FEDERAL-STATE RELATIONS COMMITTEE
Inquiry into overlap and duplication of
roles and responsibilities
Minutes of evidence
Melbourne - 5 November 1997
Members
| Mr A. Andrianopoulos | Mr M. John |
| Mr G. B. Ashman | Ms L. J. Kosky |
| Ms L. T. Burke | Mr B. T. Pullen |
| Mr D. Dollis | Ms W. I. Smith |
| Mr K. S. Jasper |
Chairman: Mr M. John
Deputy Chairman: Mr B. T. Pullen
Staff
Executive Officer: Ms L. Topic
Office Manager: Ms N. Papal
Research Officer: Mr P. Emerton
Witness
Associate Professor N. Norman (sworn).
I especially welcome among members of the public my parliamentary colleague Dr Robert Dean, who is the member for Berwick and a parliamentary secretary. I understand that Dr Davis and a number of my other parliamentary colleagues will also attend, and I welcome them in advance. In addition to the committee members who are here now, other members who may attend later include Ms Kosky and Mr Dollis. Mr Andrianopoulos apologises and regrets that he is unable to be with us this afternoon.
The Federal-State Relations Committee is an all-party parliamentary committee conducting an inquiry into the overlap and duplication of roles and responsibilities between the commonwealth and the states. It has also been asked to examine how the states might have an enhanced role for the benefit of the federation. The committee recently tabled its first report, which was on Australia's treaty processes and the role of the states in them. It has now embarked on an examination of intergovernmental financial relations, and it hopes to make a substantial contribution to the debate in this area.
The issue of financial relations between the commonwealth and the states is one of the most urgent facing us today. The committee believes that any commonwealth proposal for taxation reform, for example, must take into account federal-state issues. The seminar has been organised today to afford an opportunity of discussing these issues with experts in the field of taxation and intergovernmental finance and to facilitate some fruitful discussion on the issue. The speakers this afternoon include Associate Professor Neville Norman of the Department of Economics at the University of Melbourne, whom I welcome.
Associate Professor Norman teaches a range of subjects in the areas of economics and public finance. His research interests include protection, trade practices and the incidence of taxation. He advises a wide range of organisations on economics and investment matters. He is also on the editorial board of the Competition and Consumer Law Journal. By the way, until recently he was President of the Friends of the Faculty of Music. He gained his master of arts and bachelor of commerce, with honours, at Melbourne University and gained his PhD at Cambridge. Also with us today are Ms Claire Thomas, Mr Brett Rowse and Mr Nick Economou, whom I welcome, and who will also speak.
It is proposed that the speakers will be followed by a short question time and statements from members of the public and/or the media. After that question and discussion period there will be a short break for coffee, during which time people will also have the opportunity for informal discussion. In the second session we will hear from Professor Martin Painter of the University of Sydney, Mr Dick Rye from the Commonwealth Grants Commission and Ms Bronwyn Pike from the Evatt Victoria Foundation.
We realise the answers to questions about financial and taxation reform are not simple. However, we believe constructive changes can be made to the current system. We are interested today in a broad discussion of the issues, and I welcome comments and suggestions from all participants. When we get to the more public discussion section , for the benefit of our Hansard reporters I ask those who wish to ask questions or make comment to give their names and the agencies or organisations they represent or to indicate if they are speaking in a private capacity.
Under the powers conferred on this committee by the Constitution Act 1975 and the Parliamentary Committees Act 1968, this committee is empowered to take all evidence at these hearings on oath or affirmation. I wish to advise all present at these hearings that all evidence taken by this committee, including submissions, is, under the provisions of the Constitution Act and the Parliamentary Committees Act, granted immunity from judicial review. I also wish to advise witnesses that any comments made by witnesses outside the committee's hearing are not protected by parliamentary privilege.
I welcome Associate Professor Neville Norman from the University of Melbourne, who is a distinguished scholar in this area. Professor Norman, I ask you to briefly address us and to be ready to answer questions in due course.
Assoc. Prof. NORMAN - Thank you, Mr Chairman. As I have mentioned, I am here in my private capacity. I welcome the opportunity to comment on the terms of reference and the matters involved in them. I do not represent any body, including bodies I might have worked for. I have not been 'incentivated' to come before this committee, other than being invited. I have no paper - in part, because in my view the terms do not yet provide such specific proposals for which a paper would be appropriate.
Tax reform has been a difficult process for this country. Apart from minor variations in 1985, there has been effectively no tax reform in this country in our lifetimes, and there is still none and no precise proposal for reform. We have seen ambitious attempts to change the structure of the commonwealth tax system, notably through the work of the Asprey and Mathews committees in the early 1970s; through attempts of political parties and action groups; through the Hawke government in 1985 with the tax summit and white paper, relatively little of which came to fruition; and through the ambitious attempt known as Fightback, which commenced in 1991, and was brought to the Australian people in 1993 and rejected. At the present time we have five principles for tax reform, which were announced by the Prime Minister of Australia, Mr John Howard, in August of this year, but no precise proposals.
