South Australia's budget bottom line could be $557 million a year worse off under suggested changes to the way GST revenue is carved up between the states and territories.

The Productivity Commission has released a draft report into Horizontal Fiscal Equalisation (HFE), or what federal Treasurer, Scott Morrison, has described as "the fair go principle" on GST distribution.

The distribution is currently calculated to the financially strongest state, but the Productivity Commission recommends calculating it to the average, or to the second-strongest state.

Under the average model, South Australia would be more than half a billion dollars worse off every year, while Western Australia would get $3.6 billion more.

South Australia's Treasurer, Tom Koutsantonis, said if the Federal Government tried to change the calculation, the states would fight back.

"They find that horizontal fiscal equalisation, or the way we distribute the GST is the fairest of all the OECD countries and their recommendation is to make it less fair," Mr Koutsantonis said.

"If the Prime Minister accepts the Productivity Commission's recommendations there'll be a backlash across the country and if he thinks he's in trouble now, he's in even more trouble after he makes those changes."

The draft report is now open to submissions, with a final report to be handed to the Federal Government in January

WA the centre of GST disagreement

How to distribute GST revenue has caused disagreement between the states, in particular Western Australia, which has argued it is not getting a "fair go".

Flush with money from the mining boom, WA's share of GST plummeted to around 30 cents in the dollar.

With mining now in decline, there is a budget black hole that had some senior Western Australian Liberals threatening to leave the federation, Brexit style.

The draft report found HFE works well, with the Treasurer saying it is one of the best systems in the OECD.

"Canada, Germany, other prominent federations have been unable to achieve the fair go principle in a way that Australia has," Mr Morrison said.

But the report found the system did not work well in extreme circumstances, such as Western Australia's mineral wealth.

Scott Morrison agreed it needed to change.

"The Western Australian public have not been dreaming this up. It's real. It's a real problem and they've had the raw end of the stick on this," he said.