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
Ms B. Pike, Executive officer, Evatt Victoria Centre (sworn).
Ms PIKE - Thank you for the invitation to be part of this seminar. I had a conversation with the Chair beforehand and was told that the committee welcomed a wide and diverse range of perspectives. I was very encouraged by that, and I look forward to offering you some of them this afternoon.
With everyone rushing to jump on the bandwagon of taxation reform it is timely to pay some attention to the fundamental reasons why citizens are taxed in the first place. We should also discern the values that underpin any revenue raising mechanism for a democratic society in the 21st century. Amid all the conversation, debates and differing perspectives, in 1996 the Australian Council of Social Service and the Australian Chamber of Commerce and Industry taxation summit achieved some consensus on the criteria for an ideal tax system. The summit produced a document which posed this question: what are the benchmarks against which any taxation system should be measured to objectively assess its merits? The two groups reached consensus on seven criteria, and I refer to a slide which lists them.
The first criteria was equity - that the overall taxation system, as opposed to its individual elements, ought to be progressive. People of similar circumstances and means ought to have similar taxation responsibilities. There must also be an element of redistribution of resources between high-income and low-income people. The second was economic efficiency - that taxation should impact neutrally on various taxpayer groups and economic sectors and that commercial considerations should not be skewed by tax considerations.
The third was simplicity - that taxpayers can clearly understand their obligations. The fourth was transparency - that taxpayers must understand how and when they are paying taxes, whether they are direct or indirect, and how much they are actually paying. The fifth was costs - that compliance and collection costs should be kept at a minimum. The sixth was incentive - that there should be a minimal incentive for avoidance. The seventh was that there should be sufficient tax and that it should be adequate so that good governance can be met and community expectations related to physical and social infrastructure can also met.
There is little disagreement among people, including those we have heard from this afternoon, that the Australian taxation system is in serious need of an overhaul. Apart from identifying the declining taxation base, the overdependence on PAYE taxpayers and the distortions in the system which favour passive investment and the vertical fiscal imbalance, it is also clear that the present taxation system is inequitable and inefficient.
In public debates a large amount of attention has been focused on reforming the overall taxation system, but I think most of the attention has really focused on the commonwealth. With its greater measure of responsibility, that can be understood; but I think it is obvious from what has been said this afternoon that there needs to be a conversation about the other levels. We have talked about the states, but not much attention has been paid to taxation at local government level. That needs to be part of another conversation.
In 1997 an issues paper was written for the State Council of Social Service directors. It began by stating that the issue of national taxation reform has focused predominantly on various proposals to reform commonwealth taxation arrangements. However, the implications of this debate must necessarily involve a consideration of the role of state taxes and the implications of a growing push by the states since 1990 for a guaranteed share of commonwealth revenue.
We have also heard this afternoon that over the past few years state governments have had diminishing revenue to fund the responsibilities given to them under the constitution - namely, the provision of the majority of Australia's economic and social infrastructure. In response the states have been forced to raise revenue by other means, and this in part explains the growing reliance on things like the sale of public assets, state taxes and charges and the regressive taxes that form part of the framework of state taxation.
A number of factors have caused the serious undermining of the financial bases of the states. I am not going to go into those factors in detail, although I have referred to them in my paper. There is the decrease in general purpose payments and the increase in specific purpose payments, although the increase in the specific purpose payments has not been commensurate with the decrease in the general purpose payments - but there are currently around 90 tied grant programs between the commonwealth and the states. The states argue that such arrangements create a lot of problems for them - a lack of flexibility, blurring of accountability, duplications in administration and distortions in spending. A few other factors not yet touched on include the slow rate of growth in the Australian economy. Based on the estimate that the average rate of growth since 1975 has been a little bit over 2 per cent per annum, billions of dollars of potential taxation revenue has been forgone. The states have had to absorb that; and the indirect costs of employment inequality has been one of the consequences of that.
We have talked about the loan council and the changes since 1990 to the global limits on borrowing that the states have been forced to bear. We have also heard a little about the changes in the cost of financial deregulation and, lastly, about the High Court decision on the tobacco taxes, which again has the potential to seriously undermine the revenue base. However, I want to come back to the seven principles I have enunciated because they provide a useful framework for evaluating the impact of existing commonwealth-state taxing arrangements.
I would argue that based on virtually every criterion we can conclude that Australian citizens are not being served well by our current system. Firstly, I will talk a bit about equity. It is generally accepted in our community that the burden of tax should fall more heavily on those with the greater capacity to pay. While income tax rates are nominally progressive, the full impact of the present tax system is more or less proportional due to a number of factors such as the growing debate on consumption taxes and the scope for high-income people to legally avoid tax through artificial income splitting, negative gearing, tax shelters and general tax bracket creep.
