Box 4 Impact on GST payments of hypothetical reform ‘cameos’ The Commission has analysed three reform ‘cameos’ to illustrate how GST payments can be affected by changes in State policy. The cameos are hypothetical and show the GST impact for a single year for each State if it was to undertake the reform while the other States made no change. The impacts highlight how sensitive GST shares can be to individual State policies. In the first cameo, a State unilaterally cuts its rate of stamp duty on property in half. The lost revenue is replaced by introducing a new broadbased land tax that applies to all residential land. While the direct impact is revenue neutral, any State that does this would likely end up losing GST payments, with New South Wales, Victoria and Queensland potentially losing about $1 billion — and Queensland and the ACT facing the biggest percapita losses. In the second cameo, a State unilaterally abolishes its insurance taxes. Any State that does this would lose because spending on insurance (and consequently the measured tax base) would increase and because the State would still be assessed as having the capacity to raise revenue through insurance taxes. The GST impacts are lower than the first cameo since the insurance tax base is small relative to other tax bases. In the third cameo, a State unilaterally introduces a new congestion tax in its capital city. This raises revenue equivalent to $200 per capita, which is then hypothecated to public transport. The GST impacts are also modest in this case, though in practice there would be considerable uncertainty about how the CGC might treat the new tax and hypothecated spending. Impacts on GST payments, unilateral reform, 201617
Governance changes to improve transparency and accountability 6.2 The CGC — through its Chairperson and Commission members — should provide a strong neutral voice, to facilitate a better informed public discourse on the HFE system. 6.3 The CGC should strengthen its formal interactions with the State and Commonwealth Governments. In particular, when requested by a State Government, it should provide provisional ‘draft rulings’ on the HFE implications of a policy change. 6.4 The Commonwealth Government, in consultation with the States, should develop clear guidelines detailing the basis on which Commonwealth payments are to be quarantined from HFE by the Commonwealth Treasurer (so that they do not unnecessarily erode the efficacy of the CGC’s relativities and compromise the objective of HFE). The guidelines should strike a balance between enhancing accountability and transparency, while not unduly affecting the Treasurer’s ability to quarantine payments in exceptional circumstances that are in the national interest. 6.5 The Commonwealth Government should strengthen the CGC’s decisionmaking framework. In particular: the Commonwealth Treasury should provide input, including public submissions, to the CGC’s fiveyearly methodology review process, drawing upon its communitywide perspective the Commonwealth Treasurer should nominate specific areas of focus for the CGC in the terms of reference for the fiveyearly methodology reviews, following (as is currently the case) consultation with the States. 6.6 The CGC should immediately and systematically make the data provided by the States publicly available on its website, along with the CGC’s calculations on these data.
Box 7.7 How would discounted royalty rate changes have affected Western Australia? The Commission has estimated how the CGC’s proposal for discounting future tax rate changes might have impacted States had it been applied in the past. This analysis assumes that the approach had been in place since 2010, when Western Australia started to phase in an increase in its iron ore royalty rate. The figure below shows the ownsource revenue impacts on Western Australia (calculated using annual relativities). For simplicity, this analysis shows the impacts relative to a counterfactual scenario where the current mineralbymineral mining assessment is used for the entire period (in practice it has only been in place since 2015). It shows that in this hypothetical scenario Western Australia would have retained 50 per cent of the additional revenue, compared to about 12 per cent with no discount. With this mining discount (and a mineral-by-mineral assessment) WA’s relativities would have ranged from 0.30 to 0.60 over the period, compared to a range of 0.22 to 0.58 without. The table below shows what the implications for all States GST payments would have been in 201819 (calculated as the average of annual relativities over the three financial years up to 201617). WA’s GST payments would have been $519 million higher, whereas GST payments for other States would each be reduced by between $4 million (Northern Territory) and $190 million (NSW). Sources: Productivity Commission estimates based on data provided by the CGC; appendix C. The largest decrease in annual payments would have been to New South Wales in 2013-14 ($207 million) although on a per capita basis the decrease is spread evenly across the States. Some inquiry participants favoured the CGC’s proposal. The ACT Government (sub. DR81, p. 27) supported it on the basis that the current mining assessment can give some States an incentive to lower or avoid raising their royalty rates. The ACT Government also noted that in practice only a few mineral categories would be affected. The WA Government — while strongly favouring greater policy neutrality in the mining assessment — disagreed with the level at which a discount would be applied, and with the general approach it involves. It argued that redistribution due to tax rate changes should be
