The current impasse between large mining companies and the Gillard government over its proposed resource rent tax looks like yet another example of inept public relations if not worse:
JULIA Gillard says it is “obvious common sense” that higher state mining royalties would not be allowed if Canberra had to foot the bill.
She says that is why only existing state royalty rates or scheduled increases can be deducted from the planned mineral resources rent tax. That certainly was the wording of the original resource super-profits tax announced in May. Otherwise, the Labor government warned, the states could simply raise their royalties, confident that the bill would get sent to Canberra courtesy of the companies’ ability to deduct the cost.
Unfortunately, the Prime Minister’s haste to get a replacement pre-election mining tax deal done with the big three miners in July neglected to repeat this supposedly “obvious” point in writing. Quite the reverse, in fact.
Instead, the announced commitment was that “all state and territory royalties will be creditable against the resources tax liability”. The result is that BHP Billiton, Rio Tinto and Xstrata believe that Canberra’s sudden public use of adjectives such as “existing and scheduled” to temper this guarantee is reneging on the deal.
Apart from Gillard’s point, it looks like part of the reason why she and Martin Ferguson are backpedalling furiously is the concern that the resource tax as negotiated might be unconstitutional. The problem stems from section 51(ii) of the Commonwealth Constitution which gives Parliament the power to enact laws with respect to “taxation; but so as not to discriminate between States or parts of States“.
It’s that last bit that creates the potential problem. Because different States have different rates of existing mineral royalty taxes, the obvious way to equalise the situation is for the resource tax law to provide for differential rebates to mining companies depending on the State regime under which a mine is operating. However that might well breach section 51(ii). In Cameron v Deputy Federal Commissioner of Taxation in 1923 Justice Starke explained the position succinctly:
A law with respect to taxation applicable to all States and parts of States alike does not infringe the Constitution merely because it operates unequally in the different States—not from anything done by the law-making authority, but on account of the inequality of conditions obtaining in the respective States. On the contrary, a law with respect to taxation which takes as its line of demarcation the boundaries of States or parts of States necessarily discriminates between them, and gives a preference to one State or part thereof over another State or part thereof .
The problem is potentially compounded if States later increase their rates of mineral royalties (as Gillard and Ferguson not unreasonably fear), because rebates under the Commonwealth tax would then need to be altered to keep the overall position equal.
However, the solution to both problems seems (to me anyway) fairly straightforward, in constitutional if not political terms. The constitutional prohibition on discrimination between States and parts of States applies to Commonwealth taxes but not to grants back to the States under section 96 of the Constitution. They can be as discriminatory as the Commonwealth likes and often are. In fact the entire system of GST revenue distribution back to the States by the Commonwealth Grants Commission is designedly discriminatory in order to roughly equalise the States’ respective capacities to provide government services. I don’t see any obvious reason why the Commonwealth could not equalise the combined impact of its resource rent tax with State mineral royalties by making differential tied grants back to the States in an amount equal to each State’s existing mineral royalties, with a grant condition requiring the money to be remitted straight to the mining companies in amounts equal to the state mineral royalties they are liable to pay each year.
The evident risk of the States “free riding” on any ongoing Commonwealth promise to indemnify the mining companies for all State mineral royalties, by subsequently increasing those royalties, could be effectively dealt with by making it clear to the States that their future Commonwealth grant funding would be reduced by the same amount as any increase in a State’s mineral royalties rates.
One would hope they’re working on a solution along these lines. It seems unlikely that the Gillard government would long survive a renewal of the mining companies’ PR war against the Rudd government “super tax”.