Federalism: Is a State-based income tax a good idea?

Federalism: Is a State-based income tax a good idea?

Jenny Wong interrogates the Prime Minister’s thought bubble on States levying their own income tax.

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The Prime Minister this week, somewhat out of left field, began warming us up to the Federation reform idea of allowing the States and Territories to levy their own income tax. Not a lot of detail has been released of the Government’s plan at this stage, which probably demonstrates it is just a concept to test out with the States and Territories first.

The PM said the overall total tax take won’t increase as any income tax surrendered by the Commonwealth to the States would be offset by a reduction in Commonwealth grants to the States.

Those in favour of this idea suggest it will mean state governments are more accountable to voters, because if states can raise or lower taxes they can better determine the level of education and health services in their State.

The PM suggested that taxpayers would not notice any administrative change – the Australian Tax Office would continue to manage the collection of income tax.

Practical considerations

Some practical issues come to mind:

  • Will there be 9 volumes of income tax legislation?
  • One of each for the eight States/Territories and one Commonwealth Legislation?
  • Will there be one definition of assessable income or 9 different definitions of assessable income?
  • How will new innovation measures targeted at investors operate at a State level?
  • Do I need to lodge two income tax returns?
  • Am I taxed as a resident of a State or source from a State?

In addition, a State-based income tax is not a new thing. It existed a long while ago, 1915 to 1942 to be precise. The reasons for abolishing it was complexity, inequality, discrimination between the States and embracing the “ideology of convergence” based on common citizenship rights.

When the Government dropped any proposals to increase the GST, it was yet to be convinced a tax mix switch of that kind would give us the economic benefit you'd want in order to do such a big thing.

I would say I’m yet to be convinced taxpayers would not notice any administrative change or that the principles that led to the removal of state income taxes are no longer relevant today.

What are your thoughts?

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