tag:theconversation.com,2011:/us/topics/reforming-the-federation-10736/articlesReforming the federation – The Conversation2016-03-31T19:20:59Ztag:theconversation.com,2011:article/569832016-03-31T19:20:59Z2016-03-31T19:20:59ZThree tax alternatives to restore sovereignty to Australia’s states<p>Prime Minister Malcolm Turnbull’s proposal to hand over to the states some of the income tax powers now held exclusively by the Commonwealth is perhaps the most extraordinary event in recent Australian political history.</p>
<p>If it happens it will overturn nearly a century of the Commonwealth accumulating power at the expense of the states, commencing with the <a href="https://en.wikipedia.org/wiki/Amalgamated_Society_of_Engineers_v_Adelaide_Steamship_Co_Ltd">Engineers Case in 1920</a>. The Uniform Taxation Act in 1942 helped to accelerate the process by giving the Commonwealth exclusive control over income tax.</p>
<p>The long-term consequences have been that while the states continue to deliver crucial services to the public, especially in health and education, they lack the financial capacity to fund those services without Commonwealth assistance. Hence, beginning in the 1950s, the Commonwealth began funding education, firstly universities and later schools, as the states proved incapable of providing sufficient funds for them.</p>
<p>This condition where the central government raises more money than it needs and the states are incapable of doing so is referred to as <a href="https://theconversation.com/renewing-federalism-what-are-the-solutions-to-vertical-fiscal-imbalance-31422">vertical fiscal imbalance.</a> It means, in practice, that the Commonwealth is able to use its excess funds to dictate policy to the states. The states become subordinate entities to the Commonwealth.</p>
<p>It is interesting to note that Turnbull refers to the states as sovereign entities. They are in their areas of responsibility, but the power conferred on the Commonwealth through vertical fiscal imbalance has seriously eroded that sovereignty. The states have become mendicants who regularly go to Canberra to beg for money.</p>
<p>Equally of note is the use of the word “subsidiarity” in the Commonwealth government’s <a href="https://federation.dpmc.gov.au/issues-paper-1">first federation issues paper</a> from 2014:</p>
<blockquote>
<p>“subsidiarity, whereby responsibility lies with the lowest level of government possible, allowing flexible approaches to improving outcomes.”</p>
</blockquote>
<p>If subsidiarity is to be a fundamental principle of governing in Australia, then those responsible must also be financially responsible. Otherwise they cannot be sovereign and just become tools of the central government.</p>
<p>In the final analysis it all comes down to finance and financial independence.</p>
<p>The problem is that at present the Commonwealth holds the whip hand in financial matters. To achieve subsidiarity and make states genuinely responsible they will need to find sources of funding outside of going to the Commonwealth.</p>
<p>Unfortunately, the cards are stacked against them as the High Court has ruled that “excise”, which Section 90 of the Constitution says is granted exclusively to the Commonwealth, also covers sales taxes. This is why the Commonwealth became the exclusive owner of the GST, which it distributes to the states.</p>
<p>As the states lost the capacity to levy income tax in 1942, their taxation options are very limited. There is land tax (including council rates), stamp duty and payroll taxes, none of which raises an enormous amount of money. They also run lotteries. This is why income taxes are viewed as the best way of restoring some of the financial independence of the states.</p>
<p>If the states are to levy income taxes, it only makes sense if, in the longer term, each state can determine the rate of that income tax. The great fear is that this will contravene the principle of horizontal fiscal equalisation, or the idea that each state should have the same level of service as the others. Competition, it is argued, will lead to a <a href="https://theconversation.com/state-tax-competition-could-lead-to-a-race-to-the-bottom-56998">“race to the bottom”</a>, with the consequence that lower taxation will lead to a lower quality of service in health and education.</p>
<p>But to truly restore sovereignty and the principle of subsidiarity, some power to tax income must revert to the states.</p>
<h2>Alternative options</h2>
<p>Turnbull has sought to encourage innovation and “agility”, and perhaps there may be other ways out of this dilemma. Here are some possibilities.</p>
<p>*<em>Give states power over sales tax
*</em>· </p>
<p>As the High Court defines sales tax as excise, the wording of Section 90 could be changed so that sales tax is explicitly excluded from the definition of excise. This would require a referendum, but it would give the states much greater flexibility in their taxing regime. It wold mean that states could, in effect, raise their own equivalents of the GST, as happens in some other countries, thereby allowing the Commonwealth to lower the rate of its GST.</p>
