Prime Minister Malcolm Turnbull has beefed up his argument in favour of allowing the states to directly levy a portion of income tax, arguing it could also allow them to directly fund public schools.

Key points: Malcolm Turnbull to meet premiers, ministers tonight

Malcolm Turnbull to meet premiers, ministers tonight Daniel Andrews says the new tax plan "does not make sense"

Daniel Andrews says the new tax plan "does not make sense" Richard di Natale argues the plan will lead to competition between states to cut taxes

Richard di Natale argues the plan will lead to competition between states to cut taxes ANU professor fears SA and Tasmania will be worse off

Yesterday Mr Turnbull unveiled a broad plan to allow state and territory governments to collect a percentage of income taxes directly, rather than having the money funnelled through federal grants.

Mr Turnbull defended the announcement after criticism from a number of states, saying it had not come "out of the blue" and he was confident states would spend money "more wisely" if they directly collected it.

The Prime Minister has already suggested the states use the changes to directly fund hospitals.

This morning he told Radio National it was possible to make a "very powerful case" for the states to take over full responsibility for public school funding if they had direct access to income tax revenue.

"They [states] would then have the responsibility for state schools, which are the schools that they manage, they have the resources as well," he said.

He said the Commonwealth would not relinquish control of funding for private and independent schools.

Some smaller states are already concerned they will not be able to raise the money to fund essential services if the proposal proceeds.

"A fundamental premise of any reform like this would be that the smaller states could not be disadvantaged," Mr Turnbull said.

The issue will come to a head when the Prime Minister meets premiers and chief ministers tonight at The Lodge for dinner and on Friday at the Council of Australian Governments (COAG) meeting.

Victorian Premier Daniel Andrews has been heavily critical of the details Mr Turnbull has revealed so far, arguing it is based on no-one paying any more tax.

"So, if you have got a new set of arrangements that don't raise any revenue over and above what you collect now — how does that deal with the revenue problem?" Mr Andrews asked on 7.30 last night.

"The Federal Government proposes to reduce the amount of money that they provide to the states so the whole thing balances out — apparently no-one pays any more but somehow everybody's got more. That doesn't make any sense to me."

A draft of the COAG agreement was leaked to the ABC, showing that the Federal Government's proposed changes to the care of chronic patients would be funded by "a direct cut to states' hospitals".

PM's public school remarks labelled a 'betrayal' by unions

The Opposition and teachers' unions reacted angrily to Mr Turnbull's remarks on the funding of public schools, claiming it showed a bias towards the private school system.

Australian Education Union deputy president Maurie Mulheron described the move as a "betrayal" for parents whose children go to state schools.

He said a review into school funding arrangements, led by David Gonski, recognised the states alone do not have the capacity to fully fund schools, and that the Commonwealth had some level of responsibility.

"The PM is abrogating that responsibility and rejecting a model that has already addressed those concerns," he said.

"This is a return to the bad old days where the Commonwealth gave money to private schools and the states were left to try to find money for the state system."

Federal Opposition leader Bill Shorten said Labor would not support the idea.

"Mr Turnbull has determined that the issue of fixing up our school system is too hard for him and now he's just dumping it in the lap of the states and he's abandoning the kids and the students," he said.

"Australia deserves better than Mr Turnbull's thought bubbles, his reckless policy on the run."

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