Session 2: State Taxes

MICHAEL PASCOE:

Thank you. You did have me worried when you said you had to do it in 17 minutes, but you did it in nine and a half.

We have eight state and territory treasurers here and the federal treasurer in the one room at the one time. I think it's the only time I get to do this without coagulating, so anything is possible.

We will hear from three speakers on a state of intent. Sometimes the answers you get depend on where you stand when you ask the questions. We have three speakers to ask questions and put a statement of intent out there. First-up, Andrew Fraser, Queensland Treasurer.

ANDREW FRASER:

It seems to me tax reform is like world peace. Everyone agrees with it, but the prospects are remote. Most people's version of tax reform is just simply "I want to pay less tax" or "I don't mind if the bloke next to me pays more". The majority here are saying that. This tax summit isn't about achieving world peace, though, nor should we expect it to. We can, however, make some steps here.

First, we need to confront the breadth of the task undertaken, which goes to the core of the body. Tax, how much of it, what to do with it is the central transaction of any civil society. The fact is that reform of our federation is the main game and what we need is a parallel assessment of who spends what and as well as who raises the money and how. This is a summit on taxation and not the federation.

As sure as the sun will set, state taxes are about to get their drumming. In my view it will be a change if all we do here today is repeat the mantra that the state should abolish ineffective taxes without the next question. The GST was an important tax reform and I think my side was wrong to deny that.

I think Peter Costello's only political treatment was to delegitimise tax in the campaign. His GST, it must be recalled, did propose deliberate forms and it was a great big new tax on everything. But the democrats changed the arrangements and delivered a GST that was narrow in scope.

So there's a simple equation here. The less heavy lifting from the GST, the less capacity to remove further state taxes. The GST was never a panacea, it is less so today and likely to be less so in the future. The truth is every state treasurer would remove stamp duty tomorrow, but if we did that we would have to abolish the police, ambulance and fire services and take a sward to disability funding also. If I add a dollar to every time somebody said to me a tax would be abolished, I would have funds to do that tomorrow.

Land tax and payroll tax can form part of an efficient tax system for the future, and Mr Henry's review concluded as much. State taxes are in ever-decreasing proportion of every state's revenue and, indeed, of all public revenues in the country. How do we get past the impasse here? The states don't have the immediate capacity to fund the sort of reforms that are being wished for and it's equally apparent that the Commonwealth government doesn't have it either.

So rather than give up, I suggest that we move to harmonise those components of state taxes which can and should form part of the tax system for the future. Not ending towards harmonisation but uniformed legislation that leaves only the rates and thresholds to be set competitively by each state. We should start with payroll tax and then move to land tax. Rubbing(?) Separate regimes across state boundaries in a nation of this size is a construct of the history not the grand design.

Of course, issues around compliance and ensuring the integrity of such a system would need to be monitored and the Council for the Australian Federation can and should lead such a reform process with a hard line deadline in place. I would suggest 1 July 2014 to start the bidding. It will be a step down the road, but it seems to me we have to start somewhere.

MICHAEL PASCOE:

Leave the harmony to begin with. Neil Warren, University of New South Wales.

NEIL WARREN:

I think the thing to remember first on state tax is that we've been here a thousand times before. I mean, I was going to catalogue the reviews by the various states of their own taxes let alone the Henry Review in the last decade. Victoria, 2001, review 2010, Western Australia 2003, 2005, 6, 7, New South Wales 2008, Tasmania at the present moment. There's no question states know that they've got a problem. There's endless reviews to back it up, endless inquiries and research committed by business groups and we see that put up to this forum, from the professions as well, and as I said from the Commonwealth. So everybody agrees there's an issue.

The question now for us really in this kind of forum is how do we make progress and why so little progress historically. I think what I want to start off by saying is that first of all GST is out of bounds for a number of reasons. It's not only out of bounds because the government said they're not going to play with it, but despite what businesses want, the state GST is out of bounds as well. In fact, the states never liked the GST. They wanted access to the income of taxpayers. So if we say let's stop focusing on the GST, let's focus on something else, what's the way forward?

Well, from all my observations, states themselves actually don't seem to be able to do things despite what Andrew is saying. There's just too much tension, there's more competitive federalism than cooperative federalism. The question then is what can the Commonwealth do as the states themselves can't do things or have difficulties. This is where this critical role of facilitation comes in and here I'm not meaning the feds going to the Commonwealth again with the hat out, "Give us more money and everything will be all right if you do that". That's not actually the answer. However, if the states can't do it themselves, what can the Commonwealth do to facilitate? So here I propose to pose a couple of issues for consideration.

Firstly, I do support this independent tax review commission, this budget and integrity commission, whatever we want to call it, we do need to think of the right term, but it's critical that you do have something that's arm's length from government, from treasury, that allows some of the hard issues to be addressed. The second one is and in the spirit of John Freebairn's point about rent seeking, academics in a way need to be funded to do this independent research that you can't do within government. They're the two critical things.

There needs to be a gain changer at the Commonwealth level. There's two things that can happen here to do that. One is there has to be consideration given to states having access to the income, the personal income tax base, not the GST, to the personal income tax base. However, my research and other research says well why would the states bother unless at the same time you're creating some incentive for those states to actually embark down that path of utilising that base. Last time we were here they had access to the base and did nothing with them because at the end of the day there wasn't that incentive. So we need to give some significant consideration to how to both have a carrot and a stick approach to encouraging states this time to access that base, to embark on some of those reforms that we hear so much about.

So that's where I'd like to end my comments, giving states some access to the base, putting the framework for the consultation and for the research and kicking this thing along.

MICHAEL PASCOE:

Thank you. Alex Sanchez

ALEX SANCHEZ:

Thanks. As Professor Warren said, a plethora of reports, apart from the review of Australia's tax system, have identified the strengths and weaknesses of state taxes. The New South Wales and WA state tax review, Victorian Harvey Report all have concluded much the same thing and that's state transaction taxes are poor and are a drag to efficiency. All these repo
rts maintain that if we were to start again, then these taxes certainly wouldn't be part of the show. Without replacement revenue, these same reports say that it's up to the Commonwealth to step in. They all say, poor as they may, the states depend on these taxes to maintain themselves.

So that is the debate as we know it today. Everyone knows the badness of the situation, but no-one can escape it. It may not be peace in our time, but it's clearly state taxation reform détente. I think it is that we can no longer afford. We need to rid ourselves of taxes that impede mobility. There's no greater economic need than to remove taxes that throw sand into the cogs of resource flexibility. Perhaps in the dim past it was defensible to tolerate such stamp duties, but the shock to the resource boom has put paid to that, and as someone in the insurance industry would know, that in a dramatic, climatic country such as Australia to tax the protection of yourself against risk is deplorable.

So what do we do? Well, the first thing I think we need to acknowledge is that, yes, the states do have transparency, but they also have access to some of the best taxes available, payroll and land. We need to know that some of the those taxes, even though they're not levied by the state, actually use these broad bases. For example, the superannuation guarantee levy is a payroll tax by any other name, and so too municipal rates, they're simply land taxes by another name. So the opportunity exists to reform some of the state's poor taxes with the best bases to become their best taxes with the best bases.

Now, I think some people here would suggest that in two thousand and - we started from a poor base and the states were given a poor great tax and it's the job of this forum to correct that. My suggestion is that in 1971 the state started with their best growth tax and made it poorer over time. It's now time for the forum to correct that.

I'm proposing for the forum the states repair their payroll tax through the BAS system leaving them no worse off and retaining their own resource industry. That will repair the tax payroll base. In the short run, harmonised and broader tax bases, together with collections of the BAS provides a tax mix which would allow the states to remove their most inefficient taxes in the medium to long-term, that can be merged with the current GST to improve Australia's tax regime giving, in effect, what the Henry tax review proposed is a cash flow tax. I think it's a case from a little thing, a big thing can grow.

So that leaves the repair of land tax arrangements and here again that is eminently possible. A switch from property-based stamp duties to broad-based land taxes would have not only desirable economic effects but also social effects, as some research has just shown. Of course, this process would require the Commonwealth and the states to sit down and cooperate to put such a system in place. But a key departure from the past is this process will not involve cooperation by government to introduce a new tax or to receive a share of something; it would be about cooperation to improve a tax base. I think that's the challenge and I think that's probably a challenge for some people in this room, but I hope we might be able to have a bit of a discussion around those themes.

MICHAEL PASCOE:

Could I ask for clarification, as a humble sole trader doing his quarterly BAS, is this (indistinct)

ALEX SANCHEZ:

Instead of running your payroll system through a state payroll, you would run it through the BAS, collected by the ATO through the BAS, and then remitted on own source basis.

MICHAEL PASCOE:

Is it done [indistinct]

ALEX SANCHEZ:

It could well be. As I said, from a little thing a big thing can grow.

MICHAEL PASCOE:

It's something else, not a GST.

ALEX SANCHEZ:

On a payroll tax on the pathway to a [indistinct].

MICHAEL PASCOE:

Since we just heard from the Insurance Council, is there anyone in the room who doesn't think taxes on insurance is dumb, is appalling, is stupid? No. (Indistinct)

LARA GIDDINGS:

We all agree that they are inefficient. If they could get rid of them, they would. We're at a point now at the state level where we've got no further room to move unless there is further reform probably at the national level as well as potentially at the state level that would enable us to shift further away from inefficient taxes towards more efficient taxes.