<p>*<em>Expand land tax
*</em></p>
<p>Whenever this topic is raised one response that is invariably raised is that the states should look at ways of expanding their land tax. This could be done by increasing the rate at which land is taxed and/or lowering the threshold at which payment begins.</p>
<p>*<em>Restore inheritance taxes
*</em></p>
<p>The states once raised funds through inheritance taxes, but these were abolished some 40 years ago. Given the amount of money now locked up in real estate in places like Sydney and Melbourne, there could be significant sums to be raised in this way. </p>
<p>Moreover capital acquired by simply living in a house for a certain number of years can hardly be compared to the money one earns working at an occupation. Beneficiaries of an estate cannot be construed as having deserved their inheritance.</p>
<p>In all of the cases listed above the imposition of any such state taxes would need to be matched by a decrease in Commonwealth taxes. </p>
<p>The restoration to the states of some power to impose income tax appears on the surface to be the best way of both restoring sovereignty and embedding subsidiarity into the practice of government in Australia. There is much to be said for doing it. But if we are to grasp the opportunities of the present we need to consider other possible options. </p>
<p>What matters is less the means than the end: to restore Australia to a genuine federation.</p><img src="https://counter.theconversation.com/content/56983/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gregory Melleuish receives funding from the Australian Research Council. He is a member of the Academic Advisory Board of the Menzies Research Centre </span></em></p>There’s more than one way to restore Australia to genuine federation.Gregory Melleuish, Associate Professor, School of History and Politics, University of WollongongLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/273162014-06-09T20:36:49Z2014-06-09T20:36:49ZCould ‘hard budget constraints’ fix the federation’s fiscal feud?<figure><img src="https://images.theconversation.com/files/49929/original/vbxmn4cq-1401672733.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Realistic reforms to federal-state financial relations are possible with the right amount of political will.</span> <span class="attribution"><span class="source">AAP/Alan Porritt</span></span></figcaption></figure><p><em>The federal budget reignited debate over federal-state relations with a decision to cut $80 billion funding for the state responsibilities of schools and hospitals over the coming years. So how can federal-state co-operation in tax make Australia a better country?</em></p>
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<p>A common feature of most federal systems of government is that the states depend on transfers from the Commonwealth for a substantial share of their revenue. <a href="http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/5512.0Main%20Features72012-13?opendocument&tabname=Summary&prodno=5512.0&issue=2012-13&num=&view=">In Australia</a>, the states (and territories) account for about 40% of aggregate federal and state government expenditure, but they collect less than half of this sum from their own taxes and charges. </p>
<p>About 60% of the Commonwealth transfers to the states are GST revenue as an untied grant. A bit over 20% of state revenue comes as tied Commonwealth grants. Tied grants are those which the states accept with certain terms and conditions under <a href="http://www.austlii.edu.au/au/legis/cth/consol_act/coaca430/s96.html">Section 96</a> of the Constitution.</p>
<p>This “imbalance” of state expenditures and the taxes they collect is referred to as vertical fiscal imbalance, or VFI.</p>
<p>There are rational reasons for the misalignment of state expenditures and taxation found in all federal systems, not just Australia. However, a <a href="http://faculty.vassar.edu/kennett/Kornai.htm">“hard budget constraint”</a>, where states can both freely choose what program to increase or decrease and freely fund the changed expenditure with an increase or decrease in their own taxation, could improve the responsibility and accountability of state expenditure and taxation choices.</p>
<h2>Increased competition</h2>
<p>Apart from <a href="http://www.aph.gov.au/About_Parliament/Senate/Powers_practice_n_procedures/odgers/%7E/link.aspx?_id=2E4D926C3A2A4760928580E8C584150B&_z=z">what’s specified</a> in the Constitution, there are logical arguments for a more appropriate allocation of government spending and taxing powers between the Commonwealth and the states. This would involve the Commonwealth transferring some revenues to the states.</p>