If a ‘top up’ payment was used to maintain the current approach so that fiscally weaker States would not lose out under an EPC distribution, this would come at a total cost of $6.8 billion. Table C.1 Effects of equal per capita distribution 201819 GST payments and relativities Source: Productivity Commission estimates based on data provided by the CGC. Equalisation to less than the strongest State Equalisation to less than the strongest State involves lifting States up to some agreed level of fiscal capacity, but not bringing them up to the fiscally strongest State as presently occurs. The balance of the GST pool would then be distributed on an EPC basis. There are many possible variants of this form of equalisation. Equalisation to the average One approach to this could involve distributing GST payments to raise fiscally weaker States to the average fiscal capacity of all States. This involves using the current CGC approach to fund the weaker States based on the additional amount needed above their EPC share to address their (above average) assessed fiscal needs. It then apportions the remaining GST pool to all States on an EPC basis. For the 2018 financial year relativity calculations, all States but New South Wales, Victoria and Western Australia require GST payments to reach this fiscal capacity. The difference between GST payments under this approach and current practices are presented in table C.2. For 201819, this approach would reduce GST payments to all States but New South Wales and Western Australia.
Table C.11 Assumed average iron ore royalty rate Per cent a Imputed rate. b By assumption. c May not sum due to rounding. Source: Productivity Commission estimates based on data provided by the CGC. Calculations The dollar value of royalties collected by Western Australia due to the change in its iron ore royalty rate was calculated by subtracting Western Australia’s assumed average iron ore royalty rate in 2010 (5.099 per cent) from the imputed rate for that year (table C.11) and multiplying this number by Western Australia’s iron ore revenue base. A discount factor (the proportion of additional revenues due to a royalty rate change that is to be subject to equalisation) was set such that exactly 50 per cent of this revenue would be retained. This factor is equal to the proportion of revenue to be retained (in this case 0.50) divided by the difference between Western Australia’s share of the iron ore base and its population share: Where is the discount factor to be applied to the additional royalties that resulted from the rate increase in assessment year t. The discount factor changed slightly each year as Western Australia’s base share and population share varied. Total royalties across all States that were subject to equalisation in each assessment year was therefore: Where t is the assessment year, is the base share of State i, and is the imputed royalty rate for Western Australia. A national average royalty rate for iron ore was then calculated using these discounted royalties, and applied to each State’s revenue base to calculate assessed iron ore revenues. Calculating the total GST requirement for each assessment year required two steps. First, the total GST requirement in each State net of the original mining assessment was calculated by subtracting each State’s assessed difference for mining revenue from their GST requirement in that assessment year. The new mining assessed difference based on the
Table C.17 Change in GST payments of raising revenue by $100 201617, dollars Source: Productivity Commission estimates based on CGC (2018h) data. Average rate effects also occur for changes in States’ expenditure. These changes affect the average levels of expenditure across States, leading to changes in each State’s assessed expenses and consequently its GST payments. As with revenue rate effects, expenditure rate effects presented below are given by the change in GST payments resulting from a $100 reduction in expenditure. These effects are presented in table C.18. They are generally smaller than revenue rate effects and in most cases less than $1. Table C.18 Change in GST payments of reducing expenses by $100 201617, dollars Source: Productivity Commission estimates based on CGC (2018h) data. C.4 Cameos The cameos presented here are used to illustrate how a change to a State’s tax policy can influence its GST payments and its incentives to carry out a given reform. These include scenarios where only one State changes its tax policy (unilateral reforms), and when all States collectively change their tax policy (multilateral reforms). Three cameos are presented here: A revenue-neutral reform in which a State halves its stamp duty and introduces a broadbased land tax.
Table C.33 GST impact of stamp duty/land tax reform with category indicators Multilateral change made by all States, 201617a a GST impacts are evaluated on a ‘steady state’ basis; that is, assuming the new policy was fully in place in 201617. No transition paths are evaluated. Lower and upper bounds refer to the elasticity estimates used to calculate changes in the tax base. Source: Productivity Commission estimates based on data provided by the CGC.
