The IPA welcomes the opportunity to provide the attached document, Time to End GST Redistribution: 2018 Update, as a submission to the inquiry into the Treasury Laws Amendment (Making Sure Every State and Territory Gets Their Fair Share of GST) Bill 2018. The report outlines the theoretical and practical flaws in cross-jurisdictional redistribution of taxation revenue (or horizontal fiscal equalization), and calculates how much GST revenue has been generated in each state since the GST was introduced (rather than what each states’ entitlement would be on an equal per capita basis).
Our report argues the principle of horizontal fiscal equalization has no merit. Transferring revenue from states with a higher fiscal capacity to states with a lower fiscal capacity negatively distorts naturally occurring economic incentives, such as interstate migration, and creates incentives for state governments to raise taxes and rely on the Commonwealth and GST revenue redistribution from other states, rather than undertake pro-growth economic policy reform to expand their fiscal capacity. Moreover, equalisation fails to address (indeed, it entrenches) the core issue afflicting federal-state financial relations – the namely the disproportionate centralisation of taxation powers to the Commonwealth relative to the states’ spending obligations. This is also known as vertical fiscal imbalance, which in Australia is among the highest in the world.
Download the IPA’s cover letter to the submission here.
Download the IPA’s full submission here.