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TIME TO RETHINK STATE TAXES

The system of taxation in current use in Australia involves the Commonwealth imposing certain types of tax, while other forms of tax are in practice reserved to the States.

Thus the Commonwealth collects personal income tax, company tax, custom and excise duties and so on, while the States levy payroll tax, land tax, numerous stamp duties, motor registration fees, various licence fees and so on. In addition, the Commonwealth passes large amounts of tax raised by it (including the proceeds of the goods and services tax) to the States in the form of tied and untied grants.

These arrangements arise in part from limitations imposed by the Constitution and in part from historical accident or political manoeuvrings.

The division in heads of taxation between the various tiers of government has no great logic and is unrelated to current problems. The fact that State Governments have to resort to highly inefficient taxes such as payroll tax and stamp duties is absurd. Payroll tax makes our two most serious economic problems - inflation and unemployment - worse then they need be. This tax needs urgent abolition.

FIRE BRIGADE LEVIES

The most disgraceful of the current State government imposts is probably the fire brigade levy. While nominally imposed on insurance companies this tax is inevitably passed on to the holders of fire policies.

This approach is highly unsatisfactory on two separate grounds:

  • It departs from the practice used for funding other emergency services out of consolidated revenue - for example, the police.

  • It involves an unwarranted cross-subsidy from the prudent (those who take out cover) to the imprudent (those who do not, but who still benefit from the existence of a fire brigade service).

    MULTIPLE IMPOSTS

    Property investors can now find themselves subject to three lots of tax on the one general insurance premium:

  • a fire brigade levy on the basic premium itself
  • GST on the premium, on the fire brigade levy and on any broker fee
  • stamp duty on the GST-inclusive premium and the GST-inclusive fire brigade levy.

    Stamp duty in most other cases is also levied on GST-inclusive values - a "tax on a tax" which seems to have little logical or moral justification.

    COSTS OF COLLECTION

    Most stamp duties currently being imposed are relatively expensive to administer, particularly when the cost to the private sector of complying with the legislation imposing them is also taken into consideration.

    SOCIAL ASPECTS

    Many stamp duties are furthermore inflationary and some suffer from other defects. Thus some duties represent a tax on the poor (for example, stamp duties on credit transactions) or a tax on the prudent (for example, stamp duties and other charges in relation to home purchase transactions).

    Other duties unfairly penalise persons involved in judicial processes. Others again hit small businesses. Such imposts are hardly desirable social objectives in contemporary society.

    A full revision of the stamps legislation should, therefore, be undertaken with a view to eliminating most stamp duties.

    However, fees for service (as distinct form duties imposed for revenue reasons) may be appropriate in some circumstances, provided that the cost of collecting them is not disproportionate to the amounts raised.

    EDUCATING TAXPAYERS

    Any tax reform measures which are revenue neutral in total inevitably involve winners and losers.

    It would accordingly be desirable to simultaneously introduce a public relations campaign explaining the nature of the changes and emphasising for example:

  • That all taxes are ultimately borne by individuals, so that if governments alter the route by which they raise any given sum this does not amount to increased taxation.

  • That income tax is a particularly fair method of obtaining revenue as it has full regard to each person's capacity to pay (although income tax overall is too high in Australia and it would be preferable if the Commonwealth were to reduce its dependence on collections from this source).

  • That income tax is non-inflationary and that, on the other hand, the abolition of payroll tax and certain stamp duties would mean that consumers would benefit from lower prices for goods and services.

  • That the abolition of payroll tax would also lead to a lowering of unemployment.

    CONSTITUTIONAL LIMITATIONS

    While the Commonwealth Constitution as interpreted by the High Court does not allow the State Governments to raise sales tax, various quasi-sales taxes are currently in use - for example, the stamp duties or licence fees on liquor, tobacco and gambling, as well as those in respect of gas and electricity consumption and petrol.

    To the extent that revenue needs to be raised, extension of these quasi-sales taxes would seem justified, particularly in the Australian context, where reliance on direct rather then indirect taxes is already very high by international standards.

    REDUCING THE HEADS OF TAXATION

    On a different tack, the motor registration fees and other taxes on motor vehicles should now be abolished in favour of a single levy related to petrol consumption.

    This latter tax would fit in much better with national objectives:

  • to encourage the conservation of a scarce energy resource
  • to discourage pollution
  • to encourage the use of public transport.

    The elimination of annual registration fees would also result in certain administrative savings.

    In respect to all the above changes uniform legislation in all States would be desirable, but is by no means essential. In particular, the States, having regard to their sovereignty, should remain free to vary the rates of tax in accordance with local conditions (although standard rates throughout Australia have obvious advantages).

    Major changes to Federal/State financial relations will not occur readily. But it would be a good start if a joint Federal/State Royal Commission were to be set up to study the whole question, to evolve an up-to-date tax structure for the nation as a whole and to recommend appropriate amendments to the Australian Constitution to enable any desired reforms to be implemented.

    • © N E Renton 2006

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