<p>On the expenditure side, many government goods and services will be more efficiently supplied and better meet democratic principles and the diverse needs of people if provided by local government, rather than a one-size-fits-all central government. Education, health, law and order and transport infrastructure fall into this category.</p>
<p>However, government expenditures providing national public goods – including defence, foreign affairs and redistribution for social equity objectives – are more suited to central government provision. Macroeconomic management via fiscal and monetary policy levers also falls to the national level. </p>
<p>In reality, however, the line between a desirable Commonwealth and state expenditure is a broad, grey one.</p>
<p><a href="http://www.curtin.edu.au/research/jcipp/local/docs/Competitive_Federalism.pdf">Competitive federalism</a> can facilitate the efficient provision of many government goods and services. Comparing expenditure programs and taxes across the different states may also lead to increased interstate migration of businesses and people.</p>
<p>Changes in peoples’ preferences, new technology and so forth call for a continuous process of experimentation and innovation to better deliver government goods and services. At the same time, competition between the states does not rule out co-operation between the states or with the Commonwealth.</p>
<h2>Challenges of mobility for taxation</h2>
<p>A second set of arguments behind an imbalance of state revenues and expenditures concerns the location of different taxes. To avoid inefficient migration of resources between the states, state tax revenue bases should be on relatively immobile inputs, especially economic rents on land and other natural resources. </p>
<p>Relatively geographic mobile inputs and a progressive income tax – to achieve society-wide redistribution and equity goals – are best left to the Commonwealth. Consumption and payroll taxes fall in between as arguably state or Commonwealth taxes. Simplicity for lower administration and compliance costs favour a central tax collection, even if states set different rates on a common base.</p>
<p>In principle, states’ dependence on the Commonwealth for over half of their revenues need not be a problem if the states face a “hard budget constraint”. If a state wants to spend $100 million more or less on education or health, it can both freely choose what program to increase or decrease and freely fund the changed expenditure with an increase or decrease in its own taxation. </p>
<p>As a result, states are publicly and transparently responsible and accountable for changes in their budget policies.</p>
<h2>Resolving the stand-off</h2>
<p>Under current Commonwealth-state financial relations the states arguably do not always face a hard budget constraint. In this context, a number of reforms could improve the accountability of both the Commonwealth and the states to improve spending and taxing programs.</p>
<p>First, the removal of joint involvement of two levels of government in the same expenditure area is necessary. A clarification of responsibility would reduce challenges in accountability, blame-shifting and duplicated administration.</p>
<p>Second, replacing Commonwealth tied grants with untied transfers would increase state autonomy and responsibility for their expenditures. The levels of the grants should be credible, transparent and – to an extent – independent of short-term fiscal circumstances of both the Commonwealth and states.</p>
<p>Third, a hard budget constraint requires state governments to have access to their own broad-based and relatively efficient taxes. An obvious option is to broaden the land tax base. Removing the special exemptions for a broad payroll tax base likely will require a co-operative agreement across the states.</p>
<p>Fourth, co-operation between the Commonwealth and the states – and between the states themselves – would be assisted with institutional arrangements to provide greater equity of influence and a longer-term view of challenges to Commonwealth-state financial arrangements.</p>
<p>The <a href="http://www.theaustralian.com.au/national-affairs/policy/hockey-eyes-state-federal-rewrite/story-fn59nsif-1226744820867">forthcoming white paper</a> on reforming the federation provides a vital opportunity to improve Commonwealth-state financial relations for a more productive economy and improved accountability of governments. Realistic reforms to federal-state financial relations are possible with the right amount of political will.</p>
<hr>
<p><strong>Further reading:</strong> <a href="https://theconversation.com/topics/reforming-the-federation">The Reforming the federation series</a></p><img src="https://counter.theconversation.com/content/27316/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Freebairn does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The federal budget reignited debate over federal-state relations with a decision to cut $80 billion funding for the state responsibilities of schools and hospitals over the coming years. So how can federal-state…John Freebairn, Professor, Department of Economics , The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/273692014-06-08T21:10:00Z2014-06-08T21:10:00ZIs education better off in state or federal hands?<p><em>The federal budget reignited debate over federal-state relations with a decision to cut $80 billion funding for the state responsibilities of schools and hospitals over the coming years. So how can federal-state co-operation in education make Australia a better country?</em></p>
