COAG: Radical tax plan to fix hospitals

Scott Morrison says the overall tax burden on Australians won’t rise under a plan to let States levy income taxes.

Malcolm Turnbull is proposing only a short-term fix to the states’ hospital funding crisis with a four-year deal to 2020.

State and territory governments must face “greater accountability” for their use of taxpayer funds, Treasurer Scott Morrison said today, as the commonwealth considers allowing the states and territories to levy their own income taxes to cover their rising health and education costs.

UPDATE: Malcolm Turnbull announces his plans to provide states and territories with independent income taxing powers. Plus Dennis Shanahan comments on his Federation reform plan

The Treasurer insisted the government had no interest in lifting the overall tax burden on Australians, but said any proposal to resolve the funding crisis would be considered “earnestly”.

Malcolm Turnbull is proposing only a short-term fix to the states’ hospital funding crisis with a four-year deal to 2020, but has suggested states would be allowed to levy their own income tax surcharge beyond that to cover health and education costs.

It would be the biggest revolution in personal income tax since the federal government assumed all income taxing powers during World War II.

Mr Morrison today acknowledged the states’ desire for “greater autonomy about how they spend their own budgets”.

“This is not a government that has any interest in lifting the tax burden on Australians,” he said.

“I’m a pragmatist on all of these issues and a pragmatist always focuses on solving the problems, and if those sorts of remedies lead to a solving of the problem then of course you’re going to consider them earnestly.”

But Labor leader Bill Shorten predicted allowing states and territories to levy income taxes would result in an overall higher tax burden. “I have a better idea than Mr Turnbull’s plan to increase income taxes — I’ll make multinationals pay their fair share, I’ll make sure we don’t have excessively generous superannuation tax concessions for people who already have millions on millions of dollars of superannuation. A Labor government will stop wasteful government spending including the discredited Emissions Reduction Fund,” the Opposition Leader said.

“Their idea is to pass the cost of the (federal) budget onto household budgets by increasing income tax — that is not a solution to help the sick.”

Former National Commission of Audit chairman Tony Shepherd said allowing state governments the power to levy their own income taxes would abolish the state premiers’ ritual “demeaning, cap-in-hand trip to Canberra” to plead for funding.

Mr Shepherd’s commission recommended in 2014 the federal government cut its 32.5 per cent marginal income tax rate to 22.5 per cent, give states claim to the 10 percentage point difference, and cut the number and value of tied grants that hobbled states’ policy independence and clog the federal bureaucracy.

“I support the Prime Minister in this. I think it would be a great reform,” he told ABC radio today. “The states will always want more money. This makes them more directly responsible for raising the money they need.”

Mr Shepherd suggested that after a “trial period” the states could be allowed to raise income taxes even higher.

“We certainly didn’t recommend that they could go higher than the current rates of income tax, but I think after a trial period I think would be a sure possibility, so the state then says ‘we need more money’, and the commonwealth says ‘it’s in your domain to do so, so go ahead’.

“The point there is devolution and making the federation work, and stopping having to go every year in that sort of demeaning cap-in-hand trip to Canberra to ask for money.”

Tony Abbott, asked as prime minister about the idea of a state-level income tax, described the idea as “double taxation”. “I don’t think anyone wants to see double taxation. Speaking for myself, I want to see lower, simpler, fairer taxes over time. I want to stress that — lower, simpler, fairer taxes,” he said in May 2014.

Labor frontbencher Ed Husic adopted Mr Abbott’s language to criticise the idea as “double taxation”.

“It is just an election fix that is going to create an election mess. That’s all it is,” Mr Husic, the opposition treasury parliamentary secretary, told Sky News. “It’s an attempt to fix up a federal Coalition stuff-up on healthcare — a $50 billion stuff-up — and forcing the states and territories to stump up for a solution.”

Opposition treasury spokesman Chris Bowen criticised Mr Morrison over the proposal. “Morrison’s latest ‘reform’ thought bubble is to take us back to pre-‘42. Not progress, not reform,” he tweeted.

States are divided on the radical tax plan to levy their own income taxes to secure hospital funding as premiers warn they want the federal government to foot the bill for their long-term health needs.

State officials were provided with details of the plan for the first time yesterday, with this Friday’s meeting of the Council of Australian Governments in Canberra expected to sign off on a deal to ­resolve the impasse over hospital funding.

The Prime Minister is proposing the states would assume ­greater responsibility for supporting their hospitals beyond 2020 through a personal income tax system similar to Canada’s, allowing different levels of income tax across the states and territories.

The Australian Taxation ­Office would still collect the ­revenue on behalf of the states, but they would each legislate their own income tax surcharge.

Northern Territory chief minister Adam Giles expressed scepticism about the income tax plan, which he “roughly discussed” with Mr Turnbull this morning. “The proposal as I understand it is for Canberra to reduce their income tax and give the states and territories power to raise an income tax which, for the consumer, I understand, should be about equal,” the Country Liberal leader told ABC radio. “Now, if it’s going to be an equal amount of tax paid, I sort of question why we would go through that process in the first place.”