State taxing matters also contribute to the lack of equity in the overall tax system. Because of the taxation powers allocated to the states under the current commonwealth-state agreements and the reductions in federal grants, most of the state taxing options tend to be regressive.
They tend to be taxes levied on goods and services rather than linked to income, so they hit a person on a low income harder than a person on a high income. A clear example of this is petrol tax, which is charged at a flat rate per litre. Those who use petrol pay the same amount regardless of their incomes, which means that those on low incomes use a greater proportion of their discretionary money to buy petrol than do those on high incomes. Of course, the tendency for low income people to occupy cheaper housing that is available on the urban fringe only exacerbates this problem.
Gambling taxes, which have grown at an astronomical rate and which are projected to reach around 15 per cent of Victorian state revenue by the year 2000, are also regressive. The number of electronic gaming machines is twice as high in areas of low income as it is in areas of high income, while research from the Victorian Casino and Gaming Authority already shows that people on low incomes are more likely to use discretionary family income on gambling than high-income gamblers. It can also be said that the relatively heavy tax burden borne by low-income households could be offset by social spending in their favour. We have heard a little bit about that this afternoon - for example, things like social security payments and funding for health, welfare and education. But recent cuts in spending on those areas by both state and commonwealth governments have also affected the redistribution mechanism.
The second point concerns economic efficiency. Of course, we know that one of the major constraints on the state's own source of revenue growth is the perceived need to maintain a competitive tax structure in relation to other states. This is the beggar-my-neighbour stuff that Martin was talking about. Generally, state governments have claimed that the level of state taxes and charges is an important factor in the choice of residence made by individuals and enterprises, so states have been forced to keep taxes on businesses low and to offer particular concessions. A clear example of this is the pressure that the Victorian government is now facing from Crown Casino. The recent instabilities in the stock market saw Crown Casino shares drop at a rate of around 15 per cent. The following is taken from a recent report in the Age:
Analysts say there had to be concerns about the gaming sector in general as casinos such as Crown have specifically aimed at Asian gamblers as high-revenue generating customers. The casino complex had invested heavily in an opulent complex to appeal to these customers.
Now Crown is asking the state government to give it state taxation concessions for its high rollers. One of the arguments is that competition will inevitably take these customers away from Victoria. I guess this was what Nick was partly talking about in being caught between a rock and a hard place. The competitive framework is putting pressure on state governments, which have arrived at a point where their revenue bases have now been stretched but at the same time their taxation capacities are being offered up in the name of competitive federalism. I think the community is the real loser in all of this.
The next area is simplicity. According to the 1997 budget statement presented by the Victorian Treasurer, Alan Stockdale:
Victoria's tax revenues are derived from an array of typically narrowly based taxes. Even the largest of these, payroll tax, raises only 26 per cent of the total, while each of the other tax bases contributes no more than 15 per cent and some less than 5 per cent.
I have not heard anyone in the taxation debate arguing for a more complex system, so obviously simplicity has to be one of the criteria. The current commonwealth-state taxing arrangements and the mechanisms that the states are forced to rely upon are extremely complex.
Transparency is the next area. One of the problems with a number of state taxes is they are what I call Clayton's taxes - the taxes you have when you are not having taxes. While there is no deliberate cover-up, the reality is that it is extremely difficult to ascertain who is really paying what when one takes into account both income and consumption taxes. Research shows that where there is a lack of transparency in our taxation process. This contributes to high levels of public cynicism and a lack of commitment to compliance. In an ideal world the community would see tax as an opportunity to contribute to the common good as a kind of reflection of their collective aspirations, but when people are unsure of their responsibilities, or they feel that others are covering up, that actually breeds and contributes to a climate of mistrust.
The next area is cost. Of course we know that taxes raised by the state generally involve significant administration and compliance costs. According to Professor Freebairn from Melbourne University:
The complexity of the Australian tax system and its high compliance costs, as evidenced by thousands of pages of legislation and regulation, the high use of expensive legal and other advice by taxpayers and direct compliance cost estimates follow from basic structural flaws. Different tax systems, different tax bases across jurisdictions, different tax rates and arbitrary demarcation borders, special concessions and so forth directly add to complexity and uncertainty. But they also provide the opportunities of and the rewards for tax avoidance. This sets up a never ending and moving game between taxpayer and tax collector, involving expensive usage of resources better employed for other purposes.
I will not go into the matter of minimal incentives for avoidance. Needless to say, obviously that is a principle that we would need to be doing some work on, given our eroding tax base.
