On income taxes levied at a state level

Apparently the Turnbull Liberal government is considering allowing states to levy their own income taxes, after the federal government makes a significant cut to federal income taxes to allow for the change.

I think this is — in general — a good thing. It limits the capacity for the federal government to starve belligerent states of funding and gives the electorate a strong argument for the abolition of taxes such as stamp duty as the state now has more control over direct taxation. (Note that I would prefer we abolish the federation and institute proper bottom-up governance in a unitary state, but that is indeed a rant for another post.)

I do not claim to be an expert in taxation law, but I am quite certain that there will not be a rational debate on this issue because Australian politics is definitely not about consensual discussion but all about confrontation. We also have this whole any-tax-is-a-bad-tax religion that many people subscribe to.

As a result, we’re going to see the discussion play out like so:

• People will bang on about “no more new taxes!”
• People will say “this is just a way for tax accountants to make more money!”
• People will say “this is a tax hike in disguise” and will result in different taxation rates in different states
• Rational people like me will write some things that will ultimately be ignored

It is important to acknowledge that Australia is indeed a federation of states based around colonies that largely shouldn’t have existed. There’s no real logic to the distribution of borders (though I dare you to try to convince me otherwise).

Given this, we should take full advantage of the fact that we do indeed have several sovereign states within a federal framework and empower those states to levy taxes to pay for what that state actually wants, be it healthcare, education, etc which are all still within the remit of each state, but apparently being able to fund these things is not within said remit.

Each state does have different costs associated with managing their state due to the entirely arbitrary boundaries and different industries within each. Even parliamentary systems differ from state to state, like Queensland doesn’t even have an upper house of Parliament.

Taxation should be bottom up. Those closest to the services needing to be provisioned should be the ones determining what they need, and pushing their proposals up. The question becomes: how far up should they have to push? Under our current federal model, these services are mostly served and provisioned by the states, with grants funded by the federal government.

It is therefore entirely appropriate that the states levy taxes directly, and I would argue that we should perhaps see further moves towards freer state taxation over federal taxation in the future. It seems it is a sensible move towards empowering local governance and bottom-up governance that stops the states relying almost exclusively on GST revenue and allows at least a semblance of progressive taxation in a country that strongly needs a significantly more robust taxation system.

Looking forward to seeing your take on these moves, and your opinions on my interpretation of them.