Mr Giles urged caution about allowing different states and territories to levy different levels of income tax.

Tasmanian independent MP Andrew Wilkie said the proposal would hurt his state, which relies on taxpayers in more prosperous states to support its budget. “For our smaller tax base to fund our health and education services, as would be the case in the larger and wealthier states, is ludicrous. It is a recipe for even less funding for our hospitals and schools and consequently even higher rates of disadvantage,” the Denison MP said.

The proposal comes as the federal government seeks to find room in its budget for modest tax cuts to allay the effects of bracket creep on average wage earners.

South Australian Labor Premier Jay Weatherill, who with NSW Liberal Premier Mike Baird has been leading negotiators for a new tax and health compact, yesterday described Mr Turnbull’s offer as “a band-aid on a gaping wound”.

Mr Weatherill’s concern is that the federal government is proposing a funding package for just the next four years, but the cost of hospital funding will escalate rapidly beyond that.

The Australian has learned the states are using estimates prepared by the Parliamentary Budget Office showing the difference between the health funding agreement they struck with Labor prime minister Julia Gillard in 2012 and the formula imposed in Tony Abbott’s 2014-15 budget will reach $7.9bn in this year’s budget forward estimates period, which will run to 2019-20.

However, the cost then climbs to $14bn a year by 2024-25. A spokesman for Mr Baird said the annual funding shortfall would reach a massive $35bn by 2035.

Premiers did not disclose ­details of yesterday’s offer, but one official commented it was less than $5bn and involved states making their own contributions from greater efficiencies in their health systems.

Mr Turnbull yesterday confirmed that the new deal on funding would retain the central elements of Labor’s hospital ­reform package. Hospitals would continue to be funded on the basis of the procedures they carry out, rather than the traditional block grants, with a federal government authority setting the ­efficient price for each procedure.

“We will be presenting to the premiers and the chief ministers a proposal that’s obviously under discussion at the moment which will see us maintaining the commitment to activity-based funding and a national efficient price which will ensure that everything we are doing at the federal level is calculated to ensure that Australians get the best care in hospitals and that hospitals are delivering that care to Australian patients as efficiently and effectively as we can,” Mr Turnbull said.

Under Labor’s plan, the federal government funds 45 per cent of the cost of all hospital procedures, whereas the Abbott government’s funding offer covered only a base amount plus population growth and the rise in consumer prices, adding to about 4 per cent a year. Over the past decade, hospital costs have risen an average of 8 per cent a year.

Mr Weatherill previously ­advocated for the states to receive a share of income tax in return for accepting a rise in the GST.

But he said he did not support a proposal to give states the ability to levy an income tax surcharge, and suggested it would be a “point of difference” at Friday’s meeting.

“I don’t know what the appetite is (for that) and there are probably forces within the commonwealth government that don’t want to offer anything to the states,” he said.

“(But) I think it would create confusion if different states had different taxation regimes,” he said.

He added that it could also create a disincentive to investment if one jurisdiction had a higher rate.

He said changing the revenue mix to give states a share of the federal government’s total income tax revenue in place of tied grants was something he remained open to considering.

“It would be another useful contribution to federation reform because it would reduce red tape and the bureaucratic obligations between both spheres of government.

“You could get rid of a lot of red tape, you could give us more autonomy and give us access to a growth taxation revenue.”

Northern Territory Chief Minister Adam Giles said he was open to the idea of setting income tax rates, but it did not offer a long-term solution for hospital funding.

“You would want to be careful that it is not a race to the bottom,” Mr Giles said. “Competition would be good in the philosophical approach, but I think we are looking too far down the agenda in any potential tax ­debate, and we are looking at hypotheticals and just navel gazing at this stage,” he said.

Labor treasury spokesman Chris Bowen noted that the idea of state income taxes would do nothing for national efficiency and was about pushing the burden of health funding onto the states.

“A mangled commonwealth-state income tax system goes in the opposite direction to decades of national economic reform and the development of a national marketplace connected to the world,” he said. “On top of all of the other different state-based tax rates confronting Australian businesses, like for payroll tax and stamp ­duties, do we really need to add ­income tax rates to that list?” Queensland Premier Annastacia Palaszczuk criticised the poor communication with the states on health funding ahead of the COAG meeting. “As yet, the premiers, the first ministers haven’t received any ­papers from the federal government about the discussions that will be on the table,” Ms Palaszczuk said. However, West Australian Premier Colin Barnett was more positive.

“I had quite a long conversation with the Prime Minister yesterday about that and about some prospective changes in taxation,” he said. “If the Prime Minister can get the states to agree I think it could be quite a significant COAG.”

With David Uren and Sarah Martin