MICHAEL PASCOE:

You've got a bunch of other taxes available to you. You just don't want to press the button on them.

LARA GIDDINGS:

There's certainly some very difficult issues that governments have to confront around land tax, for instance, and across Australia we all have different rules around land tax and, in fact, we could probably broaden that tax out, which raises some of the issues that we heard in the morning session as well around the business taxes as to what that impact then has on the broader community, and there is an argument right now, for instance, one that we are feeling very hard in Tasmania at the moment is the rising cost of living for people and to put an additional tax on the family home at this point in time I know would cause a lot of alarm and concern and hurt for Tasmanians, so it is a difficult issue to pursue. In theory, absolutely, broadening out the land tax base is one way that state governments could go.

The other key point to that is the issue of bipartisanship which has been raised as well. That sort of level of tax reform, to be frank, would require a lot of bipartisan support, and not just political bipartisan report, but also support from other major stakeholders, including unions, business and others so you have everybody speaking from the same sheet so to speak.

MICHAEL PASCOE:

There's one thing worse than a general tax on insurance, it would be an emergency service levy on tax, on insurance. Why does New South Wales do as the treasurer there?

MIKE BAIRD:

I think picking up Lara's point, the question becomes why have you got such an inefficient tax base full stop. This is our argument. I agree with Andrew in terms of the summation. The states are in this awful position. If you look at the imbalance across the country where our tax base falls well short of our expenditure responsibility and notwithstanding the noble claims of trying to reform your own taxes, which clearly each state is trying to do, you will never get to that position where you align the revenue and expenditure responsibilities unless there is participation at a federal level.

I've got some sympathy with the federal government at the moment, what the Prime Minister and Treasurer are dealing with, with the global economic events. That is putting on a huge pressure at a time that we're trying to consider tax reform. So my argument would be we shouldn't be focused necessarily on those financial pressures today; we should be looking at reforms going forward. What we have argued in our submission is income tax sharing. Quarantining a part of the income tax to go back to states is a clear way we can move from inefficient taxes to much more of a tax base and we're happy to participate along those lines. It's not easy but certainly the less you share in the inefficient taxes, you will never move forward.

MICHAEL PASCOE:

We've heard from Henry that states do have available to them some very efficient taxes. Can I put to the treasurers present is it a matter of you wanting access to a tax that someone else has to bear the owning of levying. Have you, in fact, competed away your own tax base by continually cutting payroll tax? Andrew Fraser, you've got the lowest payroll tax in Australia, you've got websites that boast about it.

AN
DREW FRASER:

I think the end point here is that competitive federalism is a major part [indistinct] the nations that are geographically large that do well, there's no real accident about that. I think the real question here is regardless of what tax system we have at a state level, it is going to be subject to attention and that's a good thing. Theoretically if income tax was something that was set by the states, does anyone think that we would have had the debate during the last decade about how our income tax settings got very uncompetitive. The only thing that counted for tax reform was a report turning up four weeks before the budget and a little bit of giving away going on that ultimately counted for tax reform.

In the end, if you had a competing between states, and no doubt Tasmania would have a lower rate, as would South Australia, we would probably be a tick above that given the growth and the breaths of the state. That's good theory. I think it comes down to the fact that ultimately vertical fiscal imbalance is undemocratic. We've got the widest VFI of many federations around the world. That means to me - what that says to me is the real task here is to bring that back closer and you will get not only a better tax system but a more democratic country.

MICHAEL PASCOE:

I'm confused. You want to harmonise tax [indistinct]

ANDREW FRASER:

Harmonising the system so we don't have eight systems, but I'm all for states being able to compete on what the rate is and thresholds are. I think what that drives in the end is a more competitive arrangement. If we had no vertical fiscal imbalance, everyone was equal, your capacity met with your - the capacity to raise funds met with your obligation to spend it, then the tax systems between each state would be very competitive. The point you're making here is, well, shouldn't we all just elevate up. There's no point in having a bloated one tax to try and overcome what is the structural inefficiency which is vertical fiscal imbalance.

MICHAEL PASCOE:

It [indistinct]

NEW SPEAKER:

[Indistinct]

ANDREW FRASER:

We also have the lower stamp duty.

NEW SPEAKER:

I understand that.

MICHAEL PASCOE:

If you compete too much politically on tax cuts you end up [indistinct].

EDDIE KUTNER:

We've been talking about state taxes and I'd like to bring the issue of taxing on property and property development because it's a major raiser of state tax, but when it comes to housing, it's not about state taxes and federal taxes; it's about an appropriate tax that brings about the social outcomes that you want and supports the society and the issue of housing being a basic need.

Just to put the issue into perspective, there is a critical shortage of housing in Australia and there is a crisis of affordability. The National Housing Council puts the shortage at about 200 thousand. The HIA research puts it at 220 and there is research to indicate that by the year 2020 there will be a shortage of about 500,000 houses. Beyond it being an economic problem, it's obviously a social problem if that's the sort of society we want and social key cohesion.

MICHAEL PASCOE:

What do you want?

EDDIE KUTNER:

I want appropriate taxes that encourage the creation of new housing because that will resolve the issues surrounding -

MICHAEL PASCOE:

... ... [indistinct]

EDDIE KUTNER:

In analysing stamp duty you need to distinguish between old or existing real estate and new real estate. Removing stamp duties on existing real estate won't create one extra house and creates no employment. Yet, encouraging new construction by removing stamp duty and all those imposts and supply constraints that costs create, you will create new housing, new employment, new productivity and that in itself passes the tests of being not only fair but also it would pay for itself because there are about 350,000 people working in the new housing development industry, and the multiplier effect is for every dollar spent in construction there is 2.9 dollars of economic activity. So I think it passes all the tests that we should be focusing on removing the impost on creation of new housing.

MICHAEL PASCOE:

In a broader sense, Robert Carling, inefficient state taxes, are they part and parcel of federation? Is there a solution beyond politics?

ROBERT CARLING:

Andrew Fraser seems to think that they're undesirable, but it would be good to be able to get rid of them, but we can't so we just have to stay with them and harmonise. I would like to think that we go further than that. There seems to be broad agreement that stamp duties and other insurance taxes should not be part of the system. There is a question about payroll tax and I think that payroll tax is undesirable in its current form, but it could be reformed in a way that Alex Sanchez has talked about, but the big issue is how to pay for removing these things. I think that the state's could, for example, they could phase out the insurance taxes, which is probably at the top of the list, they could do that out of their own resources over a number of years and they would hardly notice it, but once you get down a list to the big ticket items, like the stamp duty on property transfers and so on, there would have to be some balancing revenue to make up the difference.

Now, this has all caught up with the issue of financial autonomy of the states and the Henry Review raised the issue of state access to personal income tax base without making a recommendation on it. Neil Warren has raised that this afternoon also. I think that that's probably the way to go. I don't mean an overall increase in personal income tax; I mean a substitution of the state's or part of the Commonwealth income tax as it currently is. I think that this provides the opportunity to deal with both issues of excessive financial dependence of the states on the Commonwealth, to use the jargon, vertical fiscal imbalance, and also opening up the capacity for them to reduce or get rid of some of these other undesirable taxes.

MICHAEL PASCOE:

[Indistinct] CPA Australia.

PAUL DRUM:

Thanks, Michael. I think there's a few good points touched on here. One of the major themes seems to be that the states can do it but they can't do it alone, and central to CPA Australia's thesis is that tax reform isn't going to happen in this regard unless it is driven by the Commonwealth. So I would like to take the treasurer up on his invitation earlier to everyone to speak on anything that they wanted to, including the GST, and just tell you a little bit about the work that we've done in that regard about fixing inefficient taxes, many of which are state taxes.

So as everyone probably knows, the Henry Report clearly articulated how much of a problem the tax system has become with 125 taxes and charges of which ten collect 90 per cent of the revenue. So we clearly have a problem here, and most of this room will know it, but it's a problem that needs to be addressed. It can't be fixed without the intervention being driven by the Commonwealth. Those 125 taxes don't include the new three ones: Carbon, minerals and the temporary flood levy. So as we go forward, we're actually adding extra levies and charges and taxes and we're doing nothing about the 125, which is why we're here today.

So as part of the CPA's Australia looking at this problem and considering it, we did what some people think unthinkable, but we were very encouraged by other submissions, and that is to look at what increasing the GST would do to enable the removal of inefficient taxes and what that would do for productivity. This is more than a back of the envelope calculation on retiring certa
in taxes at the state level and introducing larger Commonwealth taxes, which the GST is, of course, and its one where all the revenue does go to the states.

This was econometric modelling from KPMG. We chose them because of their good work in the Henry Tax Review and so as to move the dial on where the review left off. That report is publicly available. It models four different models, increasing the GST to 12.5 per cent, 15 per cent, 20 per cent and also a model of keeping the rate the same at 10 per cent but increasing the base, broadening the base to include items that are currently GST free. As I said, in every case, not the increased with the GST, but because of the retirement of the inefficient state tax, insurance levies, fire insurance, motor vehicle levy, motor vehicle registration fees, some of the commercial property transfers, things we're talking about here, because of the efficiencies come from the retirement of those taxes, there's a positive contribution to GDP and productivity and that's really what tax reform should be about. I want to put that on the table as part of this discussion too.

