Little to lose and much to win under Productivity Commission plan

An immediate shift to the Productivity Commission’s favoured model for distributing goods and services tax collections would not have cost any state or territory more than 2.5 per cent of its revenue and delivered substantial long-term economic benefits, ­revealing the difficulty of reform where government “loses”.

The final report of the commission to government, delivered in May and released yesterday, said the current system of “horizontal vertical equalisation”, which sent Western Australia’s GST share below 30 per cent of the amount collected in that state,had “a ­material cumulative impact on the economy and wellbeing”.

“States may not even consider major reforms, even where the benefits to the community would be considerable,” the commission said. “If a state like Victoria, with 25 per cent of Australia’s population, increased its tax base and therefore increased tax revenue by $100, it would see $75 of the ­additional revenue redistributed to other states.”

In an effort to support some of the commission’s recommendations, the Turnbull government yesterday announced it would pump an extra $8.7 billion into the GST pool over the decade to ­ensure “no state was worse off”.

The commission suggested the reform picked by the government — to benchmark states’ fiscal ­capacity to the stronger of NSW or Victoria rather than the strongest state (currently Western Australia) — would “not significantly reduce disincentives for reform other than for the fiscally strongest state”.

Treasurer Scott Morrison also announced a 75c floor for any state or territory’s per person per dollar distribution of GST, as part of changes to be phased in by 2027.

WA’s share plunged below 30c during its resource boom, as billions in iron-ore royalties were in effect shared with other states. “A floor is targeting a symptom, and ultimately, prevention is better than cure,” the commission said.

The government’s GST proposals are a win for Tasmania, South Australia and the territories. Analysis by The Australian shows a per capita distribution of GST, by contrast, would have cost Tasmania and SA $3.3bn in revenue this year, or between 12 and 17 per cent of their total revenues. Northern Territory’s total revenue would drop by about a third. The beneficiaries of per capita distribution would be NSW, WA and Victoria, which this year will subsidise the other governments by almost $7bn, the analysis showed.

The commission favoured benchmarking fiscal capacity to an average of all states and territories, which it found would “provide a better balance between fiscal equality, fairness and ­efficiency”. “All states would have been able to meet at least 97 per cent of their assessed expenditure needs (under this reform),” it said.

There were “strong first-mover disincentives” to reform tax systems, it said, saying NSW or Victoria would lose about $1bn GST a year if they shifted from stamp duties to a broad-based land tax. “Any state that developed contentious mining activity would bear the full social and political cost of the development, but only retain its population share of the royalties,” the commission said.