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Malcolm Turnbull's tax revolution: Hand income taxing powers to states

State and territory leaders have responded coolly to Malcolm Turnbull's invitation to take less in tied grants from Canberra in exchange for gaining their own income taxing powers with which to directly meet soaring hospital and education costs.

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The bold proposal, the most radical restructuring of federal-state taxing powers since World War II, is set for discussion at this Friday's Council of Australian Governments meeting in Canberra.

Mr Turnbull declared the only thing in ample supply in the current system, which is beset with overlapping federal-state responsibilities, was "finger pointing and blame".

"We're all sick of it," he said.

But his solution, which was outlined in Tony Abbott's now benched Federation White Paper process, faces stiff opposition in practice, with premiers condemning the proposal as a "bugger's muddle" and a "thought bubble".


Smaller states expect to be further disadvantaged and others worry it would lead to a higher overall tax burden, foster unhelpful state-to-state confusion and increase the political pain of cutting unaffordable services.

While outwardly wanting to appear constructive, premiers are deeply sceptical about the idea, regarding its future implementation as highly problematic, and viewing its emergence onto the COAG agenda now as a deliberate pre-election distraction by the federal government designed to "throw a bone to the states" to keep them quiet.

One leader described it as "scrabbling about in the desperate search for an agenda".

But Mr Turnbull is determined to push ahead.

"Right at the heart of the problems in the federation is the fact that the states do not raise enough of the revenue that they spend," he said shortly after telephoning premiers to outline his general thinking.

"What we are proposing to the states is that we should work together on this basis: that we, the federal government, will reduce our income tax by an agreed percentage and allow state governments to levy an income tax equal to that amount that we have withdrawn from.

"From a taxpayers' point of view, he or she would pay the same amount of income tax but the states would be raising the money themselves. We would obviously administer it and collect it for them, so again there'd be no compliance costs."

Mr Turnbull described the proposal as "the only way that we can genuinely reform our federation".

But in a sign of how preliminary the idea is, the Prime Minister and his Treasurer contradicted each other on a critical aspect of the proposal, with Mr Turnbull acknowledging that states could individually put up their income tax surcharge, possibly leading to as many as eight different tax rates, and Treasurer Scott Morrison, denying that this was a risk.

"In future, of course, on the longer term, a state should be free to lower that amount or indeed raise it and then they are accountable to their own voters," Mr Turnbull said.

When queried on Mr Turnbull's admission of higher taxes in future, Mr Morrison said: "Well the Prime Minister has, I don't think, gone that far ultimately".

"I think what we've seen today is an idea which is being explored with the states and territories, and very much started with their initiation of this.

"I mean the Australian people expect us to work collaboratively and co-operatively with the states and territories to try and fix these problems ... we'll see if we're able to come to an agreement with them."

State leaders expressed strong misgivings, with Victoria's Labor Premier Daniel Andrews, who had just spoken to the Prime Minister by phone, dismissing it.

"In a conversation with the Prime Minister, he indicated to me that this would be revenue neutral. If it's revenue neutral, how is it dealing with funding gaps in hospitals and schools?" Mr Andrews said on ABC radio.

"I don't think this has been thought through, I don't think this has been properly examined."

"The focus of Friday's COAG is to address the $80 billion of Malcolm Turnbull's cuts to health and education," Mr Andrews said.

"As far as Victoria is concerned, Friday will not be about tax policy thought bubbles."

"While I have historically argued for a share of income tax for the states, this has not involved increasing the income tax burden on Australian households, which already have among the highest income tax rates in the world," said NSW Liberal Premier, Mike Baird.

"These matters can be considered in the longer term. What is required right now is a partnership between the Commonwealth and the states for the health and education services we need."

However Mr Turnbull can expect a warmer reception from his WA Liberal confrere, Premier Colin Barnett who said on Tuesday: "The Prime Minister is very much of the view, as am I, that we need to better define respective responsibilities of the commonwealth and the state."

"I'm not a typical COAG premier. I don't go along and grizzle about money, other than the GST occasionally."

with Richard Willingham

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