Radical proposal, which was revealed by Guardian Australia on Tuesday, would allow states to raise or lower special levy on income tax rate

Malcolm Turnbull has confirmed he is proposing to give the states a share of income tax – and in time the power to increase their tax take – in a major shakeup he says will end “the depressing blame game” and fix the “core problem” of the Australian federation.



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.

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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 levy.

“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,” he said as he outlined the plan he has already discussed with many state premiers and will formally put to them at the Council of Australian Governments meeting on Friday.

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.

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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” 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 commonwealth is proposing to give the states around an extra $3.4bn over three years to help cover the costs of running hospitals until the new agreement to give the states a share of the long-term growth in income tax revenue can be struck.

The amount is only a tiny proportion of the proposed $80bn in cuts from projected hospitals and schools funding in the Abbott government’s first budget. As Guardian Australia revealed on Tuesday, the Turnbull government is not offering any extra money for the final two years of the “Gonski” schools deal in 2018 and 2019.

“This is very big fundamental reform to federalism,” Turnbull told reporters in Sydney. “The most fundamental reform to the federation in generations.”

“This, we believe, is the only way that we can genuinely reform our federation. It will give the states real financial autonomy,” he said, and would end “this depressing blame game where no one really knows who is responsible for what.”

He said over time it would allow states to say “OK, we have got an issue with one part of our services. Can we fix it ourselves or do we need more money? If we need more money, then they go, the state would go to their parliament, raise the money, go to the people and persuade them of the merits of it.”

He said any new agreement on taxation would have to look after the interests of the smaller states.

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“This is a very important part of the design to ensure that there is no disadvantage to the smaller states and there are mechanisms within the federal finance arrangements to do that. We can manage that. I have talked to the premiers of South Australia and Tasmania about this directly.”

The opposition leader, Bill Shorten, said the government’s funding offer to the states amounted to “a Band-Aid for a bullet hole” and immediately accused the coalition of increasing taxes.

“What Mr Turnbull is proposing is to allow states to levy income taxes ... I can guarantee Australians a Labor government will not give income tax powers to state and territory governments,” he said.

State governments have reacted cautiously but positively to the plan, which federal sources said had been under development for some time.

The Australian Capital Territory chief minister, Andrew Barr, said the proposal was the “next logical step” in changing the tax mix and eradicating “inefficient” state taxes.

The federal government is seeking agreement from the premiers and chief ministers on Friday to continue negotiations over the possible details of the tax shift.

The New South Wales premier, Mike Baird, said: “While I have historically argued for a share of income tax for the states, this has not involved increasing the income tax burden on Australian households, which already have among the highest income tax rates in the world.

“We have not seen a formal proposal but we are happy to consider one constructively.”