The National Gst and Commonwealth-State Financial Relations: A Neglected Issue

Abstract

While the introduction of the GST continues to dominate economic and political debate in Australia, in terms of its efficiency, equity and compliance cost implications, a neglected but important aspect of the tax reform package focuses on Commonwealth-State financial relations. A central feature of the reform is the replacement of a set of narrowly based and inefficient indirect taxes levied by the Commonwealth and State Governments with the national GST. This is accompanied by substantial reductions in personal income tax rates, giving rise to important implications for the degree of vertical fiscal imbalance (VFI), the efficiency of the States’ tax regimes and the capacity of the States to maintain discretion over their fiscal regimes. The Queensland Government has claimed that the initial State compensation arrangements were grossly inequitable, and that subsequent features of the initiative will impede the Queensland Government’s capacity to maintain its low taxation status.This paper concentrates on the themes of equity, VFI, State tax efficiency and the question of whether Queensland’s days as a low tax State have been ended. Although the degree of VFI can be expected to increase, the elimination of selected State taxes and their replacement with the national GST should facilitate efficiency gains. Moreover, it is concluded that the capacity for the Queensland Government to adjust the remaining components of its tax base, together with the reapplication of the Commonwealth Grants Commission methodology for distributing GST revenues to the States from 2002-03, effectively means that the national GST need not pose a substantial threat to the Queensland Government’s capacity to maintain its low tax status. The paper does not attempt to assess the precise impact of the national GST on the economic performance of particular industries in Queensland, which would require extensive econometric and statistical modelling and is outside the scope of this paper.