Guest Notes

Provincial notes

15 October 2016

9:00 AM

15 October 2016

9:00 AM

Turnbull was right. Let the states tax us

Go and teach a constitutional law course in my native Canada and almost all the law students will simply assume that a strong, competitive federalism is a good thing. This is the default assumption. Premiers of the same political party as the Canadian Prime Minister will regularly attack that PM on any issue that hurts their province; party allegiance comes second to being seen to stand up to Ottawa. This is true if it’s a right of centre Tory PM and Premier or a left of centre Liberal PM and Premier.

And of course all of the provinces have their own income tax power. Quebec even insists on people using a separate tax return form. And of course there are different provincial income tax rates in each province – each province decides for itself what its rates will be. Some are high, as in Quebec. Some are low, as in Alberta. The others vary all over the place. And of course every province has its own school curriculum. Nor is there a national securities regulation regime in Canada, the provinces do this.

And yet Canada is wealthier than the one-size-fits-all obsessed Australia; it has fewer public servants per capita.   No one in the Great White North talks about ‘co-operative federalism’. The main point of federalism is competition (the secondary point being to satisfy more people’s preferences by avoiding one rule for all that might split a country 51-49 and instead letting each State make different calls on the issue, and so satisfy 65, 70 or 75 per cent of people). Provinces compete; they try new things; good ideas are copied; dumb or costly moves have to be paid for by the province that tries them and the politicians who did so tend to be punished by that province’s voters. Let me spell it out, the voters can do this punishing because it is much easier up there than here in Oz to see who is responsible for what taxing and spending.

But maybe you think Canada is a decentralised nightmare. Okay, wander south of the border and you’ll find that federalism is at least as potent in the US. Funny that, considering that Australia very clearly has what you can think of as ‘a US-type Constitution’. More than anywhere else on the planet the drafters of our Constitution copied the Yanks.   Yet unlike here if you go to the US the individual 50 States are very powerful. They make their own calls. More than a few have no State income tax at all, while New York and California have comparatively high rates. Some US States have a sales tax; some don’t. Difference, competition, and innovation is what you’ll find, not the across-the-board one-size-fits-all uniformity that is the Australian hallmark.


I could go on and talk about other very successful federal systems such as you find in Switzerland and Germany. In all of them the States or Provinces or Cantons or Länder have income tax power. In fact it’s hard to think of a single federation in the democratic world where the States don’t have their own income tax power, except for here in Australia. Heck, in the UK now – and remember it’s not even a federation – Scotland has its own income tax power. But not NSW or Victoria or any of our States.

I won’t dwell too long on whose fault this is, but the short answer is that most of the blame lies with our High Court of Australia. It has the most ‘favour the centre’ track record of any top court in the democratic federal world. (Remember the egregious WorkChoices case?) In two big cases during and just after WWII it let Canberra, for all practical purposes, take away the income tax power that the States till then had enjoyed. It did so on what, to me, is an implausible interpretive approach.

And what do we have today here in Australia? Well, we have pretty much the world’s worst vertical fiscal imbalance, which is jargon for saying the centre, Canberra, raises most of the money but the States have to spend loads and loads of it (on education and health and more). The gap here is just about the world’s worst. So the centre has to send all sorts of moolah to the States, usually with all sorts of strings attached (which kills variation and innovation – hear that Malcolm? – and diversity). We in Australia then make things even worse again by the way in which we try to equalise things between the States. Sure, they do this in Canada, but not like here. Here we distribute GST receipts using an opaque, incentive-killing formula that rewards horrible State government performance and effectively attacks success. This is bonkers, to use the legal term of art.

I do not think that anyone in this country could fairly accuse me of having much good to say about Malcolm Turnbull. The sooner he goes (be it by the sort of party coup he himself engineered, or by the voters in a couple of years) the better. Having the most left-leaning, ABC-values sharing leader of the Libs ever (yes, ever) is a recipe for long-term disaster. I’ve said it many times before and I stand by all those comments. But fair is fair. Turnbull was exactly correct in that brief window of time before the recent election when he offered the States income tax power. This absolutely needs to be done for the long term health of Australia’s federation and it was a disgrace that all of our Premiers, Libs as well as Laborites, are so inured to being mendicants they rose up and cried ‘No’.

Look, if Dan Andrews had to ask only Victoria’s voters to pay a billion dollars not to build a road, he’d find that a lot harder than when the Feds send largesse into all the States anyway; and when there’s an über-aggressive State equalisation GST carve up that rewards failure; and when at least some of that thrown-away money will come from voters in other States. Or take the idiocy of South Australia’s renewable energy policies. That State has the country’s highest energy prices, a wholly unreliable network, and will see even more jobs and employers flee the State. Why should the rest of the country subsidise, nay reward, such bumper sticker moralising type policies? If they had to pay themselves South Australians would end this nonsense a lot quicker. But our federation is broken. The existing incentives are nothing short of crazy. So in Adelaide they can continue on with their begging bowl out.

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