The Federal Government is floating a radical idea to let the states and territories levy income taxes.

Key points: Plan would mean letting states, territories charge some income tax to fund services

Plan would mean letting states, territories charge some income tax to fund services It is a suggested solution to stand-off between the states and Federal Government that has dragged on since 2014

It is a suggested solution to stand-off between the states and Federal Government that has dragged on since 2014 Proposal to be discussed at the Council of Australian Governments meeting

Prime Minister and Cabinet Department head Martin Parkinson has briefed state and territory officials about the proposal and premiers and chief ministers will get the full details ahead of the Council of Australian Governments (COAG) meeting, on Friday.

Treasurer Scott Morrison was this morning questioned about the proposal and said it was under consideration.

"I'm a pragmatist on all of these issues and a pragmatist always focuses on solving the problems," Mr Morrison said.

"If those sorts of remedies lead to a solving of the problem, then of course you're going to consider them earnestly."

He has stressed the federal government doesn't want the overall tax burden to increase.

Prime Minister Malcolm Turnbull has already spoken about taxation reform to some state leaders, including Western Australia's Premier Colin Barnett.

"So if the Prime Minister can get the states to agree I think it could be quite a significant COAG," Mr Barnett said.

The plan is understood to mean letting the states and territories charge some income tax — and then use it to fund services like health and education rather than relying on Commonwealth grants.

It would be a major change to the way the federation works, potentially creating a patchwork of different tax rates across the nation.

But ACT Chief Minister Andrew Barr said it was worth considering.

"Income taxing powers would be part of a broader tax mix then for state and territory governments," he told Lateline.

"In the spectrum of taxes that are levied in Australia, they are relatively efficient.

"They certainly pass the test of being able to be levied progressively, so you can certainly tax higher income earners more and have a fairer tax system as a result.

"So they are a better form of tax than some of those blunt measures like the GST for example.

"To the extent that they become part of the state and territory tax mix, I am relaxed about that."

'It would be a logical next step'

But other state leaders are not relaxed, waiting for Mr Turnbull to explain the plan — one source described it as a farcical thought bubble being communicated through leaks.

Space to play or pause, M to mute, left and right arrows to seek, up and down arrows for volume. Watch Duration: 8 minutes 30 seconds 8 m ACT Chief Minister Andrew Barr says income tax changes are worth considering

Mr Barr pointed out it was similar to an idea floated last year by South Australian Labor leader Jay Weatherill.

"That's the principal argument that Jay Weatherill put forward was to link a more robust revenue line, namely income tax, with those areas of high growth in state and territory budgets," he said.

"It would be a logical next step as part of federation reform."

He argued it would address the problem of vertical fiscal imbalance — which is where the Commonwealth collects the bulk of the revenue, but the states and territories do the bulk of the service delivery.

"Where we could address that by extending income tax powers or returning income tax powers to the states and territories — it's an option that needs to have a public debate," Mr Barr said.

"And we certainly look forward to what the Prime Minister will put on the table this week."

It is a suggested solution to the stand-off between the states and the Federal Government that has dragged on since Tony Abbott and Joe Hockey's 2014 budget, which left the states $80 billion short of funding they were otherwise expecting over a decade.

Since then state and territory leaders have argued they cannot afford to run their hospitals and schools without the so-called growth funding.

This week's COAG gathering will see the Federal Government give them extra money for hospitals to get them until 2020, but in exchange they would be encouraged to make their health systems more efficient.

Federal Health department head Martin Bowles told a Senate committee earlier this month that meant finding ways to treat people chronic and complex diseases rather than relying as much on them being in hospital.

But the Federal Government is not expected to offer any extra money for schools at this meeting, which disappoints Mr Barr.

"We have a revenue problem in this country, we're not at the moment raising sufficient revenue to meet our future health and education needs," he said.

"I hope for an outcome in health but I also hope for an outcome in education — we won't be letting go of that outcome from 2014 either."