly believe much of the reasoning in those cases was totally wrong and misguided (starting with Engineers). Once judicial interpretation becomes sufficiently “case-hardened”, as is the case with both tax and federalism jurisprudence, it is generally improper for the High Court to attempt to unwind it. A political solution is required.

Phil
Phil
2022 years ago

Ken,
just go fishing from the jetty in Nightcliff and forget about everything else…or take your girlfriend to the wharf and have a nice bottle of Chardonnay ( ! ) Or may be, take her to HumptyDoo, the pub there is number one ! Or the Bark Hut…just be a Territorian, just be yourself.
Cheers.

Phil
Phil
2022 years ago

Ken,
just go fishing from the jetty in Nightcliff and forget about everything else…or take your girlfriend to the wharf and have a nice bottle of Chardonnay ( ! ) Or may be, take her to HumptyDoo, the pub there is number one ! Or the Bark Hut…just be a Territorian, just be yourself.
Cheers.

cs
cs
2022 years ago

Ken, the income tax scenario was heavily worked over internally by the premiers in 90-91. It’s just not on, for the oppositions will oppose it, citizens won’t get it, and the first government to go to the polls will lose over it. End of story.

Still, they have to do something. Time to think.

jen
jen
2022 years ago

cs

any predictions?

Bill Cushing
Bill Cushing
2022 years ago

Ken, you are spot on.

What has come over the Liberal Party?

On Howard’s logic, this country should have only one (federal) police force. Imagine that! Then imagine (say) Wilson Tuckey as the Police Minister. Try to square that with the notions of political freedom which the Liberal party once espoused (eg under Menzies, or even Fraser).

Howard’s trashing of our Federal system is the biggest threat to our political freedoms that this country has faced since WWII. (Even if he is changing tack on hospitals.)

And hardly anybody has woken up to it–apart from Ken Wiltshire, Greg Craven, J Quiggin and your good self.

My own feeling is that a single State could not unilaterally re-introduce income tax.

This is not because it would be unconstitutional.

I think it would be impractical, and impolitic.

Victoria (say) is not a Quebec–which could take unilateral fiscal action, and has.

I think the six States would have to act together. It would certainly be interesting to see a Premiers’ Conference (Premiers only, no Feds) called to discuss a fiscal Plan B in defiance of Howard & Costello. (I trust some are already doing a bit of homework on it.)

Kieran Bennett
2022 years ago

Ken,

It’s certainly an interesting argument, but who really cares if the States become oversized municipal councils? Australian citizens? I certainly don’t.

Sincerely,

Kieran.

Ken Parish
Ken Parish
2022 years ago

Kieran

maybe the reason you don’t care is that:
(a) you’ve never experienced what it’s like to be ruled from afar by a bureaucracy that’s completely out of touch with local needs and aspirations; and
(b) you don’t realise just how critically important basic concepts of liberal democratic constitutionalism (like separation and division of powers) actually are to the freedoms you take for granted.

I don’t care per se whether state governments become glorified local councils either. But I DO care whether we lose our basic freedoms because one government has managed to sieze excessive power to an extent where it can abuse it without any effective restraints, checks or balances.

Kieran
2022 years ago

Ken,

I can only really see two decent arguments for federalism. Rule from afar is bad, which I think is largely irrelevant (the tyranny of melbourne or the tyranny of Canberra, or even Perth for arguments sake, they are all the same for this (former) country lad.

The other decent argument being that the more localized government is, the more democratic control. I had prepared a huge rant, I decided to back it up with a few figures, but alas in the process I fear I have gone and proven myself utterly wrong.

You may find it interesting.

http://www.kieranbennett.com/index.php?option=content&task=view&id=91

Sincerely,

Kieran.