A Senate committee has revealed the government has not yet worked out the carve-up of $2.9bn of health funding promised to the states, as well as a lack of preparation for a controversial proposal for states to levy their own income taxes.



Appearing before a Senate committee scrutinising the 1 April Council of Australian Governments (Coag) meeting, government officials said the allocation of the $2.9bn had not been finalised.

The deputy secretary of the Treasury’s fiscal group, Michael Brennan, said hospital activity levels would determine the distribution and, as a result, “a state may or may not get its population share”.

Greens Senator Nick McKim said Tasmania’s premier expected to receive $10m less than a population-based carve-up would imply and Queensland expected $138m less.

The application of a 6.5% cap on growth commonwealth expenditure was also yet to be determined, said Alison Larkins, the acting deputy secretary for social policy in the Department of the Prime Minister and Cabinet (PMC).

In a submission to the committee, the Australian Medical Association president, Prof Brian Owler, said the $2.9bn was insufficient and appeared to be an “inadequate short-term ... downpayment to appease the states before the federal election”.

Asked to explain the submission, Owler said: “It was very clear talking to state and territory leaders that they feel the level of funding would enable them to fund public hospitals going forward was towards the $16bn mark.”

Officials from the Treasury and PMC said the government had only decided to raise the issue of state taxation at Coag and see if states agreed when the prime minister, Malcolm Turnbull, announced the proposal.

They said the government had not decided to allow the states to raise income taxes beyond current levels when Turnbull and the treasurer, Scott Morrison, made contradictory public statements on the proposal.

On 30 March, Turnbull said in a statement “the key principles will be that this is not about increasing the total tax take”.

But in response to questions, Turnbull added that in future states would be free to lower or raise the amount of income tax they levied.

Morrison dismissed the suggestion states could raise income taxes above the current level as “speculation” and said the prime minister had not gone as far as saying that states should be able to do so.

Turnbull had to withdraw the policy within days after the states rejected it at Coag.

Luke Yeaman, the first assistant secretary of PMC’s economic division, explained: “The proposal was that in the immediate term there would be no additional increase, the commonwealth would vacate a certain share of income tax and states would fill that. At some point in the future it was possible, subject to discussions with the states, that they could vary tax rates as with other taxes.

“The prime minister indicated that was in contemplation in the future. I wouldn’t call it a design feature.”

Brennan said Treasury was aware of the broad proposal for state income taxes but the possibility of states increasing them was one of “a number of details that would need to be worked through if there were in-principle support for the proposal”.

Officials confirmed policy papers prepared for Coag did not include the state income tax proposal because Turnbull intended to raise it in private with premiers before the meeting.

Larkins said it was “not unusual to raise issues at Coag without papers” and “it’s not unusual to have a substantive discussion” without papers.

The Labor leader in the Senate, Penny Wong, noted Turnbull’s statement that the state income tax proposal was “the most fundamental reform to the federation in generations”.

Summarising the officials’ evidence, Wong said it was apparent the states didn’t get “anything in writing before it was discussed with them, it was raised over the long weekend” before Coag.

She said the only document explaining the policy to the states was the media release prepared by the prime minister’s office and state treasury officials were not consulted except for informal phone calls from the PMC chief, Dr Martin Parkinson.

Wong asked rhetorically whether it was really surprising the states had rejected the proposal, given the lack of consultation ahead of Coag.

In response to criticisms that the income tax proposal was designed to shift blame to the states for funding cuts, Morrison has said it was a serious proposal that had been rejected because states were not prepared to take responsibility for raising revenue.

CPA Australia’s head of policy, Paul Drum, described the proposal for states to set their own level of income tax as a “curve ball” out of the blue and said “the way it was proposed was a bit of a thought bubble”.



State income taxation had been included in tax papers for “academic discussion for the sake of completeness for decades”, he said, but “it hadn’t been part of the narrative, it hadn’t been promulgated around to capture people’s ideas” before Turnbull proposed it ahead of the Coag meeting.

Drum said the effect of state income taxes depended on “how it was done and the rates set” but the CPA believed so-called double taxation was anti-growth.