MICHAEL PASCOE:

[Indistinct] and the states will get the money if they brought it off. The state treasurers would love that, I'm sure. [Indistinct]

GERADINE KEARNEY:

Thank you. Australian Trade Unions agree, I think, that the existing state taxes are a bit of a mishmash. They are regressive and inefficient and we've had a lot of examples around the table this afternoon already. We agree that there are no at the moment strong incentives for states to actually reform or unilaterally reform their taxes. We do need a robust process that brings together states and Commonwealth and other stakeholders to look at a way we can fix this. I would encourage if we do that we include civil society partners and trade unions in that because it's very important to have the voice of the workers in that debate.

It's encouraging to hear from a speaker earlier on my right to say don't forget that these taxes do actually provide services and that they are about the social wage and they are providing very important things like health and education, and if we are going to say that the Commonwealth has a role, and we believe they have a role, I would like to suggest that there needs to be greater transparency with how states actually deal with the supplements they get from the Commonwealth. I think the recent reforms we have seen in the health system, whereby there's going to be activity of base funding applied to health services, is one such reform where transparency can be apparent and we can see how those dollars are spent and we can simply get value for the taxes that we spend.

I'm amazed -- not amazed, I knew it would happen -- that somebody would suggest broadening and raising the GST base, but as we all know the GST is a regressive tax, it does not promote progressive tax system, it creates inequality and, of course, penalises those on lower incomes. ACTU has done research to show that despite the fact that we have a progressive income tax system, our tax system is, indeed, flattening out and that the percentage of taxes that low income households are paying are rising progressively and are reaching similar levels to wealthy households. I think that's a dangerous path to go down, and as somebody else has said this morning, it certainly would not create a society that we would want, which is what our tax system is about.

MICHAEL PASCOE:

It's not too late [indistinct].

WAYNE SWAN: 

No. I haven't changed my mind. The bouncers aren't coming to get the gentleman from the CPA. That will be later.

I did want to make this very sensible point, that some people believe that the GST is some sort of money tree, but the fact is that when it was introduced originally, in addition to the revenue raised, 18 billion dollars was spent additional on compensation and I don't know whether the gentleman from the CPA actually factored that into his modelling. This is not necessarily a great deal in terms of fairness nor in terms of efficiency. So that's why the government is opposed to increasing the rate or widening the base.

MICHAEL PASCOE:

[Indistinct] more money than you know what to do with over there. Isn't that the allegation?

CHRISTIAN PORTER:

We would argue slightly differently, but that's for another forum. You've had a lot of agreement from the state treasurer, we've shared experiences, but it seems there's three tiers of reform. There's low-hanging fruit, insurance-type taxes, and probably the states could do more in that area to have that first year of reform. You've got the second tier of reform, the things that sit inside that, replacing transfer duties on real estate and broader-based land tax, these types of things. That may involve transitional costs, so that may involve some cooperation with the Commonwealth to achieve that to perform.

I thought Andrew's suggestion about harmonising at the second tier of reform, most of that reform could be done by the states without being here, but the big issue, I think, is this income tax issue, and the third ambitious tier of reform, which is whether or not there could be the retirement of a whole range of taxes which we all know are less efficient than other comparative taxes, but that would require replacement revenue.

I guess from WA's perspective, at the highest level of conceivable reform, what we are interested to know is whether it is in the sense that there's some agreement from the states that this is the likely model for serious reform in this area, whether there's any appetite from the Commonwealth to entertain that. It's a bit before my time, but I understand that PM Fraser had some consideration of that, PM Howard, for reasons unbeknown to me as a conservative, has no interest in entertaining that, but if we could take something away from this forum, some indication as to whether or not that was even on the books, because if it's not, we drop back into that second level into the pit and go home and do our best.

MICHAEL PASCOE:

[Indistinct]

WAYNE SWAN: 

What seems to be proposed is that somehow we could give the states a lot more money for the taxes they abolish but not end up increasing our own tax intake. We would have to be slashing services in health and education. What they have to dois use their tax bases and use them more fully.

MICHAEL PASCOE:

Before we move on, the two matters put forward in the review was to broaden and unerode payroll tax as well as land tax. Are we taking for granted here something about payroll tax? Who wants to speak in favour of a better, bigger, broader payroll tax, putting more power back into the states? We've already had Alex talk about it, and then I want to hear some someone who thinks that payroll tax is a bad tax. Ric Simes from Deloittes.

RIC SIMES:

Payroll tax, in fact, is a tax that should have an efficiency ranking very similar to any other labour income which would be more efficient ones. The reason why it's very inefficient at the moment appears to be of all of the exemptions, but we've seen, whenever I've been observing it, [indistinct] information at elections is to increase the exemptions with some payroll tax, land tax or whatever, rather than worry about the base itself, so a broadening of the payroll tax base would help quite a lot.

Just listening to the comments around the room more generally, it does seem to me this is one area where the analysis has been done. We don't need to go off and do any more reviews or analysis or whatever. These are things where it comes down to a political will. The Treasurer mentioned the Commonwealth shouldn't be throwing any money at this. In fact, I think that one of the things coming out of the modelling is that the Commonwealth does get a deficien
cy dividend from this and so that there should be some money available at the Commonwealth level also just to grease the wheels a little bit, but certainly what is being advocated here is an adjustment to the state taxes themselves and most of the initiatives would be done within the state realms.

MICHAEL PASCOE:

[Indistinct] does anyone want to speak against payroll tax to say it's an evil thing? Yes, Mark [indistinct]

MARK LENNON:

I think it's a question of theory and practice which has been alluded to by the previous speaker that payroll tax has been in the hands of the states for 40 years now since 1971 and we're yet to see it be an effective and efficient tax, but we're told it can be. We believe very strongly in the union movement. It is inequitable and is a tax on jobs and I'm yet to be convinced a strong argument in favour of it.

If you accept some of the arguments put here today and you were to increase payroll tax by 50 per cent around the states at the expense, say, of stamp duty, then you're still going to have a very significant shortfall in state revenues that is not going to meet the ultimate problem. What concerns me in the discussion today is that we focus on two taxes, payroll and land tax, and not looked in terms of immediate answers to the problems and not looked at the broader question about revenue sources for the states.

MICHAEL PASCOE:

[Indistinct].

MARK LENNON:

That's a question I think you have to - there would be a number of answers to that and I don't have them immediately here today, but you have to look at what's in the paper that talks about sources of taxation being either personal income, business income, consumption or economic rents are really states confined to economic rents and business income in a sense. That's where you're going to start. The review of the system will have to start at those four principles.

MICHAEL PASCOE:

Peter Davidson from the Australian Council of Social Service.

PETER DAVIDSON:

Thank you. I'm going to start with a risky statement. I think we agree on the main problems in this area. One, that federal and state governments need more revenue to fund services for an ageing population, and I will come back to that later if I get the chance. Secondly, states rely too much on inefficient transaction taxes. We don't agree on the solutions. Raising or broadening the GST would indiscriminately reduce the living standards of those whose incomes are too low to pay income tax. It would also devalue the assets of retirees. Other countries may have higher consumption taxes. They also have universal free community services. The public won't accept Swedish consumption taxes without Swedish services.

Here is the problem: when the GST was introduced, it was supposed to provide a growth tax to fund community services. Within a year, the Victorian Government cut payroll tax. That triggered another round of what I would call and others have called destructive tax competition among the states. The problem here is that the states have eroded the most efficient tax bases they have, land tax and payroll tax. You have to ask what would happen if they were offered a part of the income tax as well.

So what are the alternatives? It seems to us we need to find a way to encourage state governments and incentivise state governments to use better use of the tax bases they have, particularly land tax and payroll tax before we call upon low income earners to pay more for their groceries to fund the abolition of inefficient taxes. One option may be to amend the grants formula to take account of the extent to which states have made use of the efficient rather than inefficient tax bases. That's one option.

MICHAEL PASCOE:

Before we get to the [indistinct] Andrew, Barr, the ACT Treasurer, you've got the highest rate of payroll tax as opposed to Andrew Fraser, but you've got the highest hurdle. 1.5 million dollars.

ANDREW BARR:

Highest threshold, yes, encouraging more business.

MICHAEL PASCOE:

So no-one in the ACT pays tax?

ANDREW BARR:

[Indistinct] that large proportion of the private sector within the ACT that is in a small and micro business category we have applied a higher rate to those larger national and international operations that operate within the territory.

MICHAEL PASCOE:

Here you are sitting in the middle of [indistinct]

ANDREW BARR:

[Indistinct]. We will need to lead to some changes. What will be interesting for us, really, is the capacity to fund the reforms, albeit the pace of that change effectively. If we are doing it by ourselves with the ACT, then it's going to be a long slow process of reform, but I accept that there is a need for that reform to occur. It really is a question of what's the pace of that change and how we would have communities with us because we've all got services to provide and most people notice a loss of service more than they notice a reduction in taxation.

MICHAEL PASCOE:

[Indistinct]

HEATHER RIDOUT:

I think everybody knows we have a problem, but I think everyone probably realises it's a burning platform, one of the crisis areas that will only get worse. It's not an optional extra for us keeping going around and around the merry-go-round on this one. On any equation the states are going to have huge demands on their budgets going forward and they don't have enough money now to cover them, but that issue is going to get worse and worse and worse.

So I think we have to be pretty upfront. Given I'm sitting next to the Treasurer, I think I can say it, we're friends, this won't happen without federal government leadership, whether its incentives, cajoling. It is very much part of that. I think the states do have a role. I'm more concerned than ever about the lack of cooperation between the states, for example, on the OH&S issue. We're seeing less cooperation rather than more cooperation. I think that is a worry.

