Turnbull reveals state income tax plan

Prime Minister Malcolm Turnbull says the federal government wants to let the states and territories impose some income taxes of their own, suggesting the current system is a failure.

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Mr Turnbull says he will put forward the idea to the state and territory leaders.

It would involve the federal government reducing its income tax by an agreed percentage and allowing state and territory governments to levy an income tax equal to that amount.

State premiers have been quick to play down Malcolm Turnbull’s proposed tax overhaul aimed at ending the federal and state governments blaming each other for lack of funding.

Under current laws, the federal government is the sole recipient of income tax.

The Prime Minister says he wants to reduce the federal government’s income tax collection.

He wants to allow the states and territories to collect the remainder to fund services like hospitals and schools instead of going to the federal government for funding.

Mr Turnbull says taxpayers would still pay the same overall rate of income tax.

But he says it would give the states and territories more autonomy and end the regular funding disputes with the Commonwealth.

Mr Turnbull says the plan is a recognition that there is a fundamental failure with the current system.

“It is the failure of the states to have access to the revenue sources to be able to do what a government should be able to do and say, ‘Okay, we’ve got an issue with one part of our services. Can we fix it ourselves, or do we need more money?’ If (they) need more money, then they go — the state would go — to their parliament, raise the money, go to the people and persuade them of the merits of it.”

But Opposition Leader Bill Shorten has rejected the proposal.

“Mr Turnbull is undermining universal taxation in Australia. That means he’s undermining universal healthcare in Australia. I can guarantee Australians a Labor government will not give income-tax powers to state and territory governments. Australians already pay quite a lot of tax. If Mr Turnbull’s only suggestion to fix up his budget is to increase the cost on household budgets, well, it’s a bad idea.”

University of Newcastle economics professor Bill Mitchell says the Federal Government is trying to address a complex system that has plagued Australia since last century.

He says, under the Constitution, the states have most of the large expenditure responsibilities, yet revenue-raising capacities that are not commensurate with that.

Professor Mitchell explains.

“In 1942, as part of the war effort, the federal government assumed all of the income tax responsibilities. It was voluntarily given up by the states to make the spending situation more efficient. So what this is arguing is we will go back to the pre-1942 situation, where the income tax capacity was split between the federal government and the state governments and the state governments could effectively levy whatever income taxes they thought they could get away with. And there would be a reduction in the amount of grants that the Commonwealth government would give back to them.”

But doubt remains that the states will agree to the idea.

New South Wales premier Mike Baird says he disagrees with the plan.

South Australia’s Jay Weatherill says it will not work.

Queensland wants to see more detail.

And Victoria has dismissed it as a so-called “thought bubble.”

Federal independent MP Andrew Wilkie says Tasmania could get stuck with the nation’s top income tax rate if states and territories end up levying their own impost.

The proposal will be put to the state and territory leaders at this week’s COAG meeting.