It’s a standard assumption these days that state governments are fiscal flotsam, with no scope to do anything other than take the federal government’s GST payments and spend them accordingly. And it’s true to some extent – state governments did eliminate a number of transaction taxes as part of the GST agreement. But the idea that state governments have no control over their revenue base – or, alternatively, that their revenue base is made up exclusively of economically inefficient taxes that would be economic vandalism to raise – is just nonsense.
A look at the Victorian government’s state budget is illustrative. The Victorian government does receive about 22 billion dollars in grants from the federal government. State tax revenue is about 15 billion dollars, and the balance of revenue from sources like dividends, service fees and whatnot comes to about 9 billion dollars.
If the states really wanted to, of course, they could lobby the federal government to raise the GST. The untied GST grant is about 11 billion dollars. So, assuming the same funding formula was retained, increasing the GST to 11% would instantly add around another 1.1 billion to the state’s bottom line. But because of the cack-handed design of the GST – where the federal government collects the revenue, and divvies it up for the states to spend – the politics of raising it are awful.
But the state government also levies payroll tax and land taxes – in the case of land taxes, inefficient ones like stamp duty. So a state government, if it so chose, could collect extra revenue from land tax, and do so in a more efficient way, by abolishing stamp duty and replacing it with a universal land tax. Heck, the Henry review called for just that. Land taxes, in total, earn the Victorian government around $5 billion per year. So, eliminating stamp duty and replacing with a higher-rated land tax could raise more revenue and improve economic efficiency to boot.
The Henry review also called for the abolition of payroll tax and the GST and their replacement by a new variety of consumption tax. But, frankly, there doesn’t seem to be any particular urgency to do so – payroll tax is actually a relatively efficient tax, of which the long-run burden falls upon labour, not capital. And it’s a serious earner – levied at a rate of 4.9%, it makes the Victorian government another 5 billion a year. Push it up a little and suddenly your budget looks a lot healthier.
If the Victorian – or any other state government – wants to raise taxes, it has the option to do so, and do so in ways that are not – contrary to popular myth – horribly economically damaging. We can have nice things, including raising the money to pay off the loans required to build the infrastructure we all deserve. It’s just that Victorian governments have chosen not to do so.