Wearing all my hats, I think our members find operating across the boards a nightmare. Small businesses have a different view. The financing options looks like we've got three. We talked about the GST. On the issues of dealing with the regressive nature of it, we actually have done quite well with that issue over the years. We have been able to compete quite well. We've been through this quite a few times and not done too bad a job. If you put it at about 3 per cent, you can get rid of payroll tax, insurance taxes, but it's on all business. So business has to be [indistinct]

In terms of piggybacking on personal income structure, that is certainly operating in some countries, but we already rely on the income tax system. So all we're doing is overloading one that we have. I think probably having a look at a more efficient business cash flow arrangement has to be on the agenda and I think it's a modern tax. It's not one like a GST which is [indistinct] I think some of these issues are the compromises we need to get serious about because I don't think we have enough time to get serious.

MICHAEL PASCOE:

I will take two comments on this area.

RICHARD ECCLESTON:

As a professor of political science, what sort of federal system do we want? I agree with Heather and I think everyone agrees that one of the big structural problems in Australian Government broadly defined is the increasing inability of states to be able to provide key services. Clearly small jurisdictions are feeling the pressure now, but I suggest that all states are vulnerable to those pressures and I think that was born out by the BCA report. The question is which pathway do we choose: The classic American federal system or the Australian tradition of dual federalism where we gra
nt the states a degree of financial independence and political independence to respond to the political needs of their constituents and competition between the states as part of that.

We do need to think about ways of addressing the acute fiscal imbalance.

The other approach which is where Australia is at the moment is the German style of integrated approach where all the decisions that really matter are made centrally and states become agents of service delivery. We're in a kind of hybrid at the moment. If we go down that path without making a conscious decision to go back to the American tradition of dual federalism, what it requires institutionally is much better representation of regional interests here in Canberra and that's one of the problems with the sort of centralist agenda that I think is happening at the moment.

MICHAEL PASCOE:

Kim Wells, are you a centralist American or German? He's a Victorian, the Treasurer.

KIM WELLS:

A proud Victorian. I guess it's easy for everyone to criticise the states for having inefficient and inequitable taxes, but the reality is that what you do with a secure revenue base, that we have already in Victoria, we're getting rid of our insurance, the tax on the insurance, we're moving to a property base, so we're moving in that step. We're also making it a little bit easier for first home buyers, but to get rid of -

MICHAEL PASCOE:

How hard was it? Is it impossible? A lot of states seems to think it is.

KIM WELLS:

It's an election commitment. We're already down the track to go from tax on insurance to property base. If we were to get rid of our stamp duty and inefficient tax for around 5.4 billion dollars plus our land tax, income is about $1.4 billion, we would have to increase the land [indistinct]

The amount of waste and mismanagement between the Commonwealth and the state and the Commonwealth and local government and states on local government doesn't seem to have been factored in, the reason we all are very keen to jack up the reliance on taxation, but I still think that part of the discussion needs to be the waste between the three levels of government when it comes to expenditure.

MICHAEL PASCOE:

So we abolish the states. I don't think you were saying that. Just on that matter of harmonisation, I've heard that the states can't harmonise how one reads a logbook from another.

NEW SPEAKER:

We do have fairly uniform charging models. What we don't have at the moment, we work in a national marketplace but we don't have national regulations. When we cross boarders, the rules change. We do have states that are still putting up impediment to that process. We have a bigger impost on our industry than what we're talking about here today. It's making the interstate transport marketplace dysfunctional.

MICHAEL PASCOE:

There's an increasing amount of money involved in that. It's a cost to everybody. David Koch.

DAVID KOCH:

Just as an outsider, this is an issue that gets constantly discussed. It's a massive issue. I don't think the opinions have actually ever changed. The big issue is nothing has ever been done about it because it is so broad. Surely we start taking baby steps first and all agree on the harmonisation. Forget whether individual taxes are efficient or inefficient, that can come later, but in terms of small business we are a federation. There should be a harmonisation on taxes.

The decision is being made by politicians. We use this forum to lock up the treasurers, federal and state all in one room, give us a decision, that doesn't include jargon like vertical, fiscal integration, body politics, stakeholders, having to get everyone to agree because you've got so many interests you will never make a decision. A decision hasn't been made.

So first step, get each state treasurer and the federal treasurer to say we will agree with the expert committee of the best tax brains to actually come up with a formula for us, to go through every state tax and say this is how it will be harmonised. Then you go to the public and say it's not our fault, it's the body of experts who take into account all your vertical, fiscal whatever it is. There's a trade-off between payroll tax and land tax and things like that, depending on each of the states. You've all got to cop a little of it, but the problem is politics and you can't please everyone, but somebody has got to make a decision because that's what the public wants you to do.

MICHAEL PASCOE:

We started with an offer from Andrew Fraser, putting harmonisation of payroll tax on the table. Will you take that opening bid and lift it to a few others and see if any other treasurer isn't going to play?

ANDREW FRASER:

From my part I think that is the way that we progress this, and the point I was making is that ultimately these taxes can form part of a system of the future and the best way to start that is by harmonising them. That was the point I was making at the start. I was, I suppose, as a politician who is the son of a car salesman, I'm worried about taking advice from journalists as well.

MICHAEL PASCOE:

Gee that was a blow.

ANDREW FRASER:

But nevertheless, I do think that this is the way to go. However, I would like to broaden it out. The truth of the matter here is that there's 125 known taxes in this country, as was indicated by the CPA. That's what Ken Henry called them in his report, 'known taxes', meaning that there might be some others but no-one can find them.

Of the 125, local government has rates, the states have 25 and the Commonwealth has 99. So if ten taxes are doing 90 per cent of the effort and state taxation represents only 20 per cent of all the taxes that are raised in Australia, why do we spend 80 per cent of our time talking about state taxes? It seems to me that there is a very long list of other inefficient taxes out there and maybe they should be folded into this debate.

MICHAEL PASCOE:

I thought you were going to end up with the amount of carbon or something. Any state treasurer here not prepared to sign up to a conservative attempt at harmonisation? The offer was 2014.

NEW SPEAKER:

I'm very happy to take that up. I 100 per cent agree. Whatever date we agree with I'd be very happy to support that, but I think taking Andrew's challenge further, and it does come back to the federal treasurer, ultimately we are happy to come back here if there is an acknowledgment, as was just articulated, that most of the efficient taxes, if not all of them, most of them, together with what goes with them, is at a federal level.  If they come back onto the table for a serious discussion, whether you call it vertical or fiscal imbalance, that's code for that you have discretion.

MICHAEL PASCOE:

[Indistinct] now you're playing politics again. We'll talk about that if the federal treasurer does this and--

NEW SPEAKER:

The treasurer is doing it. I'm agreeing to harmonisation.

NEW SPEAKER:

I'm saying let's get the first step which we haven't had. We've talked about it for years.

NEW SPEAKER:

I'm going to say bugger that and payroll. Let's abolish payroll tax by 2014.

ALEX SANCHEZ:

Harmonisation is the last refuge of scoundrels. Let's be serious here. How about we harmonise the base of payroll tax and get that right as in 1971. Let's spend some time doing proper tax reform. Is it a lobbying of harmonisation--

DELIA LAWRIE:

Your payroll tax is the same in business in Queensland and elsewhere. The states have done the work on payroll tax, harmonisation. There are arguments about what they will be and how we t
ake advantage of the taxes we have and how we can step away from the inefficient taxes. We knew this would turn out to be a state-bashing exercise.

At the end of the day there are some realities in here. There isn't a single political party that isn't backed by the chambers of commerce and industry leading up to every election that says reduce your payroll tax rate and increase your threshold. Now, we all get out there and compete to do that, certainly to try and win over the business sector to win government. Equally we are a jurisdiction without a land tax, so thanks everyone to suggest tinkering with land tax and that leaves me nowhere in the territory. Don't have a fire services levy either.

Now, at every single election the property council promises there will be no introduction of the land tax. Every budget the same. It's curious to think that governments on their own can sit there and behind closed doors get all the treasurers together and let's all agree. Unless industry and council social services appeared, the trade unions are all in there together. We cannot bet over the real barriers of sorting out the tax reform. So I'm pleased we've got the forum.

If you look at Germany and Canada, they are good federal models. Personal income tax, the state equivalent governments in both Germany and Canada have access to them. They also have access to the corporate income tax and they also have access to the GST that's equivalent. I get how difficult it is in this current economic climate for any government to consider anything that in any way is going to shape its revenue base because we are all struggling to do far more services with less revenue, but there's an appetite, and I'm sure out of this forum we will see some pathways of further discussions, but get real, states are carrying the burden of servicing, the growth jurisdictions do need more to fund the infrastructure to drive the economic opportunity of our nation. So we're not going to just cut off the inefficient taxes without having a genuine debate around stable revenue.

MICHAEL PASCOE:

Thank you. We will get to that fiscal integration, I promise. First of all, Robert Jeremenko from the Tax Institute.

ROBERT JEREMENKO: 

I'm not a politician nor a journalist.

MICHAEL PASCOE:

Then you're higher up the rung than some of us.

