Differences with states on tax reform could be 'irreconcilable': Morrison

Treasurer Scott Morrison has declared that differences between federal and state governments over tax reform may be “irreconcilable” because states want to use funds from a GST change to spend more.

Speaking ahead of Thursday’s treasurers' meeting, Morrison said the Commonwealth wanted a “growth-friendly” tax system, not a “spending-friendly” one, and this meant handing back proceeds of changes in tax cuts.

The tax discussion was getting to the point where objectives were able to be clarified and they “may not be reconcilable”, he said.

“The issue here is whether tens of billions of dollars each year should be made available through an increase in the GST to simply give to the states for them to support their recurrent expenditure. Now that is not tax reform, that is just spending with higher taxes.”

The federal government was not interested in increasing taxes to finance higher spending. Its objective was to promote growth by getting the shackles off personal income tax and off company tax.

“It may be that tomorrow those objectives are very different and if that is the case then it wouldn’t actually enable us, I think, to get to a united position,” he told Sky.

Prime Minister Malcolm Turnbull will meet first ministers on Friday, with tax also on the agenda.

As the government seeks to address bracket creep, the independent Parliamentary Budget Office says while the compensation arrangements brought in with the GST “largely remain in place”, the impact of personal tax cuts “has been eroded over time by bracket creep, with the average personal tax rate projected to return to its pre-GST level by 2018-19”.

The GST is a Commonwealth tax but all the revenue it raises goes to the states. There has been a push from NSW to increase it to provide funds for increasing health costs. But the states and territories themselves are divided over changing the GST.

Morrison said if the states wanted to spend more they could raise their own taxes.

Thursday’s discussions among federal, state and territory treasurers is primarily about state taxes, but the GST is also set to feature.

The Commonwealth has given the states modelling, at their request, of eight options, including six changing the GST and two that would change the Medicare levy. The option of raising the GST to 15% and including food and non-alcoholic drinks, and water and sewerage would raise $45 billion annually, before compensation is provided.

The PBO report, noting the GST is a regressive tax, said on average households in the lowest income decile paid more than 12% of their disposable income on GST – about three times the proportion paid by those in the highest decile.

The value of GST exemptions represented about 4% of the disposable incomes in the lowest decile, or about four times the proportion received by those in the highest decile, according to the report, released Wednesday.

In absolute terms, the amount of GST paid increases in line with household income, from about $40 a week in the bottom decile to more than $140 at the top.

Similarly, in absolute terms GST exemptions provide much greater benefits to higher income households – about $32 a week in the top decile, some two and a half times that for those households with the lowest income.

The report models five scenarios for reform, including in each compensation that would fully offset the changes for the bottom 40% of households.

The scenarios would increase annual GST revenue, after compensation, by between $4.8 billion (extending the GST to basic food) and $49.3 billion (a 15% rate and the removal of the exemptions for food, health, education, child care, and water and sewerage).

Former treasurer Peter Costello this week wrote that “some hotheads” in the Coalition wanted a 15% GST.

“Those calling for a 15% GST are the people who have no experience of what it is like to campaign for such a policy,” he said.

Asked whether he had spoken to Costello about this view, Morrison said: “Sure, I talk to Peter very regularly about these things and Peter is absolutely right – tax reform is not easy” – which made it important to be very clear about its purpose.

The incoming secretary of the Department of Prime Minister and Cabinet, Martin Parkinson, this week said the GST should be broadened because there were too many items exempt, making the tax less efficient than it could be.

Parkinson also said state governments needed to raise more of their own revenue.

“Raising taxes is not solely the responsibility of the Commonwealth,” he said, noting that the structure of the federation reduced incentive for states to reform their own taxes.

Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond the academic appointment above.