State government revenue options

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.

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6 Responses to State government revenue options

  1. Chumpai says:

    Generally agree 100% with this post in particular the land tax. A broad based land tax instead of stamp duty makes a lot of economic sense.

    I’ve felt for a while that stamp duty discourages the buying and selling of property. E.g. an elderly ’empty nesting’ couple downsizes from a house with numerous bedrooms to a small unit with one bedroom – increasing the supply of larger houses (and decreasing the price) for prospective buyers (such as a young family).

    I have mixed feelings on the payroll tax, but as the link to the you provided suggested, broadening the tax, reducing complex loopholes and lowering the overall rate would make economic sense.

    One other small point. State governments are largely responsible for a lot of service delivery, so it might be worth thinking about transferring all sin/consumption taxes from federal to state governments. For example state run hospital services would deal with the negative outcomes of alcohol and tobacco consumption though I believe the taxes on these substances is collected federally. The flip-side to that argument tho I think gambling is taxed by state governments though, from memory I think this has lead some to accuse the Victorian State governments of being addicted to gambling revenue and not adequately tackle the problem.

    Apologies for the long comment, but again good post.

    • Mat says:

      Chumpai, Hell will freeze over before Canberra – under either Party – voluntarily transfers any taxes back to the States. They only do so with the GST because htey made an agreement back in 1999, which binds every Commonwealth government since, in order for the States not to kick up a huge fuss.

      • chumpaii says:

        Indeed, its an idealistic scenario (if you’re pro state). Its probably more likely the States will be dissolved than get access to more taxes. But hey, stranger things have happened.

  2. Mat says:

    You mention payroll taxes, and float the idea of raising them for more revenue. Given Victoria’s chronic employment issues (presently 5.4%, behind only Qld and Tasmania), is making jobs more expensive (the direct effect of such a tax increase) really the best way to raise revenue? The land tax makes sense, and perhaps the Victorian government could actually not sell-off profitable utilities, if it’s worried about money?

    • OK, right now is probably not the time to raise taxes, but the long run effect of payroll tax is to suppress wage growth, not reduce company profits.

      • Mat says:

        To some extent this is true. However, whether the effect is wages reduction, employment reduction or a bit of both, still not a good effect.

        I wonder if the States would be allowed to charge some kind of toll on pollution? That might be a way to raise revenue, while reducing something we’d like to see reduced.

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