ROBERT JEREMENKO:

We represent the tax professionals, and whilst harmonisation of state tax basis and taxes themselves is worthy, to borrow a phrase, it's the lazy way out, once a generation opportunity to review the tax system, as the Treasurer has said on a number of occasions. We had the Henry Review findings, stamp duties as an example, so we can talk about harmonisation, that's worthy, but if we go away from today without actually committing to getting rid of the state taxes that don't work, that are a drag on productivity, stamp duty being one of them, and work out how we fund states to replace that, we're just doing the country a disservice.

Now, the GST has to be on the table. I believe I have support from my colleague on the table here at CPA. To go to the Treasurer's point, 11 years ago when the GST was brought in, there was a compensation package and that's how major tax reform was achieved. It was done in the carbon price package announced only a couple of months ago. Packages of reform can be delivered and different sectors of the community that may be impacted more harshly by changing GST can be looked after. So we can't shy away from discussing it and I will be seeing the bouncer later as well for talking about the GST, I presume, but as I say, it's short-changing Australia if we come out of today from this just talking about harmonisation.

MICHAEL PASCOE:

.... you're sitting back here.

JULIAN DISNEY:

Firstly, a comment on harmonisation, but secondly to land tax because I think that's extremely important, and this is the best place in the program that I can sit and talk about. First in relation to harmonisation, one has to strike a balance between that and competition. Many of the problems that we're talking about here are the result of competition. That's why the revenue basis is being eroded at the state level. You can, as has been said, do some harmonising in the base and definitions which reduce complexities and you can allow competition on the rate, but I think you still need to have some harmonisation to avoid excess competition.

I think it's appreciated in a lot of walks of life that you can have a lot of competition and competition works best when the boundaries for it are set. One example of that is that we need a basic benchmark system developed by the Commonwealth as to what it is that states must be expected to tax. They can tax more if they want. If they tax less, then they lose some of the grants they get from the Commonwealth. There's some elements of that already in the Commonwealth grants commission approach and GST distribution in a way, but speaking very broadly, one of the problems with that approach at the moment is basically it just judges what an appropriate benchmark is by saying what everybody else is doing. That's a simplification, but I think it's better to say what should be done as a base level.

That leads me to the land tax because I think that's a key part to how one should address some of the politics of the land tax. The main purpose of the land tax, the main benefits of it, are not, I think, to do with raising revenue and what I propose wouldn't. We can focus too much on tax reform in revenue raising. It is actually its impact on economic and social behaviour. The worst impact of the land tax and this applies to some other elements that we will talk about in other sessions, is that it hugely inflates house prices. That's basically simple economic theory, that the excessive exemption of owner occupied property ... inflates house prices, which for about 20-odd years you weren't allowed to mention.

Now, even the OECD admits that and the productivity commission. We really need to address that. That incidentally would reduce the burden on states' budgets because if you just take an example of the costs for public housing or for homelessness, that would help, for the benefits of land tax go well beyond its impact on the property market and helping to reduce excessive price inflation.

That excessive price inflation has driven general inflation which has been damaging, meant that other parts of the economy has to be slowed down when they didn't need to be, it's aggravated pressure on interest rates, it takes resources away from more productive activity, including export activity. It's a major factor, probably the biggest factor that we're the highest household debt per capita in the world. It deprives us of an important immobile tax base which is immune from or less vulnerable to the pressures of globalisation. It's stable.

Equity is the very last of all of those considerations, but it's very important from an equity point of view as well. Equity in wealth is greater than equity in income. I don't go anywhere near as far as Henry would in this role. I would only receive the exemption at the very top end of land tax. We need to be very careful that we don't knock the guts out of the housing market. This is a very slow process. So I would remove the exemption at the top end and allow some deferral until sale or death and only reduce stamp duty down at the bottom end.

The main problem with stamp duty is its impact on mobility. It is not an impact at the top end. So we can gradually phase it out. I think the states that won't properly explore it even to a basic level, their land tax must pay a penalty in terms of the grants that they get.

MICHAEL PASCOE:

Adrian Pisarski?

ADRIAN PISARSKI:

Land tax, efficient as it is, is legislated by the states and local government. About 40 per cent of local government's
revenue comes from rates. That's a constraint area. There's only one tax there available to us. Of course, there are capping in two jurisdictions on those. One of those things Henry said was rates are very efficient but government should be given autonomy to set the rates. In New South Wales and the Northern Territory it would be good if rate capping was removed. As we said, 30 per cent of revenue for local government comes through rates. Fees and charges are about another 30 per cent, so costs recovery. Inter-governmental transfers account for another substantial amount, some of that money when it comes from the federal government, some comes from the states.

It will be a difficult thing for local government if while we move to inefficient tax payments, we saw a reduction in the capacity of the states to support local government. We're all in a situation where we're trying to deliver services and infrastructures for our community. They don't really care who is taxing them as long as they get the services and infrastructure that they need. Some of that occurs at the local level. We are constrained in trying to provide those services and infrastructure. We have significant backlogs. We want to keep access to a rates base. We would like to see that rate capping removed. We don't want to see ourselves out of that, but if we move to more efficient taxes, we don't see equality, we don't want to see a reduction in the ability of the states to support their local governments.

MICHAEL PASCOE:

Ian Winter.

IAN WINTER:

In the belief that some research evidence might help the debate, we engaged Professor Gavin Wood and [indistinct] to actually model the Henry recommendation and test that recommendation of removing stamp duties on property transactions and replacing that by extending a land tax to include owner occupiers as well.  We modelled that for the Melbourne market.

If we're seeking outcomes such as easier entry to home ownership for first home buyers and we want to remove barriers to residential mobility and, therefore, increase labour mobility, if we want to see an increased supply of private rental accommodation, downward pressure on the escalating house prices, encouragement of a more compact urban form, faster redevelopment of old industrial sites in our urban centres, a reduction in the number of taxes and the replacement of a volatile revenue stream with a much more predictable revenue stream, then you would, indeed, pursue the Henry recommendation of removing stamp duties on property transactions and reducing land tax. That's modelled by Ahouri which needs to be tested as well as I guess some of the options for transition.

One of the ones that we've been thinking about is you would slowly transition to a land tax regime as a property is sold. So no one owner would pay stamp duties and land taxes on the same dwelling. It would simply transition over a period of 10 years given the turnover of residential properties. That would mean that state governments would be waiting for the revenue stream, they wouldn't get it as quickly and that may need some assistance from the federal government to make that transition.

MICHAEL PASCOE:

[Indistinct].

TOM POCKETT:

I just want to reflect on Mike, I can't see his sign. The CTR did a fairly broad study and the point we're missing out on, a significant productivity improvement is a point that hasn't got enough airing in this forum. Allan has concluded that abolishing in isolation, there would be a 1.7 per cent in GDP. So it goes to the heart of why we have to get rid of the state taxes and why we have to do it in a reasonable timeframe.

They also modelled - well, they also thought about looking at broadening the payroll tax and the land tax, and clearly that's an opportunity. We don't think it is going to cover the shortfall. Therefore, there will need to be absolute cooperation between the states and federal government to fund that shortfall. I can't remember who made it, but there was a comment before unless you have all those people in the room actually working together, both social, commercial and the state treasurers and federal, you actually won't get an outcome.

The commercial enterprises that I deal with in terms of state taxes are a nightmare. You've got different taxes across the state, the gentleman from the transport industry I think hinted at it, but I think hinting at it is not enough. It is very, very complex. Harmonisation is great but doesn't solve the problem.

MICHAEL PASCOE:

Adrian Pisarski from National Shelter.

ADRIAN PISARSKI:

Going back to the issue of land tax and stamp duties for a moment, and to backup everything that Julian and Ian have outlined, it is in our view better to go from stamp duties to land tax, but that's not to say that stamp duty by itself is necessarily evil and there are other approaches that could be adopted. The Queensland Government in its last budget raised the threshold on stamp duties so that it reduced it for lower income earners and raised it for higher property values, the point being it's about housing affordability, and housing affordability is about getting a better deal for low to moderate income households.

We can talk about inefficiencies of tax regimes and the best way of designing a tax system, but if at the end of all of that we have a tax system which doesn't deliver affordable housing, we're denying a basic right to the people of Australia. So we can't just leave it at stamp duty and land tax in that sense. We actually have to look at what else the Henry Review pointed to and we have to really look at capital gains tax, exemptions and other tax deductibility regimes we have in Australia.

We think that the Henry Review pointed to quite elegant solutions around its savings income discount. Moving in that general direction is something that is going to really repair what is a fundamental problem with our system. I can't see where else in the agenda that I get to say this, so I'm going to say it now. If we don't change those things, we're going to be condemning ourselves to a future of unaffordable housing, particularly for the low income households, and we will have very bad social consequences if we do that.

We are spending, currently foregoing about 30 billion dollars a year in those sorts of tax measures and we still don't have affordable housing, and the worst aspect of that is that all of the investors in these products with their tax benefits seem to be picking up existing housing rather than building new stock. So we are not adding to the supply of new affordable housing for low-income households and we are adding to the burden that successive generations are going to face, particularly in terms of intergenerational equity. Sorry to broaden it out to federal issues, but we needed to do it.

MICHAEL PASCOE:

It is also a state and federal issue on zoning and freeing up of land that is locked up for other purposes. Talking of property, Peter Verwer from the Property Council of Australia.

