FEDERAL income tax would be cut and states allowed to levy the difference under a scheme Prime Minister Malcolm Turnbull will propose to premiers on Friday.

And he backed the prospect of nine different income tax systems of varying rates competing with one another.

Mr Turnbull today outlined what he called a “once in a generation reform” to redesign the income tax system for the first time in 74 years.

The Prime Minister said his “big idea” would make states more accountable and transparent, increase efficiency, and fix the problems where the Commonwealth raises most of the revenue but states do most of the spending.

Earlier, Treasurer Scott Morrison said any changes would not increase the overall tax burden.

However, Mr Turnbull told reporters premiers would have the capacity to raise or lower their levy on incomes, which could see citizens of one state paying more than workers across the border.

“The way we would envisage it working is that we would withdraw from a certain amount of income tax. That would be available to the states,” the Prime Minister told reporters.

“We would agree that that would be the maximum they could levy for a period. But in future, of course, in the longer term a state should be free to lower that amount or indeed raise it.

“And they they would be accountable to voters.”

He said it was a move to empower voters, as his reforms to Senate voting had been.

“Ideally, in a federation, the citizens of NSW should decide how much revenue the government of NSW raises to deliver the the services the people of NSW want and demand,” Mr Turnbull said at a news conference in the Sydney suburb of Penrith.

The prospect of Australia having nine income tax schemes had few firm backers today after it was floated with premiers yesterday by the Turnbull Government.

“Good luck to selling that to the Australian people,” said a Labor frontbencher.

The proposal, revived before Friday’s Council of Australian Government’s (COAG) meeting, was for the six states and two territories to raise their own income tax in addition to the levy on wages going to the Commonwealth.

Mr Morrison downplayed immediate action on the idea and told reporters to stop “leaping ahead”.

However, he said that as a pragmatist he would consider the option “earnestly”, as well as measures to keep costs down.

Mr Morrison defined the problem as one level of government “which is running programs and controlling — or not controlling — costs, and you’ve got another level of government which increasingly is having to foot the bill”.

“There has to be greater accountability as to how we all spend money,” he told reporters in Sydney.

He said state treasurers, and in particular the South Australian Government, had raised the income tax option after talks late last year on measures to boost their revenue bases.

Mr Morrison said a key part of a joint statement from the talks was that the Commonwealth would continue to participate in discussions “on the basis that these reforms do not increase the overall tax burden”.

And he agreed that an expanded income tax scheme could see competition among states with residents in one paying more tax than citizens just across the border.

“I’m a pragmatist on all these issues and a pragmatist focuses on solving the problem,” Mr Morrison said.

“And if those sorts of remedies lead to a solving of the problems then you are going to consider them earnestly.”

Extending income tax powers for the first time since the Commonwealth takeover in 1942 would allow states to get funds for projects such as capital works and long-term programs such as hospital networks without having to rely on the Federal Government.

It would acknowledge that while the Federal Government dominated revenue raising it was the states who had to fund the big measures such as health and education.

A state income tax was considered by Liberal prime minister Malcolm Fraser in 1978, by Labor’s Bob Hawke in 1990, and was recommended to Liberal Tony Abbott by his Audit Commission in 2014 to help the states pay for infrastructure.

Mr Abbott rejected the “idea of double taxation”.

“Speaking for myself, I want to see lower, simpler, fairer taxes over time. I want to stress that — lower, simpler, fairer taxes,” Mr Abbott said in May 2014.