State premiers are concerned Malcolm Turnbull’s radical new state income tax plan will be used as a distraction from the immediate funding crisis caused by the $80bn in cuts to long-term hospital and school funding in Tony Abbott’s first budget.



Guardian Australia understands Turnbull is preparing to offer the states a total of $3.4bn over three years in interim health funding while the longer term reform is negotiated, and he and the health minister, Sussan Ley, will on Thursday announce a new plan to coordinate the health care of chronically-ill patients to improve their care and reduce their hospital admissions.

Under the new scheme, which will begin in July 2017 as a trial involving 65,000 of Australia’s estimated 7 million patients with a chronic condition, doctors will be paid quarterly rather than receiving a Medicare fee for each visit and will coordinate all facets of the patient’s care.

On Wednesday the prime minister also confirmed he was considering a long-term plan of transferring a proportion of income tax-raising powers to the states, including, after an initial period, the power for each state to raise its own income tax share.

But state premiers are determined the meeting will focus on the immediate and looming funding “cliff” caused by the cuts to projected funding in the 2014 budget, which amounted to $57bn over 10 years for hospitals and almost $30bn for schools. It is understood the federal government is making no immediate offer for increased funding for schools.

The Victorian premier, Daniel Andrews, said the focus of Friday’s Council of Australian Governments (Coag) meeting had to be health and education.

“As far as Victoria is concerned, Friday will not be about tax policy thought bubbles,” Andrews said.

“I fear this is a bit of distraction tactic ... from the savage cutbacks to hospitals and schools.”

South Australian premier, Jay Weatherill, who himself proposed the idea of states getting a fixed share of federal income tax, said he thought the idea of going a step further and giving each state the power to increase or decrease their tax rate was “impractical”.

“I think we need to concentrate on the real business. We want to see a concrete proposal to address the $80bn cut to health and education. This should be the first business of the nation,” he said.

“I don’t think it is practical in a country like Australia ... I don’t think it will work and I can’t believe the prime minister is seriously advancing this ... I can’t imagine any state taking advantage of it even if it was available.”

And the Liberal premier of New South Wales, Mike Baird, said of the tax changes, “these matters can be considered in the longer term. What is required right now is a partnership between the commonwealth and the states for the health and education services we need.”

As revealed by Guardian Australia on Tuesday the radical plan involves lowering federal income tax by a certain percentage, allowing the states to levy an income tax surcharge at the same rate as that reduction, and reducing commonwealth grants to the states by the amount raised.

It is understood the commonwealth is proposing around a 2% reduction in the federal tax take and a similar amount to be levied by the states –although the actual tax collection would still be administered by the commonwealth.

Turnbull confirmed that, over time, the states would be free to increase or decrease the amount of income tax they levied.

“We would withdraw from a certain amount of income tax that would be available to the states and we would agree that that would be the maximum they would levy for a period. In future, on the longer term, a state should be free to lower that amount or indeed raise it and then they are accountable to their own voters,” Turnbull said.

The treasurer, Scott Morrison, had earlier insisted that “this is not a government that has any interest in lifting the tax burden on Australians” and that anything presented to Coag would not lay the path for an increase in the overall tax take.

Speaking to Sky news hours after Turnbull’s confirmation of the tax plan, Morrison said it remained “speculation” and insisted that the prime minister had “not gone that far” when asked whether states would be able to put their income tax surcharge up.

He suggested the questioner should not “jump the gun” and that the plan remained “an idea that was being explored” to be discussed with the states.

“This isn’t about raising taxes at all ... we have no appetite for states to be able to increase taxes ... we don’t want to see taxes go up, we want to see taxes at the most stay where they are and preferably go down,” he said.

The trial of the chronic disease care plan, to be announced on Thursday, will cost about $22m and perhaps more as it is extended, but is intended to reduce overall health spending in the longer term by providing more efficient care. The Coalition began investigating it when it abandoned the Medicare copayment after a fierce doctor backlash.

The most common chronic conditions include diabetes, heart disease, cancer, mental health, eye disease, respiratory conditions and arthritis.