There is a contradiction at the heart of tax reform. Timid governments, worried about a voter backlash, do too little, too late.
Yet in the medium to long term, major structural changes in the economy and society may force real tax reform on government.
The Henry Tax Review vision for tax reform in Australia was based on a couple of key drivers of change. These included an ageing population, the public expectation of high levels of public services and the ongoing integration of the Australian economy into the global economy.
It also pinpointed the shift of economic power to Asia, the dependence of the Australian economy on foreign investment, the need to address climate change and the identification of a range of inefficient (mainly state and territory) taxes hampering economic development.
These pressures all led the Henry Tax Review to recommend a shift in direction for tax to four robust and efficient tax bases. These were a broader personal income tax base, a business income tax with more growth-oriented rates and base, private consumption and economic rents from minerals and land.
“Tax it lightly”
To sum it up, if it moves, tax it lightly; if it doesn’t, tax it more highly.
Land can’t move and most labour can’t, unlike finance and investment capital which can be moved with the click of a mouse.
The will to implement a grand tax reform vision may be beyond the current government, especially with memories of the Resource Super Profits Tax clearly in its mind.
Be that as it may, there is one sector in the community missing from this tax reform debate and specifically from the Forum discussion, and that is local government.
As John McLaren and I argued in our paper for the Australian Centre of Excellence for Local Government, The Henry Review of Australia’s Future Tax System: Implications for Local Government’, this tier of government “now has an opportunity to press forward and attend to its concerns about funding and the provision of services to its constituents.”
To that end we thought that the sector could “influence the current and long term debate about the future shape of the Australian tax and tax transfer system.”
But if the Federal Government’s discussion paper for the Forum is any guide, that won’t be happening.
Local government per-se receives only one mention. That is in the first chart which shows clearly that, apart from the Petroleum Resource Rent Tax, the most efficient (or least inefficient) tax is municipal rates levied by local councils.
Why is local government important? It is democratic, transparent and performs a vital delivery role for many basic services, from roads and road maintenance to water supply and sewerage, community facilities like swimming pools, public halls and libraries, aged care facilities, stormwater drainage, waste management, natural resource management and emergency and disaster response and relief.
It’s economic impact too is huge. The sector employs more than 185,000 people. It owns fixed assets and land worth more than $300 billion. It raises over $32 billion in revenue. That is 3% of Australia’s total tax take. It spends over $27 billion.
The latest available figures show that 83% of local government funding comes from its own sources, according to a 2009 Productivity Commission report into local government finances, with property rates and fees and charges accounting for most of this.
(However, the combined share of this own-source funding has decreased over time, reflecting growth in other revenue sources, such as developer charges and fines.)
These figures need unpacking because they hide a divide between rich councils - which can raise all their revenue needs from property taxes and user charges - and less well-off councils, mainly in rural and regional areas, who rely more heavily on grants. It is estimated between 10% and 30% of Australia’s councils face financial sustainability issues.
Tax reform offers an opportunity to provide local government with a secure tax base and a deepening of its implantation into the democratic soil of Australia’s nationhood and nation building.
Certainly there are broad hints in the Henry Tax Review of a new invigorated role for local government both as a revenue raiser and protector and developer of assets and services.
For example, opportunities for local government input into the shaping of tax reform exist around land tax debates. The Henry Tax Review recommended harmonising state land taxes and local government rates.
Councils impose taxes on land in the form of rates, and states in the form of land taxes. But the base, rate and thresholds vary.
For that reason, the Henry Tax Review suggested increasing, broadening and standardising land tax in each state, and that local government rates adopt the same base as state land tax. In addition there could be joint administration of the taxes, with one central contact point.
Indeed one could almost imagine some sort of tripartite deal involving the Commonwealth, states and territories and local government in which land tax revenue provided a secure base for councils to provide the services their constituents need.
Integrating land tax bases
Certainly the Henry Tax Review saw its suggestion about the integration of state and local government land tax bases as offering the opportunity for a reassignment of tax responsibilities within the federation.
It would be easy for example to alter the rate of tax charged by each level of government, and hence the revenue each collects, but leaving overall revenue untouched.
But there are other areas too where a federal government with foresight and vision might utilise the expertise of, and appeal to, the self-interest of local government.
For example, the Henry Tax Review made a number of recommendations about road user pricing including congestion charges. But it also suggested that road owners (local government owns 80% of Australia’s roads) be properly reimbursed for the damage heavy vehicles do to their roads. Again the Government will not pursue these recommendations.
A vital role
The Henry Tax Review saw itself as planting seeds for the future. While the role and funding of local government is not part of the Tax Forum, we can be confident that the general issue - as well as specific matters such as land tax and road user pricing - will continue to arise.
As John McLaren and I wrote: “The drivers for reform, the vital role local government plays in our society, and the breadth of possible tax reforms, all present opportunities for local government to raise longstanding issues about the adequacy and certainty of its revenue base in a new light, and to seek systemic rather than ad hoc improvements.”
Unfortunately the Tax Forum is part of that ad hoc and visionless approach to tax reform. Local government must bide its time, again, and develop strategies to put it into tax reform discussion and debate.
John Passant is one of the key organisers of the Tax Reform: Results and Prospects Conference being run by the Faculty of Law and the ANZSOG Institute of Governance at the University of Canberra on 5 December.
Speakers include Secretary of the Australian Council of Trade Unions, Jeff Lawrence, General Manager of the Revenue Division, for Treasury Department Rob Heferen, and Professors John Freebairn, Henry Ergas, Chris Evans and Michael Walpole, as well as the Tax Institute’s Robert Jeremenko and Dr Andrew Leigh MP.