PETER VERWER: 

Thanks. I take from the discussion so far that reform ends up being a timing issue. It's timing and also the framework of incentives that are going to be applied to all of the nine jurisdictions, in fact, ten including local government, which is actually critical here. If we're going to talk about reform, maybe it does occur at two levels. Firstly, a level of tax maintenance, which we heard from the Queensland Treasurer before and his colleagues, and I'm glad you pushed them, 2014 is a great date for the first of those reforms to start coming through, but they're just no brainers. There is harmonisation, and I'm not as negative as Alex, making it electronic, all those approaches, just move on and do that. We will not be addressing any of the issues raised by the Prime Minister and the Treasurer earlier today and others about deali
ng with productivity levels, ageing society, moving out of our demographic suite spot unless we undertake radical reform as well.

Henry's report had no shortage of those, particularly in relation to land tax. It was very scary. I had to have extra hours with my hypnotherapist - non-tax deductible - but we wouldn't want to rule any of those out. We have been very successful in the NT about not having a land tax there, but it's only because like other business groups we don't want to have certainty replaced by something which we think could be worse. So the answer here is we do think having a modernised low-rate broad-base tax such as land tax replacing highly volatile inefficient taxes is worth exploring.

We certainly wouldn't go along with the idea that I think Julian has proposed that you might keep a bit of an old system because it might have some social policy benefits that you would see. You get rid of bad taxes and you replace them with decent taxes. Now, the land tax system at the moment is theoretically conceptually okay but a disaster in practice and so there would need to be some concepts that a group like this sets up.

Firstly, it would have to be grandfathered, shouldn't be forced into a new system when you brought property on a previous system. You can be asset rich and income poor. There needs to be totally different approaches between the residential and the non-residential sector. Certainly we think that concepts like vertical equity aren't as relevant to the business sector, but with those in mind, we could definitely shape a far more modern system that achieved the main recommendation of the Henry Review. Here are bad taxes, get rid of them over a ten-year timeframe but not wait for ten years to get the first dividends. Let's create a champion and a gatekeeper of this reform that's going to firm up those packages, do a regulatory impact statement on them, have property community consultation and let the parliaments of Australia go to decide on them.

MICHAEL PASCOE:

Going to the problem of being asset rich and cash poor, moving into the fiscal equalisation topic, Andrew Fraser, you've got a view on land tax and I've got a question on it and that is any state government ... do you think it can be explained and sold to the population if you want it to?

ANDREW FRASER:

I think there were two points I wanted to clear up. The first was someone made the point before that there should be a penalties on states if they don't have tax settings that make the effort. The truth is there is and has been for a long time and it's through the government grants commission process. You are penalised if your base doesn't meet the standard that they set. This is in some way a debate that is being conducted by participants who are not aware of that basic fact.

The next point is in response to Alex, I appreciate his attempt to make sure this session was more lively than the previous one, so in honouring that, beyond politicians and real estate agents and journalists’ insurance, that their bills would be 530 billion cheaper next year if we reduce duty on insurance bills.

MICHAEL PASCOE:

Do it.

JULIAN DISNEY:

Can I just respond?

MICHAEL PASCOE:

Very quick, Julian.

JULIAN DISNEY:

Firstly, I acknowledged the existence of [indistinct] but it doesn't do what I'm talking about. It basically judges whether you're doing as well as others. That's different from what I'm talking about. I'm saying a nationally-established thing probably by the Commonwealth. Secondly, in relation to falling house prices, and whether that is welcomed politically, there are a stack of things are not available.

Another approach for this is for the Commonwealth to do this and one of the most interesting things in the Henry Report is the emphasis of deeming income on assets. The Commonwealth could just decide to deem income on the top end of the owner-occupier property market. It could then return that income to the states if it wanted to. That would overcome the problems of the complexity and competitive race to the bottom that we would otherwise have. That's another approach to it.

Another approach that was touched on is you could do this by placing stamp duty so you actually pay stamp duty over quite a bit of a life of a house which is converting stamp duty into land tax.

MICHAEL PASCOE:

We've got about half an hour left. We want to hear from the broader community here. We also have to deal with horizontal fiscal equalisation, but so far no-one has been talking about increasing taxes. The Business Council put out a paper at the end of last week showing the federal government had been conservative in terms of the extra tax that would be required. The light came on for me in the fiscal future when during the first round of botched negotiations of the feds taking over the state hospitals, that that was enough to chew up the entire GST.

Jennifer Westacott, the bunch of pinky left high-tax individuals that you are, you want to increase taxation overall?

JENNIFER WESTACOTT:

No, not at all. We think that's the wrong question. We think the question is what do you want the taxation system to do, and how can you actually get it to both meet the service needs of the future and grow the economy. So we weren't suggesting that the tax take would need to be higher at all in our submission. We were simply pointing to the problem, which I think everyone around the table today has highlighted.

If you take the combined State and Commonwealth Intergenerational Report, we have a very, very big fiscal crisis coming our way in 40 years and the conversation we're having now has to be part of how we prepare both the states and the Commonwealth revenue and expenses to deal with that.

MICHAEL PASCOE:

John Brumby, GST distribution, are you a poacher to gamekeeper to look at divvying up GST between the states? How is it going?

JOHN BRUMBY:

It's going very well. We've released an options paper which I think has been well read. We've met with all of the state treasurers and some of the state premiers and chief ministers. In particular, Nick Greiner is a member of the panel and Bruce Carter from Ferrier Hodgson in South Australia, both with apologies today. Our job is to review the distribution of the GST pool, which is about 48 billion dollars at the moment.

So the old concept of HFE actually goes right back to the 1930s, really, and it was an idea then, and Victoria and New South Wales were the manufacturing states that got the benefit of high tariffs and so this was a mechanism really to compensate Western Australia and Queensland for the high tariff protection that Victoria and New South Wales enjoyed.

Since 2000 all of the GST revenue goes into the pool. Current money value is about 48 billion dollars and the grants commission aims to distribute that money to the states and territories in a way which gives every state and territory the chance to provide an equivalent level of services and infrastructure; in other words, a single federation, a fair nation, whether you live in the Northern Territory or Melbourne, you live in an area where you have the opportunity of being provided similar services and infrastructure.

So of about 48 billion, four billion is redistributed. So the donor states historically have been New South Wales and Victoria. They've traditionally put in and the other states have been recipients. In more recent times Western Australia, because of the resources boom, has been the major contributor in relative terms.  Queensland is starting to come into the picture, so you have New South Wales, Victoria, Western Australia and Queensland contributing to the pot and basically assisting the Northern Territory, which is very remote, has a large indigenous population, special needs in those areas, and T
asmania, of course, again some remoteness and much of the resource base of Tasmania really legislated away over the last 30 years, so their capacity to drive a strong economy is more limited and, of course, South Australia.

So it's 4 billion out of 48 and I guess the big question we're looking at, to be blunt, one of our goals is how we maintain confidence in the federation going forward, and at the moment in Western Australia you pay a dollar in GST and you get back just 70 cents. If the resources boom continues, it will be less than that in the future. So one of the judgments for us is, is that fair, is that the system working well after decades of Western Australia being a recipient or to retain confidence in the federation, that's too much to contribute, we need to look at a new mechanism going forward.

Every state would say they either pay too much or don't get enough back, so it's a difficult job. We will release a draft report in February next year and that will have some options for the states to look at with our final report. I think the deadline that the Treasurer has set is around October/November next year, so that's the timeline that we are working to.

Two other quick comments if I can, just take that hat off for a moment. Andrew's comment about harmonisation, although some people would think that's not a big step forward, Victoria/New South Wales harmonised payroll tax by 2007 and it was a big step forward. If you're a business nationally operating across state boundaries, that is a good thing. The most constructive proposal to come out of today is one that can be achieved without significant cost to state revenues - David Koch, I'm not a politician or journalist any more.

On regulation, Victoria set a target 25 per cent reduction over four years, so we believe that regulation has to be addressed. It has been addressed through the COAG process. If you had a new source of revenue, whether it was income tax or whether it was GST, whatever it was, I don't personally believe the debate is settled yet about what taxes you would reduce or abolish. The reality is, if you have a manufacturer today in Australia, facing a dollar at near parity, you would say reduce payroll tax because it's a tax on jobs, it's a tax on employment and so I don't think that the debate is settled about whether you reduce stamp duties or whether you reduce payroll tax, perhaps by broadening out the base but by bringing the top rate down but taking out the pressure from the businesses doing it hard at the moment.

MICHAEL PASCOE:

There's not one state that thinks it's just about right now.

NEW SPEAKER:

You can ask them all individually and they will all say they're cheated and robbed.

MICHAEL PASCOE:

Christian Porter, is this really unfair, this system we have?

CHRISTIAN PORTER:

It's just a question of degrees. I think John's summary of it was accurate and a very fair summary. There's a pool of GST moneys, about 48 billion, there's a subset of that, about four billion, which represents a total amount of donation, and inside that four billion each of donor states make a certain quantum of donation. John said at the moment for every dollar taken from Western Australia GST 70-odd cents comes back. Our treasurer estimates with the continuation of the boom and the growth, that could drop to 33 cents coming back.

Now, I think the reason why John's economy exists is because if that did happen, I hope that it does not, but our predictions say it will, if it did happen you will get a fraction of what would otherwise be a sensible and sound principle which is that the states that are doing better at a point in time should be donating to those states that are not. We accept we are a donor state and we have been in the past a recipient state, but you lose that confidence in the system and the system becomes disreputable if the amount becomes gross.

