The Productivity Commission wants future GST distributions to merely bring the financially weaker states up to a "reasonable standard". Credit:Virginia Star The commission found Australia's system of dividing GST revenue is broken, "beyond comprehension by the public" and poorly understood by most within government. Although it has broad support, it delivers "unfair equity", attempting to bring all states up to the financial strength of the strongest state, even if the GST revenue kept by that state needs to fall to unprecedented lows. The report also pointed to a "first mover disadvantage" that applies to any state that attempts to introduce a new tax first. At the moment if NSW or Victoria attempted to switch from stamp duty to land tax each would lose more than $300 million in GST payments. If it attempted to introduce a road traffic congestion charge NSW would lose $670 million. Victoria would lose $6 million. The commission rejected three proposed ideas to ease the burden on Western Australia. One is to hand out extra Commonwealth grants outside the GST process, as the Turnbull government has done. Another is to guarantee that no state's GST share would fall below 70 per cent of what it put in, and another is to allow each state to keep at least 50 per cent of an extra revenue it raised from mining, proposed by the Commonwealth Grants Commission.

Its calculations suggest Western Australia loses in GST adjustments as much as 88¢ of every dollar it raises in mining royalties. It suggested that instead of aiming to bring the financial capacity of each state up to the financial capacity of the strongest, an updated formula attempt to merely bring it up to the financial capacity of the average or second strongest. The commission said in normal times the new formula would make little difference to the GST distribution. Only at extreme times such as the present when West Australian's share has dived to extraordinary lows, would it soften the blow. Mr Morrison welcomed the draft recommendations and said the way the GST revenue was carved up needed a proper fix, rather than more "band-aids and bolt-ons".

"The commission needs to do a lot more work, they have got to firm up what they believe the answer is, although they have given some good hints," he said. "They have also got to work out a transition plan so that we can get from A to B. It's not enough to know where B is, you have to work out how to get there and that is what I have tasked them to do between now and the final report." The commission rejected a proposal put forward by government ministers and the Grants Commission to penalise states that banned coal seam gas mining by allowing those that permitted it to keep all of the extra royalties they earned. "Mining revenue is a prime example of a source-based advantage; one a state benefits from by virtue of where its borders happen to be drawn," the commission said. "It should prima facie be included in the equalisation process." Victoria's Acting Treasurer Gavin Jennings said the commission had poured cold water on the Coalition's plan to discipline states that protected their environments. "Mr Morrison's thought bubble to punish states like Victoria and NSW who have acted to protect their farmers, their world-class produce and their environment, has been thrown into the bin where it belongs," he said.

NSW Treasurer Dominic Perrottet said it was encouraging to see the Productivity Commission acknowledge what NSW has said all along: that the GST system was in dire need of an overhaul. Loading "Ultimately the Productivity Commission has acknowledged we need real reform, not just to the GST system, but to the entire federal system when it comes to the taxes we pay, the services governments provide, and the way they are funded," he said. "My number one priority will be to continue to fight tooth and nail for the people of NSW to get the maximum value for the tax they pay." The commission has called for submissions on its draft recommendations. It will present a final report to the Treasurer by January 31.