Lastly, let me make a few comments on adequacy. It is well known that Australia is one of the lowest taxing countries in the OECD. In fact, in 1992 we were the lowest taxing country. Of course, a popular poll would indicate that most people would disagree with that. Knowing this fact does not necessarily mean we should rush out and increase taxes - I think we have heard enough about the lack of a political climate in which people feel they can do that - but it does mean we should have a good look at our tax mix to ensure that the system is really working in the best interests of all Australians.
Lack of revenue is a constraint on government spending in vital areas of social security, health and the enhancement of employment opportunities. Contrary to popular belief, for example, Australia's expenditure on welfare as a proportion of commonwealth outlays has not risen over the past 20 years. Neither is there evidence that low-taxing, low-spending countries have better economic growth rates than their high-taxing, high-spending OECD counterparts. In a recent paper on taxation reform the Brotherhood of St Laurence said:
In Australia we do not currently raise sufficient tax revenue to carry out the necessary spending to achieve a fairer society. Commonwealth revenue as a proportion of GDP is at its lowest level in 20 years.
It is clear that the states are under increasing pressure to fund essential services for their citizens because of the erosion of their resources. It is no wonder that in this climate they are turning to other solutions - and of course, in one particular area of these they are not alone. In his comprehensive analysis of the American gambling industry, Robert Goodman describes how political leaders have expanded gambling opportunities as a direct response to a fiscal crisis. It is an instructive case study, I think, because it points to the inadequacy of this strategy in the long term in increasing state revenue.
From the mid-1960s to the mid-1970s the average rate of return on United States corporate investment eroded substantially. As business slumped, corporate leaders enlisted governments to help with lower taxes, state loans, changes in labour laws and environmental regulations and all sorts of other concessions because they saw their profits flying out the window. Businesses moved their operations from state to state and contributed to what economist James O'Connor has named the fiscal crisis of the states. This situation was further exacerbated as time went on by growing international competition, the trend to downsizing, and the winding down of the public sector. To compound all that, in this context the Washington governments of Reagan and Bush were unsympathetic to the states, which began a frantic search for additional revenue to face the mounting demand for the additional services and the public's cry for lower rates of personal taxation.
Goodman says that:
During the past 30 years the extent of a state government's economic problems has had a direct bearing on its eagerness to legalise and operate gambling venues.
However, the evidence is mounting in the United States that this strategy is fraught with danger and may not be a substantial revenue or sustainable revenue source in the future:
In expanding gambling enterprises political leaders contribute to future fiscal crises of government in two ways. The first is that in order to be effective they must divert large amounts of consumer spending away from other business. Secondly, they must contend with the public and private costs that will result when more people gamble. While the state may be able to use its new gambling enterprises as a short-term way to create hundreds of millions of dollars in public revenue and create thousands of jobs in the gambling industry, over the long term government must cope with flattening or even falling gambling revenues -
I think we are already beginning to see some signs of that here -
while dealing with the increased private and public sector costs.
These costs - I am taking primarily about economic costs such as loss of investment income, loss of worker productivity, higher levels of personal debt, additional insurance claims, extra police, court and incarceration costs and, of course, welfare costs - all end up on the debit side of the state finance ledger. Goodman concludes:
What began as a strategy to infuse the local economy with public revenues and jobs instead will result in a crippled economy with fewer local businesses and a full-blown fiscal crisis.
I use that as a case study around the issue of adequacy - and the need, of course, is quite apparent. The states, by being forced by vertical fiscal imbalance, the drop in commonwealth revenues and all those other difficulties we have in our current complex and seemingly unworkable taxation system - -
These kinds of mechanisms in the end may not prove to be the goldmines people think they will be.
In conclusion, over the past decade federal government revenue has declined by 2 per cent of GDP, which is equivalent to $10 billion in lost revenue. For the reasons I have outlined, the taxation base of the states is both narrow and fragile. At the same time, there is an increasing demand on government to address social needs, improve economic infrastructure and provide employment for Australian citizens. While there is scope for efficiency at all levels, it is clear that there are some fundamental inadequacies in our revenue base which must be addressed. Given that the states bear the greatest burden of responsibility in enhancing the lives of Australian citizens through the provision of health, welfare, education and community safety, it is reasonable to expect that they will be key players in the ongoing debates about taxation reform.
The current system places the states in a position of relative disadvantage. Any reforms must increase the their capacity to have a reliable and sustainable revenue base which is progressive rather than regressive and which promotes prosperity that is to be enjoyed by all. It is timely that the state premiers are meeting tomorrow. We have had a fairly universal call for taxation reform and for an ongoing, reliable and sustainable revenue base to be given to the states, and I think that should be heeded.
Witness withdrew.
5/11
Public Hearing