E Fiscal equalisation in OECD countries OECD countries have a range of fiscal equalisation schemes in place. This appendix discusses the features of those schemes, how they equalise fiscal disparities, and whether there are any lessons for Australia. E.1 Features of fiscal equalisation Countries pursue different equalisation objectives OECD countries exhibit considerable variation in the extent to which their equalisation schemes seek to reduce fiscal disparities among subcentral governments (table E.1). In part, this is a function of differences in how countries define ‘equalisation’. Australia, for example, interprets horizontal fiscal equalisation as the ‘full and comprehensive’ equalisation of both revenue raising capacity and expenditure needs (chapter 2). The Commonwealth Grants Commission (CGC) commented that ‘the principle [of HFE] has focused on the provision of financial support from the Commonwealth to ensure that each State has the same capacity to provide an equivalent standard of services to its residents’ (sub. 1, p. 3). By comparison: Canada seeks ‘reasonably comparable levels of public services at reasonably comparable levels of taxation across provinces’ Germany aims ‘to equalise the differences in financial [revenue raising] capacity of states’ Switzerland looks ‘to provide minimum acceptable levels of certain public services without much heavier tax burdens in some cantons than others’ (Shah 2014, p. 9). Although ‘full’ equalisation largely eliminates fiscal disparities between subcentral governments, ‘partial’ equalisation’ (as pursued in most OECD countries) allows for greater emphasis to be placed on other criteria such as efficiency, transparency, accountability, simplicity and predictability (Shah, sub. DR103, pp. 2-3; Boadway and Shah 2007, p. 36; Brumby, Carter and Greiner 2012a, pp. 44, 135). The extent to which a country reduces fiscal disparities largely reflects the priorities of governments in regards to these criteria, taking into account wider institutional frameworks, political structures and economic constraints. This is discussed in the Australian context in chapter 6.
Pallas, T. 2017, ‘Federalism - Where to from here?’, Presentation to McKell Institute Victoria. Parker, G. 2013, ‘Howard empathy for WA over GST tumble’, Perth, The West Australian, 17 May, p. 6. PBO (Parliamentary Budget Office) 2014, Trends in Australian Government receipts: to 2012–13, 01/2014, Parliament of Australia, Canberra. —— 2017, Establishment, role and legislation, http://www.aph.gov.au/About_Parliament/ Parliamentary_Departments/Parliamentary_Budget_Office/role (accessed 15 August 2017). PC (Productivity Commission) 2004, First Home Ownership, Report no. 28, Canberra. —— 2005, Review of National Competition Policy Reforms, Report no. 33, Canberra. —— 2008, Assessing Local Government Revenue Raising Capacity, Research Report, Canberra. —— 2014a, Geographic Labour Mobility, Research Report, Canberra. —— 2014b, Natural Disaster Funding Arrangements, Report no. 74, Canberra. —— 2014c, Public Infrastructure, Report no. 71, Canberra. —— 2016, Migrant Intake into Australia, Inquiry Report No. 77, April, Canberra. —— 2017a, Commonwealth-State Relations, Shifting the Dial: 5 year Productivity Review, Supporting paper, August, 14, Productivity Commission. —— 2017b, Data Availability and Use, Report no. 82, Canberra. —— 2017c, Local Government, Shifting the Dial: 5 year Productivity Review, Supporting paper, 16, Canberra. —— 2017d, Shifting the Dial: 5 Year Productivity Review, Report no. 84, Canberra. —— 2017e, Transitioning Regional Economies, Initial Report, April, Canberra. —— 2017f, Transitioning Regional Economies, Study Report, Canberra. —— 2018, Competition in the Australian Financial System, Draft Report, Canberra. Perrottet, D. 2017, Board of Treasurers Meets for the First Time, Media release, 22 November, Adelaide. Petchey, J.D. 2017, ‘Inter-regional transfers and the induced under-taxation of economic rents’, Regional Studies, pp. 1–11. Philipatos, A. 2015, Withholding dividends: Better ways to make the public sector efficient, Target30, Centre for Independent Studies. Pincus, J. 2011, Examining Horizontal Fiscal Equalisation in Australia, Research Paper No. 2011-25, University of Adelaide School of Economics, Adelaide.
