A tax that brings no revenue but more liabilities

Lobbecke

EARLIER this year Wayne Swan declared himself a fan of US rocker Bruce "the Boss" Springsteen, citing songs by the famous US artist that championed ordinary people. He sought to draw parallels between Springsteen's lyrics and the political circumstances of today.

A little closer to home, I wonder if the Treasurer is also a fan of Australian country singer Slim Dusty's 1957 song A Pub With No Beer? Given that it was revealed last week that Swan's mining tax raised no revenue whatsoever in its first quarter of operation, Dusty's song is perhaps the more suitable musical comparison to contemporary politics.

It takes a rare skill to legislate a tax that doesn't collect any revenue. Swan has achieved the feat.

The government has been quick to point out that profits-based taxes on mining are supposed to fluctuate as commodity prices change, but there can be no denying the political embarrassment in the first set of revenue figures, especially since without revenue as forecast from the minerals resource revenue tax, the surplus of $1.1 billion falls into deficit.

The purpose behind moving to a profits-based mining tax is that it gives miners financial concessions in the bad times (courtesy of abolishing ongoing royalties) but hits them up for a greater taxation offering in the good times.

Sounds reasonable in theory.

The problem with the government's mining tax, however, is not the concept of a profits-based tax. It is the specific design of the MRRT and the manner in which it was contrived. It speaks to a government more interested in political fixes than development of sound public policy. We have seen this in other policy areas, such as the handling of the arrival of the super-trawler and the way the tender for the Australia Network was conducted. But the failures surrounding the MRRT are in another league altogether.

As a replacement to royalties, which are a constant financial burden miners must incur, a profits-based mining tax is widely accepted by economists as the better methodology for collecting revenue. But the MRRT does not abolish royalties. State royalties, as existed before the introduction of the MRRT, continue to operate. Under the federal government's MRRT arrangements, all royalties on iron ore and coal will be rebated by the commonwealth as a credit against current or future mining tax liabilities.

This financial year alone more than $8bn in royalties on these commodities are expected to be paid. The implications of how this messy approach became the legislated mining tax reform, what it means for miners (small miners in particular) and what it means for the commonwealth are profound.

When former Treasury secretary Ken Henry first proposed a profits-based mining tax, he did so as part of a suite of reforms, including abolishing royalties. This was Henry's blueprint for the original resource super-profits tax. As a bureaucrat he had the job of conceptualising such a tax. It was the job of the politicians to find a way of implementing it.

Nevertheless, as part of Henry's tax package he stipulated that there was a need to negotiate with the states, but the federal government did no such thing.

The first problem the commonwealth ran into was that Swan sought to repair a hole in his budget bottom line in the wake of the global financial crisis, so he rushed the expected revenue from a resource super-profits tax (the original design) into the forward estimates. That meant the government did not engage in appropriate negotiations with the states about how any abolition of royalties might take place.

Because the Constitution, no less, dictates that royalties are a form of taxation revenue the states own - at a time when state taxing options struggle to be anything other than regressive - it was incumbent on the Labor government to achieve a deal with the states if it wanted the purity of Henry's profits-tax model to survive.

That simply didn't happen, and the result was a damaging war with the miners, as well as state governments (especially in Western Australia), and ultimately a political turn of events in which Kevin Rudd lost the prime ministership. It was all Swan's fault, even though he won promotion to the deputy prime ministership.

Julia Gillard needed a quick fix and so she and her Treasurer (along with various political staff, no Treasury experts) sat down with the big three miners and came up with the MRRT, the design we now have. It was not only a watered-down version of the RSPT, it was a poorly designed new tax, certainly if quality revenue streams for the commonwealth was the ultimate goal.

In essence, the people supposed to pay the tax dictated the design of said tax.

Swan continued to spruik a range of expenditure measures that the MRRT would allow for as he went about selling the newly designed tax - business tax concessions and increasing superannuation, just for starters. But these sorts of costs on the budget are constants, which gets us back to the volatility of the MRRT.

The government wants you to think there is nothing unusual about the new tax collecting no revenue in its first quarter, which already follows massive writedowns on its predicted revenue. But even if that's the case, what does such a turn of events say about the way the government has structured its budget, relying on a volatile tax to fund important initiatives? It exacerbates the structural deficit.

By allowing royalties to be credited back to miners under the design of the MRRT, an incentive has been created for state governments to up their royalties. An important feature of the deal the miners struck was that any future royalty increases would also be credited: an effective blank cheque written by the commonwealth for the states.

Failing to abolish royalties not only complicates the operation of the MRRT, it also removes an important justification for a profits-based mining tax. And crediting royalties against MRRT payments creates the extraordinary situation whereby when no tax is paid the commonwealth has a liability on its books if miners ever do start paying the tax.

In fact, it's a growing liability because the royalties credits keep accumulating while the miners don't pay the MRRT and, on top of that, unclaimed credits attract 10 per cent compound interest. It is extraordinary that a government would agree to such a taxation model.

In other words, not only has the first quarter of the MRRT's operation brought no revenue, it has created a commonwealth contingent liability. It has done so without relieving miners of the cost burden of paying royalties upfront, however. This is especially burdensome for smaller miners, but of course they were shut out of the 2010 negotiations.

The introduction of the MRRT made it politically easier for state governments to lift their royalties. All, with the exception of Victoria, have already done so. If Tony Abbott does win the next election and abolishes the MRRT, no one should think state government royalties will come back down to what they once were.

If all of the above were not enough, it seems that Swan doesn't even understand the mining tax arrangements he is responsible for. Asked in question time on Wednesday about the heads of agreement with the big three miners that stipulated unused credit for royalties could be carried forward, the Treasurer replied: "The fact is that unused royalties are not transferable, nor are they creditable." Swan was only half right. It's true that they can't be transferred between mining projects, but they most certainly are creditable against future MRRT payments. You would have thought the Treasurer would have known that.

Peter van Onselen is a professor at the University of Western Australia.