The threat of a WA bank tax by the State Government is one of the perverse outcomes of Australia’s current GST distribution equation, says CCI Chief Economist Rick Newnham.
On Monday Treasurer Ben Wyatt warned he would introduce a bank tax if the Federal Government failed to deliver meaningful changes to the GST after the Productivity Commission’s review, which is expected to release an interim report next month.
Newnham says the threat by the State Government to introduce a bank tax if the GST calculation isn’t fixed, highlights the perverse incentives the GST distribution has created for states.
“A bank tax is being threatened because it is a revenue source that won’t be distributed away from WA to other states via the GST,” he says.
“This is despite it clearly being bad for economic growth, bad for business investment, and bad for job creation – otherwise it wouldn’t be touted as a threat.
“The GST formula should encourage states to generate additional revenue by developing their economy, not by raising taxes.”
CCI has made recommendations to the WA Government to fix the state’s budget deficit by reducing government spending without new or increased taxes.
It has also written to Commonwealth Treasurer Scott Morrison to outline concerns regarding the Commonwealth Grants Commission’s (CGC) proposed recommendation for future relativity calculations which was announced last week.
The CGC’s proposal would mean states would keep 50 per cent of all future mining royalty rate increases.
“Just as the CGC’s proposed recommendation would create a strong incentive for state governments to raise royalty rates to capture additional revenue, the current GST model encourages states to put up taxes that aren’t captured by the GST, but punishes them for forging ahead and developing new industries,” Newnham says.
“CCI’s submission to the Productivity Commission has called for the GST system to be reformed to a partial equalisation model, which would restore incentives for states to develop underutilised industries and boost national economic growth, without resorting to tax or royalty rate hikes.
“We have also called for the introduction of a GST floor, at 70 cents, to restore stability in GST revenue.”
The submission outlines three methods to reform the GST formula, including by carving out 25 per cent of mining royalties to ensure states keep more of the revenue they generate when they fully develop their own economy, as WA has done.
“It has become increasingly clear that the current GST distribution system has created perverse incentives for state governments across the country to block industry development, which hinders national economic growth,” Newnham says.
►As WA’s peak business advocate, CCI works to elevate the concerns of WA industry to key nationwide decision-makers. Find out more about our advocacy efforts here.