"They are at least conceptually distinct though they'll perhaps be addressed together."

As forecast, nothing was resolved following Wednesday's marathon summit of leads at the Victoria Barracks in Sydney. But as talks ground on into the evening, Mr Baird and Mr Abbott said the discussions had been constructive.

Mr Abbott said bravery, ambition and open-mindedness were critical to a solution.

"It is increasingly clear that we must work together. Any meaningful reform will require both courage and co-operation," he said on Wednesday evening.

Premier of Tasmania Will Hodgman, Premier of Victoria Daniel Andrews, Prime Minister Tony Abbott, Premier of South Australia Jay Weatherill and Mayor Troy Pickard from the Australian Local Government Association during the Leaders' Retreat at Victoria Barracks in Sydney, on Wednesday 22 July 2015. Photo: Alex Ellinghausen Alex Ellinghausen

Split opinions

The participants entered the meeting split on how to best raise the the extra $35 billion a year that will be needed by 2030 to fund public health.

Victorian Premier Daniel Andrews and Queensland's Annastacia Palaszczuk, with the backing of ACT Chief Minister Andrew Barr, preferred raising the Medicare levy.


They presented a plan to increase the 2 per cent levy to 4 per cent over eight years. Modelling done by the NSW government, which does not support the proposal, showed it would easily raise the money required. By 2019-20 it would raise more than $30 billion a year extra and more than $20 billion after lower income earners were compensated.

"Daniel and I went to an election just recently where we said that, you know, any increase in the GST is not an option," Ms Palaszczuk said.

But Mr Morrison, backed by several of his colleagues who wished to remain anonymous, said the government would not even contemplate the option.

"States have to deal with their spending, not just keep putting their hand out for more money," he said. Mr Morrison said the previous government, with the Coalition's support, increased the Medicare levy by 0.5 per cent to help pay for the national disability insurance scheme, which would still be underfunded by $5.2 billion in 2020.

Another Coalition figure said the tax burden needed to be lowered to make the economy more competitive and strengthen growth.

"If we were to increase income tax, we would stifle growth."

The government already rues imposing for three years the deficit tax in the 2014 budget which added 2 per cent to the top tax rate. Treasurer Joe Hockey admitted in April that "we are facing massive and growing competition in income tax from neighbours" and unless the tax rate was brought down, "you will see behavioural changes at a certain point".

Mr Abbott has described Mr Baird's GST proposal as "very sensible" and worthy of discussion but Mr Morrison said any GST increase could not be for revenue purposes alone but had to be accompanied by an income tax cut.


"That is an absolute contract," he said.

"The Australian people would reasonably and legitimately expect to have their taxes cut in other areas, particularly in income tax, but also in things like stamp duty and payroll tax and land tax and things like that'.

He also said a GST increase would drive up the cost of welfare because of the compensation that would be needed. Mr Morrison is presently trying to slash the welfare bill so he can fund the child care package unveiled in the May budget.

Mr Baird's proposal to lift the GST to 15 per cent would, by his own government's figures, raise about $36 billion extra in 2020 but half – $18 billion – would have to be returned as compensation to low and middle-income households. Mr Baird proposes the GST revenue funds the compensation but that would leave a $3 billion shortfall in health funding, putting pressure on the Commonwealth to kick in.

'Orgy' of revenue

One senior Liberal said he was worried by what he described as an "orgy" of increasing revenue, with no regard for more meaningful reform.

Mr Andrews agreed. "This is not reform, it's simply hiking the rate," he said.

The premiers and Mr Abbott will continue their talks on Thursday morning but all parties have warned a resolution will be many months away.

They all decided to keep talking. The summit was precipitated by a decision in the 2014 federal budget to strip $80 billion from the states in future hospitals and schools funding and make them come up with revenue ideas to fund the services which they administer.