Federal Treasurer Scott Morrison has ordered an independent inquiry into the system used to distribute GST revenue to the states and territories.

Key points: Inquiry will examine impact of GST carve-up on national productivity, economic growth

Inquiry will examine impact of GST carve-up on national productivity, economic growth WA Premier Mark McGowan urges Federal Government to 'act immediately' on findings

WA Premier Mark McGowan urges Federal Government to 'act immediately' on findings NSW also backs inquiry but other states line up against WA, oppose cut in GST revenue

Mr Morrison has prepared terms of reference for an inquiry by the Productivity Commission into the distribution model, which sees Western Australia receive by far the worst share of GST revenue of all the states.

WA will get a return of just 34 cents for every GST dollar raised next financial year after a determination last month by the Commonwealth Grants Commission (CGC).

In a statement, Mr Morrison said the inquiry would examine the impact of the GST carve-up, including claims that it creates disincentives for reform.

"Under Australia's current approach, the CGC recommends a GST distribution to the states that provides each state with the capacity to provide its citizens with a comparable level of government services," he said.

"In recent years, views have been put to the Government that the current approach to [horizontal fiscal equalisation] creates disincentives for reform, including reforms to enhance revenue-raising capacities or drive efficiencies in spending, arguing that any gains from reform are effectively redistributed to other states.

"In commissioning this inquiry, the Government seeks an examination of the issues underlying these claims."

Mr Morrison said it was important that the system underpinning federal-state financial relations supported economic growth across the country.

"Ultimately, all Australians benefit when the states actively pursue reforms seeking to improve productivity, efficiency and economic growth within their own jurisdictions," he said.

Finance Minister Mathias Cormann said the Government recognised that WA's share of the GST was unacceptably low.

"Nobody would have predicted back in 2000 that any state's share of the GST under the sharing arrangements would fall as low as what it has," he said.

WA, NSW welcome inquiry

WA Premier Mark McGowan said he was pleased the Federal Government had ordered the inquiry and urged it to act on the recommendations — due to be handed down by the end of next January.

"The most important thing to happen out of this is action," Mr McGowan said.

"As soon this report is handed down … the Commonwealth Government needs to act immediately. We can't wait any longer for action on the GST."

Mark McGowan says the Federal Government needs to adopt the inquiry's findings. ( ABC News: Eliza Laschon )

He said the Federal Government had the power to change the distribution system, regardless of whether the other states agreed.

"[The Prime Minister] will have the blueprint … this is an opportunity to reflect the national interest. Don't put it off forever, don't put it off to some ill-defined period in the future, take action now."

The New South Wales Government said it also supported a change in the way the GST was shared between states and territories.

NSW Premier Gladys Berejiklian said under existing arrangements, the state was set to lose $18 billion over the next four years.

"A fairer GST model would be based on per head of population, and certainly NSW is doing really well," she said.

"We are happy to support the smaller states — I don't take that away from the smaller states — but not at the rate we are now. It's just getting beyond the point of fair."

Other states line up against WA

Queensland Premier Annastacia Palaszczuk called on the Turnbull Government to rule out cutting the state's share of GST revenue.

Annastacia Palaszczuk says Queensland will fight to keep its share of the GST. ( AAP: Lukas Coch )

"I'm extremely worried … Western Australia would end up getting more of the GST pool, as opposed to Queensland. I'm not going to have that happen," she said.

"Once again, we see the Federal Government trying to pander to one state as opposed to everyone else."

South Australia's Treasurer Tom Koutsantonis said the Federal Government was trying to shore up votes in WA.

"The Commonwealth Government have been routed in Western Australia, [it] is the one state they are doing really really poorly in," he said.

"In an attempt to even things up, they want to take GST away from South Australians and give it to Western Australians … they're using the Productivity Commission to try to improve their stocks in WA."

Tasmania's State Growth Minister Matthew Groom also took aim at WA.

"There have been a number of occasions in the past where some of the other states in particular have sought to take some of Tasmania's share of GST," he said.

"Tasmania is entitled to get its fair share just as all the other states are … we believe the current distribution is consistent with that."

Business community wants 'open inquiry'

The WA Chamber of Commerce and Industry backed the inquiry, saying the current system did not encourage states to develop under-utilised industries.

"The GST carve-up gives WA an unfair deal and also removes the incentives for all states to grow their economies, so we hope the Productivity Commission will demonstrate this in an open inquiry," CCI chief economist Rick Newnham said.

He said Mr Morrison could make changes without the agreement of the other states.

"The Federal Treasurer can instruct the CGC to change the carve-up as long as it stays in regards to horizontal fiscal equalisation … so what we're calling for is a partial change to that method."

Meanwhile, Senator Cormann confirmed a fresh top-up payment of about $226 million would be given to WA for infrastructure projects next financial year to help offset the state's lower-than-expected GST allocation.

The WA Government had called for the top-up payment after the revised figures from the CGC last month left a $241 million hole in its budget for next year.

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