—— 2012, ‘Lessons from Worldwide Practices of Intergovernmental Fiscal Transfers’, (accessed 22 September 2017). —— 2014, ‘Principles and the Practice of Fiscal Equalization Transfers with special emphasis on Solidarity or Robin Hood Programs’, Warsaw, Poland. Simpson, R. and Figgis, H. 1998, Land Tax in New South Wales, Briefing Paper, No. 6/98, NSW Parliamentary Library Research Service, Sydney. Smart, M. 2004, ‘Equalization and stabilization’, Canadian Public Policy/Analyse de Politiques, pp. 195–208. Smith, J. 2015, Australian State income tax during the interwar years - Implications of economic integration for financing social services, Presentation to Crawford School of Public Policy conference, 27 April, Australian National University, Canberra. Smith, T. 2014, ‘Roles and responsibilities in the Federation’, A Federation for the 21st Century, CEDA. Starmans, C., Sheskin, M. and Bloom, P. 2017, ‘Why people prefer unequal societies’, Nature Human Behaviour, vol. 1, no. 4, pp. 1–7. Stewart, M. 2017, ‘Two ideas for renewal of Australia’s fiscal federal democracy’, A People’s Federation, Federation Press. Swan, W. 2013, Terms of Reference for the 2015 Methodology Review, Office of the Treasurer, Canberra. Tasmanian Government 2017, The Budget — Budget Paper No. 1, Parliament of Tasmania, Hobart. Tooth, R. 2015, Analysis of Demand for Home and Contents Insurance, Report to the Insurance Council of Australia, Sapere Research Group, Sydney. Turnbull, M. and McGowan, M. 2018, Media Release: Major jobs and infrastructure boost for Western Australia, (accessed 7 May 2018). Twomey, A. 2014, Public Money: Federal-State Relations and the Constitutional Limits on Spending Public Money, March, Report No. 4, 2014, University of Sydney. Victorian Government 2011, Submission to the GST Distribution Review (Issues Paper), Melbourne. WA Government 2000, Budget Overview 2000-01, Perth. —— 2008, Annual Report on State Finances 2007-08, Perth. —— 2011a, 2011-12 Budget — Paper No. 3, Perth. —— 2011b, Submission to the GST Distribution Review (Issues Paper), Perth. —— 2013, Submission to the Commonwealth Grants Commission 2015 Methodology Review (Terms of Reference), Perth.
—— 2014, Annual Report on State Finances 2013-14, Perth. —— 2017a, Annual Report on State Finances 2016-17, Perth. —— 2017b, Western Australia’s Submission to the Commonwealth Grants Commission’s 2020 Methodology Review: The Principle of HFE and its Implementation, Perth. WA Treasury 1998, Revenue sharing or tax base sharing?, Discussion Paper, WA Treasury, http://www.treasury.wa.gov.au/uploadedFiles/revenue_sharing_tax_base_sharing.pdf (accessed 2 March 2018). Walsh, C. 2006, Competitive Federalism — Wasteful or Welfare Enhancing?, Roundtable Proceedings, Productive Reform in a Federal System, Productivity Commission, Canberra. —— 2008, ‘Fixing Fiscal Federalism’, Where To for Australian Federalism?, Centre for Independent Studies, Sydney. Watson, W. 1986, ‘An estimate of the welfare gain from fiscal equalization’, Canadian Journal of Economics, vol. 19, no. 2, pp. 298–308. Watt, I. and Anderson, B. 2017, Parliamentary Budget Office Review 2016-17: Report of the Independent Review Panel, Canberra. Weingast, B. 2009, ‘Second generation fiscal federalism: The implications of fiscal incentives’, Journal of Urban Economics, vol. 65, pp. 279–293. Williams, R. 2012, ‘History of federal-state fiscal relations in Australia: A review of the methodologies used’, Australian Economic Review, vol. 45, no. 2, pp. 145–157. Wilson, L.S. 2003, ‘Equalization, efficiency and migration: Watson revisited’, Canadian Public Policy, vol. 29, no. 4, pp. 385–396. Wiltshire, K. 2014, ‘Criteria for assigning roles and responsibilities in the Federation’, A Federation for the 21st Century, CEDA. Wurzel, E. 2003, Consolidating Germany’s Finances: Issues in Public Sector Spending Reform, OECD Economics Department Working Papers No. 366, OECD.