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The UWA Business School's Professor Michael McLure has cautioned against imposing a floor on the redistribution of the Goods and Services Tax (GST) alone, as suggested by various Western Australian politicians.

WA Treasurer Dr Mike Nahan, among others, has called for each state to be guaranteed a minimum share of revenue from the GST, suggesting that Western Australia should be given at least 75% of its per capita share of the tax.

However, because the distribution of GST revenue is influenced by, among other things, shares of other Commonwealth payments that each state receives, Professor McLure says the distribution of GST revenue alone does not properly reflect the financial support provided to states by the Commonwealth.

WA currently receives 38% of the State's per capita share of GST, which is a consequence of the GST being the instrument for equalising each state's fiscal capacity. WA's low share of GST is largely driven by the State's royalty receipts, which drastically increase WA's assessed revenue raising capacity relative to other states.

But shares of GST are also influenced by each state's above, or below, per capita share of other payments received from the Commonwealth.

In view of this, Professor McLure suggested that if a percentage floor is to be introduced, it should be on total support for the states from the Commonwealth.

"WA currently receives about 68% of the State's per capita share of total Commonwealth payments to the states (including GST revenue), well above its 38% share of GST revenue alone," Professor McLure said.

"More importantly, there is a clear case for separating questions pertaining to the GST from questions pertaining to the process of fiscal equalisation.

"Thus, from a policy perspective, it would make sense for GST revenue to be distributed among the states on an equal per capita basis once a ‘fiscal equalisation fund' has been established."

Under Professor McLure's proposal, the current donor states, which currently receive a below per capita share of the GST, would contribute to the fiscal equalisation fund to a level that covers full fiscal equalisation in the first instance. Recipient states, which currently receive an above per capita share of GST, would initially receive full equalisation grants from the fund.

Donor states could source these equalisation transfers from any revenue source, not just the GST.  For example, WA could make its contribution to the fiscal equalisation fund directly from its iron ore royalties, which may serve to focus discussions on the scope of the equalisation at a later stage.

While none of this would have any initial impact on the bottom line of state budgets, Professor McLure argued it would ensure that future public discussion on states' fiscal capacity and economic development - and the associated trade-off between equity and efficiency - would be confined to the context of fiscal equalisation fund; and not be clouded by discussions of issues related to the GST.

Professor McLure said his proposal aimed to refocus public debate so that GST and fiscal equalisation are treated as distinct issues.

"Taxation policy questions, such as those related to whether the GST base should be expanded or the GST rate increased, would be undertaken on their own merits and without being complicated or confused by issues related to fiscal equalisation," he said.

"There are, of course, good economic and social reasons for many aspects of the current fiscal equalisation arrangements in Australia. However, the activities of state governments have an impact on economic development and the full equalisation of state governments' fiscal capacity has some potential to restrain economic development."

Professor McLure pointed to the need for this issue to be researched further and expressed the hope that such research would assist in any future considerations given to a trade-off between the equalisation of states' fiscal capacities and the economic development in Australia.

Professor McLure was speaking at UWA Research Week on 6 November 2014.

Media references

Karen Della Torre (UWA Business School)                                           (+61 8) 6488 8538
Verity Chia (UWA Business School)                                                  (+61 8) 6488 1346