The big problem for WA in all of that is that it's not simply about the equity of the situation and the confidence, but we along with Queensland are probably two of the most capital intensive economies on the face of the earth, both in private capital and public capital, and everyone in this room at some level in their own jurisdiction enjoys spending the revenue that is coming in through industry in Western Australia, Queensland, but the infrastructure that supports that revenue comes from all of the inefficient taxes that we've been talking about all morning.

So we've got 10 per cent of the Australian population, 45 per cent of the exports, 20 per cent of the company tax and we have a situation where I think the Prime Minister described our estate economy is hungry for infrastructure. They are ravenous for that. The size of that pool of money that could be donated could be growing much faster if these infrastructure bottlenecks were sorted out. We can talk about inefficient state taxes and increased cooperation, but the bottom line is without the money for appropriate road, rail, electricity and water infrastructure, we've got problems.

One thing further, there was a lot of talk this morning about the idea of transferring wealth from the growing parts of the Australian economy to those that are growing less well or are struggling. There’s been far less talk about moving portions of our population from the geographical areas where the industries are struggling to those areas where the industries are growing and desperately in need of labour. It may be something that comes up today, but the zonal tax rebate is critical to that.

MICHAEL PASCOE:

You love the idea of Western Australia only getting back 33 cents in the dollar.

LARA GIDDINGS:

Certainly I think there's room for review and discussion around horizontal fiscal equalisation. I would also remind people that it was only until 2007 that WA themselves were a recipient state and it's only because now they've struck gold literally with their mining boom that they've got over there, that they're able to sit back and complain in that sense of having to contribute more to the nation.

We heard earlier from Richard Highfield(?) about the difference between Germany and the US, and one of the beauties of Australia is we've got a bit of tension between those two models in terms of our federalism. One of the benefits of HSE means that you do get services that are of an average quality whenever you are around Australia, and that's on the basis that we're able to take some of the wealth from WA and land it in Tasmania. If we didn't have that, then you would have Tasmanians with worse health services, education services, than West Australians, as we see in the USA where you've got different states that have a wealthier base to them providing better services than their neighbouring state. We don't want to see that in Australia. That goes very much against our fair go value, values that we hold.

I think that FTH issue is critical, that it is, of course, improved but not to the detriment of other states.

MICHAEL PASCOE:

The clock is now ticking on us very quickly, so I would ask you to keep your comments in the last 20 minutes as tight as possible. Amanda Lynch.

AMANDA LYNCH:

I wanted to get back to stamp duty because it's the worst of the bad taxes.

MICHAEL PASCOE:

The worst of the worst.

AMANDA LYNCH:

Yeah, the worst of the worst. What's happened over the last five years is the average Australian is paying $130 a week extra on home repayments. So there's actually a lot of people out there that need reform and are crying out for reform. The question is how do we do it. Harmonisation is actually a start. I do agree that's better than nothing. We're looking at stamp duty rates that vary between 3 and 6 per cent. We're looking at first home buyer’s assistance that varies from 0 in Tasmania to almost 50%
in Victoria. I'm glad to see that is increasing in Victoria. New South Wales has also concessions for new homes only, and so that is a start; harmonisation.

The other issue is even if it's reduced, stamp duty is reduced, that would be of benefit. Of course we want it abolished, but even if it's reduced this could stimulate turnover and assist with maintaining revenue. We need to do more modelling on that, but when you looked at the abolition of marketable securities duty in 2001, there was actually the trade has almost doubled and the total value of trades more than doubled. So we need to reform. I think everyone accepts that and, yeah, something is better than nothing.

MICHAEL PASCOE:

Jackson, Alex has been keeping a low profile because I think South Australia could be the Goldilocks state because it has a quiet resource boom happening. Are you quietly sitting [indistinct].

JACK SNELLING:

I respond to what Chris has said from Western Australia. It won't surprise anyone here that we in South Australia are great believers in HFE and believed it served our federation really well over many years. The way Christian talks, it's as if this decrease in GST revenue it's going to get is a terrible affliction, but what it reflects is the amount that the Western Australian Government is receiving in royalties.

The reason for that is essentially because of the way lines are drawn up in the map in a colonial map 200 years ago, that geographical land mass, Western Australia, is incredibly rich in natural resources.

If anything was tinker with the way HFE works and particularly any suggestion of some sort of flaw being put on the percentage of GST revenue that a state can lose, that would have profound implications for the way our nation works and we will see a flight of capital away from the Eastern Seaboard from Western Australia which would not serve well at all.

In regard to it being a disincentive in South Australia, the government has done a lot to encourage the development of our sector because it's important to diversify our economic base. We have Olympic Dam expansion coming online. There will never be some sort of royalties bonanza for us as a government because much that we get in royalties we lose through HFE, but I'm the last person to be complaining about that because like Western Australia, South Australia has been a beneficiary of HFE for most of its history.

MICHAEL PASCOE:

Beyond GHT, that broader question of fiscal mismatch, Treasurer Wayne Swan, we want to be good but we need the feds to help us do it. Can you afford to help them do it, what tax you put up to make up for any lag in the form filtering through?

WAYNE SWAN:

Well, in various stages in our history we certainly have come to the party working with the states to encourage them to put in place very important reforms whether it’s deregulation in some areas, competition policy reform or whatever.  So I don't ever rule that out because I think it is important that in the Federation there are incentives for people to do better and I think we ought to have incentives as a government to do better across a range of areas and really that’s what we’re doing here today.  We’re talking about how we go forward with tax reform and that includes the whole gambit of taxes.

I certainly enjoyed people pointing out how many of those 120 odd taxes were Commonwealth taxes but something like 60 of those are levies in agriculture.  They’re not the big bad, nasty taxes that we’ve been talking about here today.  But the point I’d like to make is a very simple one, we should be working together and the Commonwealth stands ready to work together with the states but we’re not a money tree and we can’t just hand over cash willy-nilly and not be concerned about what it means for our bottom line, and what it means for our macro economy.  And one of the assumptions that’s underpinned so much of the debate here today is that somehow at the Commonwealth level there is some sort of revenue boom that’s coming with the mining boom.  Now what I want to say today is there is not.

There certainly will be a bigger revenue boom from this mining boom but it’s down the track.  What’s the reason for that?  Well, it’s partially what Christian was talking about before.  The fact is that we’ve got a huge investment boom going on in Australia, principally in Queensland, also in Western Australia but because there is so much investment involved in all of that we’re not going to see the tax revenues from that for a long time to come.  And people do want to talk about what we do with those things and whether we have a sovereign wealth fund or whatever.

But in the immediate term there isn't this huge amount of revenue flying around from the mining boom like we saw during mining boom mark one, plus like other governments in this room, we've all been hit by the global financial crisis. Commonwealth revenues are down 130 billion dollars on what they were prior to the global financial crisis. So every government in this room has got difficulty at the moment, whether it's because of the cautious consumer or whether it's because of the ongoing losses that have accumulated from the global financial crisis.

That just puts an onus on all of us to work together to solve these problems, but there isn't an endless money tree that the Commonwealth can put its hand into and pull out and say to the states, here's some more. We've done a lot when it comes to health in recent times, there has been a very big agreement with the states. We've come to the party with the global financial crisis, helping the states with stimulus, but from our point of view we've got to put in place now a strict fiscal policy, come back to surplus in 2012/13, events overseas demonstrate why that strict fiscal policy is so important and that's why there's not a lot of money to hand to the states at the moment.

MICHAEL PASCOE:

I will take some quick comments. I stress "quick", from beyond the inner circle. If you can get your hand up. Paul has a microphone here and I've one here.  First one, David Crosbie from Community Council for Australia.

DAVID CROSBIE:

I wanted to raise the issue of harmonisation and its impact on the not-for-profit sector. The kinds of concessions that each and every jurisdiction gives or doesn't give makes it incredibly difficult to act as not important from rates to fund-raising legislation. I would have thought it's a fairly straightforward kind of commitment to try and enable that sector to operate more effectively.

MICHAEL PASCOE:

Thank you. Bob....

BOB KATTER:

The cost of infrastructure in the south-east corner of Queensland is absolutely colossal. I spent a bit of time there recently and was staggered by tunnels that costs millions of dollars to build and bridges and overpasses. Some of those people clearly should be moved where the mining is taking place. They won't move there. They're not moving there.

The infrastructure in this generation is not being built as it was in the sixties, seventies and early eighties. So I would urge, if the Tax Summit is going to do something, to look, A, at encouraging people to go back there - and your tax that you pay if you worked in Mount Isa when I was a young man was half of that, that I would pay if I was given the same wage working on the coast. That was why people went there and why we created a very great society there.

The other point that I must make, those in the mining areas, in the non-mining areas of Australia, people are living in grinding poverty. They pay exactly the same taxes on an income which purchasing power is 30 per cent less, and that's an actual figure in Queensland, than the areas that I represent, t
he gulf and mid west. They have got 30 per cent less purchasing power and yet they're paying the same tax rate. That just has to be extraordinarily unfair, and people live there quite literally in grinding poverty.

MICHAEL PASCOE:

A few more quick submissions around the inner circle. Jeff Carnegie, we will get back to you. Shane Goodwin, Housing Industry Association.

SHANE GOODWIN:

There hasn't been much discussion this afternoon around where the burden of taxation lies, particularly with state taxes. Case in point is a house and land package in Sydney, value of around $640,000, 44 per cent of that is taxation, either direct, ambiguous or hidden taxes, and about 33 per cent is made up of a combination of GST, stamp duty and other taxes. If we're going to have a serious discussion around taxation reform, we need to look at where that burden lies.

