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June 14th 2011 print

David Flint

Canberra slugs the states

The federal government has developed an insatiable appetite for new taxes, and in doing so has weakened its ability and that of the states to provide good government. The proposed federal tax on state mineral resources is the latest example. It should be abandoned.


Canberra must abandon the mineral tax


The proposed federal tax on the states’ mineral resources goes to the very heart of our federal constitutional arrangements. It is time to reverse the centralist trend which has already done great damage to the quality of governance at all levels.

The federal government is even trying to use the GST  to stop the states exercising their legitimate powers concerning the level of state royalties.

John Howard had risked his government in obtaining a mandate to introduce the GST to replace state taxes declared invalid by the High Court.

With the support of the Democrats a modified GST was put in place. He then handed over all of the net proceeds to the states.

But the fact is, and the law is, the GST remains a federal tax. The attempted clawback by former Prime Minister Rudd for health purposes confirmed this.

Another indication that this is a federal tax follows from the seriously redistributive element involved in the allocation of the GST to the states.

In the case of Western Australia, its per capita share has fallen to a low 68%. The WA Treasury projects this to fall to as low as 33% over the next few years.

The argument here is not against the taxation of mineral resources. That is a matter for parliament. The question is which parliament.

That question can only be determined by constitutional and legal principles. 

So the serious debate today should not be whether the Premier gave sufficient notice to the Treasurer that he would rationalise the States royalties.

The debate should be over the whole field of taxation. It should be about which government should have which tax.

And where a tax is agreed to be uniform and to be shared, it should be about establishing principles which would ensuring a clear and fair allocation of those taxes.

 The Commonwealth has for too long misused its power to make conditional grants to the states to move into matters best left to them. At the same time Canberra has developed an insatiable appetite for new taxes.

The context of the present dispute between Western Australia and the Commonwealth is that in the rushed and secret negotiations between the Federal government and the big three foreign miners before the 2010 election, Mr Swan and Ms Gillard had  agreed they could write off increases in state royalties against the new federal tax.   

This of course would be an invitation to the states to increase their royalties. 

After the 2010 election the federal government attempted to deny this was their intention.   It was eventually persuaded that this was in fact a term of the agreement, probably by the self evident fact that without such a guarantee, the foreign miners would never have agreed to the deal. ( Unlike the earlier version, the proposed tax only applies to coal and iron ore.)
 
The great myth in this debate is that minerals (and petroleum resources) belong to the people of Australia and should therefore be subject to a federal tax.   

Any minerals reserved to the Crown under a land grant remains vested in the Crown. 

But that is not, as lawyers say, the Crown in the right of the Commonwealth. It is the Crown in the right of Western Australia. 

In other words, the minerals are held for the benefit of the people of Western Australia – as determined by the Parliament of Western Australia. 

The same is true of every other state.

Our federation is in difficulties. Successive federal governments have gone too far in commandeering the taxation revenues of the nation. A federal mining tax is yet another example of Canberra unjustifiably moving into yet another area of state income.

Over the years, with High Court interpretations and political machinations, we have reached the stage where the original intention of the Founding Fathers has been thwarted. The result is that today, ours is the most fiscally centralised of all the OECD federations. 

The States and territories raise only 19 per cent of taxes but are responsible for 40 per cent of public spending.

The essential fiscal principle of a federation was established long ago in the negotiations to form the United States of America. This is well stated in The Federalist Papers:

In a federation, the individual States should possess an independent and uncontrollable authority to raise their own revenues for the supply of their own wants.

This principle that the States must have their own income and answer to the electorate as to how they spend is fundamental to good government and the nation achieving its full potential.

The benefit to Australia from being a federation is estimated to be 10 per cent of the GDP according to the  2007 Twomey-Withers Report to the Council for the Australian Federation. They argued that this could be raised significantly by decentralising our taxation system.

What is needed is a serious re-examination of the taxation system to ensure the states have their own defined taxation resources. The first step should be for the federal government to abandon its plans to tax minerals belonging to the states.

A corollary of this is that the Commonwealth also restrain itself from moving into areas which really are the concern of the states and best dealt with at that level.    

In the past we have been told by newspaper editors and politicians that the way to improve the quality of government is by longer fixed parliamentary terms and by handing over more powers to Canberra.

These so-called solutions have failed. The answer was there all along. If we make the federation work as it was intended, we will all benefit.

It is time to make the Federation work by allowing – and requiring – the states to have their own income and enjoy a guaranteed and fair share of joint taxes.