When states argue over the GST, it’s like watching Mum and Dad bicker

I live in Sydney, but I was born and raised in Perth. So, when NSW and WA argue over the goods and services tax, with politicians calling each other names like “Gollum” and “sore loser”, I feel like I’m watching Mum and Dad fight.

Every year, the states fight over how much GST revenue they should get. If not for a change in 2018, WA would be getting $1 billion, a 1.1 per cent slice, of the nearly $90 billion GST stash next year. NSW and Victoria, meanwhile, would be getting 29 per cent and nearly 27 per cent respectively, a combined $50 billion.

Illustration by Simon LetchCredit: Simon Letch

Who decides this? The independent Commonwealth Grants Commission is responsible for plugging the numbers in to a complex formula. The equation is designed so that states with less ability to raise their own money, or higher spending needs, get more of the national GST pie. Fair enough. We don’t want huge differences in the quality of hospitals and schools across our states.

In 2018, then federal treasurer Scott Morrison shook things up. He introduced a minimum amount states had to receive, regardless of the CGC’s calculation. And he promised no states would be worse off under this deal. The minimum amount was 70 cents for roughly every dollar of GST paid by each member of a state’s population.

Without this floor, WA would next year get only 12 cents back for every dollar it put in, or 1.2 per cent of the total GST pool, with the rest given to other states. Even with the changes, WA will be getting a relatively low $7.3 billion, or 8 per cent, slice of the pie in 2025, but that’s reasonable. It’s a decent idea to shoulder some cost for those who need it.

One glaring problem, however, as NSW and Queensland have discovered this year, is how wildly commodity prices can move. A jump in thermal coal prices over the past couple of years has left both states with smaller cuts of GST revenue in 2025, even though coal prices have cooled down. Why? Because they raked in a lot more in mining royalties, and are therefore considered less “in need” of GST revenue.

As treasurer, Scott Morrison changed the way the GST is distributed.Credit: Alex Ellinghausen

No premier or state treasurer wants their funding slashed, even when they’re raking in the royalties. But hell hath no fury like one facing both a sharp drop in royalties and a smaller slice of GST revenue. How does that happen? In the mid-2010s, WA watched the iron ore price plunge from nearly $200 a tonne to just $37.70. The maths for how GST is shared is based on three-year rolling commodity prices, so it’s slow to adjust to changes.

A 70 cent “floor” isn’t the perfect fix, but a minimum required return protects all states from being plunged into a situation where their GST revenue and other income go into freefall.

And while equity is important, we shouldn’t lose sight of the goal to grow the entire economic pie. State governments should have a decent incentive to invest in whatever it is their states do best, especially at a time when productivity growth is critical. Punishing states for investing, even if their bounty is partly down to luck, is harmful when it erases huge amounts of their GST revenue.

We also need to think about why revenue from taxes on gambling, a fast-growing source of revenue for states such as NSW, doesn’t affect how much GST a state receives when mining royalties do. Revenue is revenue, and should be counted equally.

One argument commonly thrown at WA is that for decades before GST was introduced, the mining state was propped up by others such as NSW and Victoria. But WA was also disproportionately disadvantaged for many decades because of tariffs and taxes designed (at least partly) to protect industries such as manufacturing from foreign competition. WA, which relied more heavily on mining and agriculture, faced inflated costs for imported machinery and equipment which were crucial for its major industries.

Economists Saul Eslake and Chris Richardson have another gripe with the 2018 changes. They say top-up payments from the federal government to the states, to fulfil a promise that no-one would be “worse off” from WA getting more GST revenue, will cost taxpayers roughly $50 billion over a decade. But let’s not forget that money is extracted from taxpayers in all states, including WA where mining giants contribute a lot to company tax receipts, and ends up back with all the states through the top-ups.

Despite the somewhat misleading narrative that the current GST deal will cost taxpayers more than if we’d stuck with the old deal, it’s effectively just a shift which sees state governments making more direct spending decisions within their state, rather than lobbying for the Commonwealth government to fund its projects.

And WA, just like NSW, Victoria and Queensland, is still effectively sacrificing some of its GST share to help more needy states, including South Australia and Tasmania, and the territories.

NSW Premier Chris Minns and Victorian Treasurer Tim Pallas engaged in a spat over the GST.

Whether 70 cents in the dollar is the perfect figure, and whether we need to go any higher is unclear. The balance between promoting equity and encouraging states to develop their economies becomes skewed against equity the higher we lift the floor. Nonetheless, the floor will be rising to 75 cents on July 1. Then, in 2026, it will rise to match the “cents in the dollar” received by the most fiscally strong state, whether that be NSW or Victoria.

NSW Premier Chris Minns’ latest push for GST revenue to be distributed according to population, which would make the system simpler, is even worse for those who believe in the principle of stronger states supporting weaker ones. It would end up giving WA even more GST revenue than it currently gets, and would need to be paired with targeted Commonwealth spending on vulnerable communities.

As with any family spat, my metaphorical uncles and aunties have been running off at the mouth about GST, too. Victorian Treasurer Tim Pallas last month called Minns “mathematically challenged” and a “tool” after the NSW premier labelled Victoria a “welfare state receiving a whole bunch of money from the pockets of NSW families”.

Some bickering is a healthy part of being the democratic family that is Australia. But going back to the old GST distribution system, one that overly punishes good outcomes, should be off the table.

Millie Muroi is a business reporter at the Herald and The Age. She covers banks, financial services and markets, and writes opinion pieces with a focus on economics.