Wrong answer, Mr Hockey

A new front has opened up in the tax wars. The South Australian government is threatening to reimpose taxes abolished by the states more than a decade ago as part of their deal with the Howard government to receive all GST revenue. It is not too surprising in the current fiscal and political climate that someone has brought this up, nor is it surprising that the idea came from the high taxing but perennially cash-strapped South Australian government.

What is surprising was Treasurer Joe Hockey’s response – reportedly, in a word, ‘go ahead’.
 There are two ways of approaching the issue – the economic policy way, and the legalistic way.

From an economic policy perspective, reintroducing any of these taxes would be madness and not at all consistent with the federal government’s claim to the tax reform high ground. We are talking about financial institutions duty (a bite taken out every time money moves into a bank or other financial institution account), stamp duty on buying and selling of shares and other marketable securities, a tax on withdrawals from cheque accounts, and stamp duties on mortgages, leases and the like. These so-called ‘nuisance’ taxes raised around $5 billion a year before they disappeared, and would raise considerably more if they existed today.

Every tax review and every tax expert thinks these transaction taxes are inefficient, distorting and have no place in a modern tax system. Many of them go further and say the remaining stamp duties – those on real property transfers, insurance and motor vehicles – should be abolished as part of tax reform. Why Hockey would launch a tax reform project and then two weeks later raise no objection to the reintroduction of a bunch of inefficient, distorting nuisance taxes is beyond understanding.

The legalistic approach is to say the states signed an agreement with the Commonwealth in 1999 (the Intergovernmental Agreement on Reform of Commonwealth-State Financial Relations) which gave them all the GST revenue, subject to a number of conditions — including that they abolished the abovementioned taxes and would never reimpose them. The Commonwealth and every state passed legislation that annexed the agreement and stated their intention to act in accordance with it. All governments reaffirmed their tax policy commitments under the 1999 agreement in the 2008 Intergovernmental Agreement on Federal Financial Relations.

The states have largely honoured their commitments, with the notable exception of New South Wales which under both Labor and Coalition governments has repeatedly deferred the last steps in abolishing the listed taxes. (Contrary to popular belief, the intergovernmental agreement did not commit the states to abolish payroll tax.)

Intergovernmental agreements are not legally binding and in that sense there is nothing to stop any state from reneging on previous commitments and imposing any tax within its constitutional powers. For the same reason, there would be nothing to stop the Commonwealth withholding an amount of GST revenue equivalent to that raised by such a tax, thereby negating any fiscal advantage to the states(s). There is no doubt that would have been the Commonwealth’s response to the states in the past.

Perhaps the response is different now because the Commonwealth, in the spirit of the federalism white paper project, wants to be seen to encourage the states to be ‘sovereign in their own sphere’. Encouraging the states to be more financially independent, accountable and responsible is one thing, but ignoring an intergovernmental agreement backed up by legislation in all jurisdictions is another, particularly when the action would be unequivocally bad for the tax system.  

Robert Carling is a Senior Fellow at the Centre for Independent Studies