By Leith van Onselen

Prime Minister, Malcolm Turnbull, has today told the states to quit relying on the Commonwealth and raise their own taxes to fund hospitals, schools and schools. From The Australian:

“The states have got themselves into a way of thinking that every time they need more money, they just go to the ATM of the federal government,” he told Radio 5AA in Adelaide on Friday. They could not disclaim responsibility for raising revenue. “They have got to be prepared … to go to their citizens and say, for example, we need to raise more money to spend on our schools and our hospitals and we are going to increase this or that state tax,” Mr Turnbull said… The states had some of the most efficient tax bases, such as land tax and payroll tax, in Australia, Mr Turnbull said.

Mr Turnbull is right to call for the states to increase their reliance on land taxes, which are the most efficient source of tax available (see below chart).

However, he is being a little too flippant in dismissing the genuine financial pressures on the states, brought about by the vertical fiscal imbalances (VFI) embedded in the current federal system, whereby the states’ responsibilities are well in excess of their revenue bases.

The extent of the VFI were outlined clearly in the Government’s 121-page discussion (green) paper on the reform of Australia’s federation, released last June, which noted that the Commonwealth raises 82% of total tax revenue, the states and territories 15%, and local government just 3%.

The states and local governments, therefore, are left heavily reliant on Commonwealth funding, as illustrated in the next chart:

The situation for the states is made worse by the fact that they are primarily responsible for delivering public services:

Ultimately, a better functioning federation is about having clearly delineated responsibilities, along with revenue sources that are commensurate with the level of responsibility. But under the current set-up, we have neither.

The Prime Minister would do well to at least acknowledge these facts. Because as long as the current arrangements persist, then the states and feds will continue to pass the buck, cost-shift, and blame each other, leading to sub-optimal outcomes for Australian taxpayers.

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