Treasurer Scott Morrison has commissioned the report on changing the way the Commonwealth delivers grants. Credit:AAP

The Commission is understood to be attracted to the findings of the Abbott government's Commission of Audit which recommended in 2014 that revenue raised from the goods and services tax be distributed to states on the basis of population rather than need. The arrangement would leave states free to raise as much as they wanted from mining without endangering their GST distribution. It goes beyond last month's Grants Commission proposal to guarantee that they could keep 50 per cent of any increases in mining revenue without endangering their payout.

The Audit Commission suggested the Commonwealth deliver top-up grants to states that would suffer under the new arrangement including Queensland, the Northern Territory, South Australia and Tasmania. The top-up grants would be funded by cutting so-called tied grants for purposes such education and health.

Monday's Productivity Commission draft report will make the point that the Commonwealth delivers much more to the states via tied grants and national partnership agreements ($160 billion) than it does via the GST ($60.7 billion) and that these tied grants are already made on the basis of need.

It will raise the possibility of no longer using GST distributions to compensate the Northern Territory for its relatively large remote Indigenous population, providing funding for Indigenous disadvantage in another way. At present the Territory gets five times the GST distribution that it would on the basis of population, in part because of its large Indigenous population. Western Australia gets less less than one third of what it would on the basis of population, in part because of earlier high mining tax revenues.