As a general comment, the background is that to this stage there has been effectively no fundamental tax reform to the system that developed from 1942, with predominant emphasis on income tax. Yet the economic effects have changed, as we have been through periods of high inflation. Today high-income people have rights and abilities - some legal, some not - to escape from the effects of much of the income tax, and low-income people are now enduring the marginal tax rates that were struck for the rich in the early post-war period.
Many other countries, often as a result of signing international treaties - for example, the Treaty of Rome, which enshrined the European community - have been forced or have chosen to reorient their tax systems towards expenditure-type systems. Australia has a messy, complex and inconsistent set of indirect taxes. A "broad-based tax system" does not represent what we have.
In recent years the proportion of commonwealth income tax collected in the form of indirect tax has slightly fallen, but most of what is there has extreme inconsistencies. For example, it is not widely known that the per litre absolute alcohol tax through indirect taxes of the commonwealth for white wine is less than one-tenth of the per litre absolute alcohol tax for spirits, such as whisky. That this is not well known reflects, firstly, that it is extremely complicated to calculate; and secondly, that the tax is not paid directly by the consumer, as it would be, for example, if it were a retail tax, which many American states have. Many articles have been written, some by my colleagues at the University of Melbourne, pointing out the inconsistencies and distortions of the tax system and inconsistencies between state and federal taxes.
The states are severely limited, through the constitution, in the range of taxes they can have. Also, most of them raise little more than half of their expenditures from their own revenue. That creates what is known as vertical fiscal imbalance. It is not necessarily bad in itself, but it tends to leave the allocation process to the political process, rather than to the marketplace. As a result, absurd and inconsistent results can easily take place, and division of opinion on the proper allocation to states on a more horizontal basis has arisen.
Older states, like Victoria and New South Wales, have traditionally complained that a smaller share of the consolidated revenue is returned to them than their residents pay in PAYE, or income tax returns. The latest figures I looked at were, something of the order of 31 per cent is paid by Victorian taxpayers and 27 or 28 per cent is returned. The gap has been closed, but it remains a festering sore. I frankly see little reason why, with the proper allocation to the less densely populated states, like Western Australia, and to the territories, particularly the Northern Territory, there needs to be a distinction between more advanced states and the older states.
Many proposals are advanced. By way of suggestion, because I am prone to stay as an analyst rather than an advocate, I simply raise three points which, it would appear to me as an analyst, ought properly be discussed by a committee such as this within its terms of reference. The first point is the imbalance between own-state revenue and own-state expenditure. As it is so large, this committee in my view ought to come to a clear conclusion as to why that is satisfactory; and, if it is not satisfactory, what can be done about it. If it is not satisfactory, a broader range of own-revenue sources should be contemplated.
The second point is that any tax reform initiated by the commonwealth of Australia will either be incidental or insufficient - which I suspect to be the case - or it will be fundamental, in which case there will be side effects, not always recognised, for states such as Victoria. In my view the committee should have mechanisms in place to check the unintended side effects of commonwealth tax reform in Australia. In my opinion the Fightback documents did not thoroughly do that.
The third point is that if we are to take the first issue seriously there are perhaps two proposals that can be made to fit with it and they are both controversial. The first proposal is a state income tax. I am not here as an advocate of state income tax and I am not representing anybody who wants it. As an economist I simply say it has certain features that may be attractive if this country is to remain incapable of undertaking meaningful Commonwealth tax reform. Firstly, it is clearer. It tends to be less of a burden on low-income people than the indirect taxes and charges on transport and other items that are otherwise inflicted by states, including this one, on its residents. Secondly, administratively, if it works as a piggyback on the commonwealth income tax system it should be administratively easy to do through tax file numbers and the existing mechanism.
The second proposal is one of accountability. In 1995 I authored a book published by the Business Council of Australia, but had the complete rights of discretion as to what was in it. It was called Refocusing Fiscal Reform. One of its central recommendations related to the audit function - these words were written long before the role of an auditor, including that of the Auditor-General of Victoria, became public controversy. In my view the role of audit should be extended and remain professional and should cover all proposals of expenditure, all plans of a capital and current nature initiated from state governments before they are actually implemented and not be simply an after-the-event verification exercise. It is important to preserve that function in whatever changes this state makes to the role of the Auditor-General.
I have no further comment on that issue, Mr Chairman.
The CHAIRMAN - Thank you, Professor. We are most grateful to you and would ask you to remain with us during the next two speakers' presentations and for the question time to follow.
Witness withdrew.
5/11
Public Hearing