I know, Alex, you opened up with a proposal around a broader-based tax than payroll tax, but effectively a consumption tax of a different nature, but if we're going to have a serious discussion about that, we need to look where that lies and productivity dividend, the economic dividend we can get from, say, removing some of that embedded taxation from housing. What that would do to housing supply, housing affordability and what would be the economic dividend. I think that's an important part we haven't had the time to discuss that today, but going forward I would like to see that on the agenda.

MICHAEL PASCOE:

Robert [indistinct].

ROBERT JEREMENKO:

I'm encouraged to hear the Treasurer say he stands willing to work with the states on reform. What the Tax Institute wants is some outcome from this two hours and really we've got a lot of consensus here about need for harmonisation and reform. I put it to the Treasurer and state treasurers whether they are willing to put at the top of the agenda at the next ministerial council meeting reform of state taxes and harmonisation as we have discussed today. That will show commitment stands beyond this two-day discussion.

MICHAEL PASCOE:

Jennifer Westacott.

JENNIFER WESTACOTT:

This is urgent, these state taxes are very inefficient, they're hurting our productivity. We have to have a process going forward today to look at the options to replace them, broader base, lower tax. We need to deal with this ongoing structural issue of the mismatch, what the states are accountable for and raising their own source revenue. We said we should at least examine some kind of access to a more stable tax regime such as income tax, but having said that, there will need to be much more efficiency in the way states use their money and we haven't talked about the micro-economic reform needed to health and education and those things. I think we can't leave today without recognising this is urgent for our productivity.

MICHAEL PASCOE:

Andrew [indistinct]

ANDREW LEIGH:

I just wanted to comment on the optimistic picture I think comes out of the discussion on the state tax reform. The states do have terrifically efficient sources of revenue there and the possibility for base broadening reforms I think in particular are really valuable.

One other comment too on stamp duty. We should really think of this as a cost on mobility, and that's a particular challenge for an economy facing patchwork pressures. The greater the patchwork pressures are, the more one gets concerned about a tax which impedes people moving home.

MICHAEL PASCOE:

Wilhelm Harnisch, Master Builders Australia.

WILHELM HARNISCH:

There has been much talk about the technical aspects of state taxation, but I really want to bring it down to some bread and butter issue which has been discussed by a couple of speakers today. That's about housing affordability. It's very important that this Tax Forum recognise the importance of housing affordability. I hear very much about the income constraints by the states in terms of reforming their state-based taxes, but I think in all that discussion, we must never lose sight of the fact that housing affordability is a major issue for this country in going forward as this country transforms because we've got an ageing population, we've got labour [indistinct] that's required, we've got a looming crisis in terms of housing affordability for our low income-earning people and it's very important that this Tax Forum in going forward does recognise that in terms of a process of addressing it.

MICHAEL PASCOE:

Mark Leibler

MARK LEIBLER:

I think the question of urgency is a key one because for working people out there who are delivering the public services in the states, the hospitals, schools and in community services, they are struggling because they understand that the states are scrambling for revenue yet they're being asked to do more with less.

On payroll tax, if we're going to have a discussion going forward on payroll tax, let's be open and transparent about it. It's either a labour income tax or, as you alluded to earlier, it's a consumption tax. Whatever it is, let's make sure who ultimately bears the cost of any such increase or broadening of that tax.

MICHAEL PASCOE:

That's a business turnover tax. There's a lot of ways. [indistinct] Local Government Association.

WAYNE SCHEGGIA:

I think going forward from here is one of the most critical paths that we have to go down. I was involved in an event similar to this in a place that looked a lot like this that had a few more people in it a couple of years ago. There were some interesting processes talked about there that addressed a lot of the various things that are being talked about here today. I would like to see the Government revisit some of the 2020 outcomes, particularly the governance workshops that were run because that proposed the creation of a new version of COAG that gave the capacity for the conversations that we're talking about here now to have already been had and engaged with the civil society aspect of our communities to make sure that what we have are a series of recommendations that everybody can embrace and support and that it has to be critical to us going forward.

MICHAEL PASCOE:

Peter [indistinct]

PETER STRONG:

There's an opportunity here to streamline, to harmonise the collection of tax into one organisation that is collected on behalf of the states and the federal government. I think there's an opportunity to review that and see if it can be done.

MICHAEL PASCOE:

Mike [indistinct]

MIKE BAIRD:

We have the opportunity to go broader. There was a single point of collection for GST and payroll tax is an example. That would probably drive even more efficient services. If we’re going to go down the harmonisation path, I think that's an important point.

I think the second thing is to pay tribute to the Treasurer about the review of the GST. That has been excellent. We welcome that input. Certainly anything that reduces the volatility from that point of view is a great thing.

We also welcome the words from the Federal Treasurer that he is open to working with us in going forward and dealing with these issues. So however we deal with it, whether it be stand-alone or do it in the next COAG, it should be that the tax reform should be taken up.

MICHAEL PASCOE:

Christian Porter.

CHRISTIAN PORTER:

One small thing. Design tax rebate and the issue that [indistinct] raised. In 1975, if you lived in income tax zone A you got back a fair rebate. Now it's point 04 of a week's wage. If we're looking for low-hanging fruit, let's fix that and provide some incentive to live in those areas
or scrap it because it's costing us in administration. Whether you believe it's by accident or design, the revenue that is being produced in WA, the point is that that revenue needs to be supported by very significant infrastructure which makes our economy and Queensland economy very different to the economy of Tasmania and South Australia, and at the moment we are finding it very difficult to provide for that infrastructure which provides you all with growth.

MICHAEL PASCOE:

Peter Davidson.

PETER DAVIDSON:

Before we finish, I would like to return to the elephant, which is the future cost of population ageing which will hit the states as much as the Commonwealth because it's about health and aged care. Some have suggested raising the GST. I would like to put on the table another option, which is strengthen the personal income tax in relation to seniors, because they will be the beneficiaries of the spending on health and aged care and yet there are still too many opportunities for people over 55 to reduce their income tax.

MICHAEL PASCOE:

We can talk more about that in the transfer session tomorrow. We started with Andrew Fraser. Do you reckon they've taken up your offer, do you think you've got a deal here?

ANDREW FRASER:

I think we have the seeds. I think the zonal tax issue is one that can be addressed and looked at in the context of a patchwork economy. Two, I'm with Christian on the reality that royalties account for 70 per cent of revenue raised in the country, but they account for 70 per cent of what's redistributed through the GST, and I think there's an issue of proportionality that needs to be addressed.

To go back to where we started, we accept the fact that we're not in a position at the moment to go and fund removal of all of these taxes. We also accept that the Commonwealth is not in that position because there's not a lot of money sloshing around at the time. Tax reform is always easy when you can agree the wheels. The feds have also contributed to infrastructure in each of our states and done a health deal that recognises that that is the big challenge over the future, and I think we should be mindful of acknowledging that in the current circumstances about having this debate.

So if there's not the money around at the moment to do it, then I go back to where I started, and that is it doesn't cost anything for us to consider a timeline for harmonisation, that we reduce the cost of doing business in a country that is of this size and if we commit to that we will have achieved one step going out of here.

MICHAEL PASCOE:

Neil Warren.

NEIL WARREN:

I think the important thing [indistinct] can do certain things but also they need to take up the Treasurer Swan's point that they have to work with the Commonwealth, the Commonwealth has to work with the states, everybody can gain, but you have to address the kind of issues that the GST distribution review is addressing, and that is putting incentive back into states for doing the things that they want to do and that they can do, but with those incentives also come back sticks so if you don't do the right thing, if you don't abide by it, there are penalties associated with. I think the Commonwealth can play that important role there as well and it complements the states doing things.

MICHAEL PASCOE:

Alex Sanchez, you made a big offer of having payroll tax universally done through the BSA. How do you finish up?

ALEX SANCHEZ:

I will finish up by drawing attention Dr Henry’s remark about where the incidence of taxes fall. Ultimately income tax, GST payroll tax, incidence falls on labour. We are essentially in furious agreement on those things. The challenge I think is to say which one is right for now and which reform measure allows us to get some early runs on the board. Hence my proposal to go far broad basing of the payroll tax through the BAS system for compliance reasons and using that as a mechanism for change at state levy.

Now, whether other pathways take place, it's a matter for decision-makers. My scepticism around harmonisation is I think that it will not go to harmonisation of the base. Where I think the real work needs to be done, but if there's a commitment to at least entertain some of that, then I think we're actually doing fair dinkum reform as opposed to arguably putting a bit more sand in the cogs.

MICHAEL PASCOE:

Ladies and gentlemen, we are out of time. This wasn't a session about bashing up the states; it was about bashing up some state taxes, however, because the states themselves have admitted that there are bad taxes that they need for the time being.

There are broader tax bases available to the states, but the art of the possible, which is politics, to be able to get that explained and elected, is another issue again. We could rename the GST. I think we could rename it the health services tax and link it directly to the health of the nation which, of course, will see it rising. Yes, I dream a lot.

Ladies and gentlemen, thank you very much for your participation. I hope and I think we have a few seeds to go on with because as several speakers have said, it is urgent. The ageing is real, that cost to hospitals is creeping up on us.

We've got afternoon tea down the back of the room.