Harboring grudges. Why is there a GST carve up?

Labor has won a whopping, landslide victory in Western Australia.

The political pundits give many reasons for this massive victory.

Outgoing Premier Colin Barnett had been Premier for over eight years and voters felt the need for change.

The government had run up massive debts and the state has lost its triple AAA credit rating.

Many people opposed the billion dollar Perth Freight Link, which was carving a destructive path through vital wetlands, only to a stop on the wrong side of the Swan River from its proposed destination, Fremantle Harbour, which the government had talked of selling to private owners.

The government had an unpopular preference swapping deal with One Nation, a populist party with racist policies.

The government proposed to sell off half its share in Western Power. Many saw this as short term gain for long term pain, as foreign interests took control of an essential state service, with loss of annual revenues and also possible job losses to West Australians.

To these and other arguments I would add that all Western Australians are thoroughly cheesed off with the fact that they receive only 30% of the GST money that is raised in this state.

The Prime Minister, Malcolm Turnbull, in a rare visit to WA, flew over six months before the election campaign kicked off and said that he would work to ensure that a lower limit of 70% was established for the GST carve up. That would mean that WA’s share of the GST would never fall below 70 cents in the dollar. State Premier, Colin Barnett, thanked the PM and said this was the answer the Western Australian’s prayers.

However, at the start of the WA state election campaign, Mr Turnbull flew back to Western Australia and said that the 70% floor limit on the GST would not start any time soon. In fact, Mr Turnbull said it would not be likely to occur until all states were receiving 70% or better of their GST revenue, so that no state would suffer. In the meantime, he was prepared to let WA suffer indefinitely. Less than 24 hours later, Mr Turnbull flew back east, leaving all Western Australians feeling  rejected. What was worse, they felt completely ignored. Obviously, Mr Turnbull did not consider Western Australia to be a place worth worrying about.

Which begs the question, why is there a GST carve up at all?

In 2002 we were told the GST was to provide a reliable income stream to the states and to replace several state taxes. Of course, state taxes, such as Sales Tax, always remained in the state in which they were raised. So why doesn’t all the GST remain in the state in which it is raised?

The problem seems to be the changed role of the Commonwealth Grants Commission. Before 1942, income tax was collected by each state which then gave a portion of the money to the Federal government for such things as defence, customs, postal and telegraph communication, etc. Different states had different rates of income tax so, over time, Australians paid varying rates of income tax depending on which state they lived in.

In 1942, Prime Minister, John Curtin, was waging total war against a rampant Japan. In order to coordinate the war effort and also provide universal taxation rates throughout the Commonwealth, Curtin made income tax collection a federal responsibility. Some of this tax money was returned to each state, according to a formula, so that the states could pay for public works, public utilities, health, education, police, public transport etc.

Under that system, the Commonwealth Grants Commission  provided additional funds to any state that did not receive sufficient money per the formula, to meet its obligations. Such states were known as mendicant states. Western Australia was a mendicant state for much of the 20^th Century.

As we now know, this system changed with the introduction of the GST in 2002. Under the current system, the Commonwealth Grants Commission carves up the GST and allocates funds to each state according to a different formula. This means that some States do not always get all the money raised by their state’s GST.

The Grants Commission penalises Western Australia because of the money it receives from mining royalties, but pays no heed whatsoever to the many millions of dollars other states receive from the widespread use of poker machines. Some states do not raise enough GST to service their basic needs. The Grants Commissions, in its wisdom, carves up the GST revenue so that these states receive much more than 100% of the GST raised. As a result, Western Australia receives about 30% of its GST.

Naturally, the states getting more than 100% of GST, are quite happy to receive a larger slice of the GST pie and will not hear of WA getting a fairer share of its own pie. This means that Western Australia receives 30% of its GST, while states like South Australia and Tasmania receive well over 100%. In the last two years, the Grants Commission has made ex gratia payments of about 400 million dollars to Western Australia to try and address the problem of WA getting less than a third of the GST money it has raised. These payments would be unnecessary if the GST was not carved up by the Grants Commission.

But, there is no need for the GST carve up. The Grants Commission should ensure that each state keeps 100% of the GST it raises and then, as it always did between 1942 and 2002, make additional payments to those states that do not raise sufficient GST to meet their needs. The Grants Commission would obtain this money from the Commonwealth Government’s consolidated revenue, collected from all states, and not largely from one state’s GST, as happens at present.

Our politicians should be working to keep all GST in the state in which it is raised and to return the Grants Commission to the role it exercised pre-GST in helping poorer states.

For many years, Western Australia was known as the Cinderella State. Of course, Cinderella is famous for two things, her great beauty and the ugliness of her sisters. The current very unfair carve up of the GST shows us just how ugly some of Western Australia’s sister states can be when they get their hands on Cinderella’s GST funds.