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<p>It is not surprising that the financing of education in Australia has been a hot topic for decades. Almost everyone is affected or connected in some way to it. Considerations have been made about performance standards and equity in attaining desired standards, but these issues have tended to morph into “give us more money” and “who should pay”. </p>
<p>This focus on finance has enabled centralists to move the federal government more into the management of education institutions with the use of its stronger financial situation. </p>
<p>However, this is limited by the constitution, which gives states responsibility for education. The centralist wish for eliminating state involvement is fanciful, since there is little chance of any constitutional change.</p>
<h2>What’s the alternative?</h2>
<p>The alternative approach is to decentralise the financing of education to allow decisions to be made by those closest to the action. Both the Gonski review <a href="http://www.appa.asn.au/content/gonski-report/Review-of-Funding-for-Schooling-Final-Report-Dec-2011.pdf">final report</a> and the Commission of Audit <a href="http://www.ncoa.gov.au/">report</a> proposed the adoption of decentralisation through the principle of subsidiarity. </p>
<p>A decentralised approach essentially involves the federal government minimising its role to national co-ordination, <a href="https://theconversation.com/securing-australias-future-education-19606">leaving the states to manage education</a>.</p>
<p>With regard to schooling, the overall objective should be that school sector authorities in each state have sufficient recurrent finance to give all of their students the same opportunity to achieve minimum performance standards at each school level, culminating in Year 12 graduation. This could be achieved by a small group in Canberra with responsibilities:</p>
<ul>
<li><p>to set minimum student performance standards for each school level;</p></li>
<li><p>to develop a school sector funding model based on resource policies (student-teacher ratios, average teacher salary package, other recurrent costs, and expected private financial input);</p></li>
<li><p>to recommend financial allocations to each school sector in each state, within defined financial limits and taking account of sector differences and future financial sustainability; and</p></li>
<li><p>to monitor average sector student performance and to research the reasons for school sectors that are slow to improve.</p></li>
</ul>
<p>The federal government would take the group’s financial recommendations to the states to determine agreed contributions, which would then be placed in each state’s coffers. A state would retain the amount earmarked for government schools, distribute the Catholic sector funds to the Catholic authorities, and distribute funds for the independent school sector to a school registration authority in the state for distribution.</p>
<p>School sectors would report annually to the school registration authority in their state and to the federal government, explaining the method of allocating funds to their schools and on changes in student performance standards.</p>
<p>The federal government should be the dominant funder of the universities and the vocational education sector due to their importance for Australia’s international reputation. </p>
<p>Decentralisation in the form of more reliance on market prices is contained in the recent federal budget. States, however, should still be responsible for vocational education providers that operate only within one state.</p>
<h2>Some associated issues with the current system</h2>
<p>Each state needs to address the issue of equity across their upper secondary programs in schools and vocational education institutions. Governments across Australia should consider compulsory schooling or equivalent being extended from 17 years of age to completion of Year 12 or equivalent program.</p>
<p>Currently, states do not have the funds to match their education financing needs. A growth tax could could resolve this. </p>
<p>Some time ago the GST was introduced for similar reasons. An increase in the GST rate, however, is unlikely to occur given the difficulty of obtaining general public support. An alternative is to redirect an agreed percentage of income tax to the states for particular areas such as education. </p>
<p>It must be hoped that sorting out decentralised education funding arrangements will lead to a renewed focus on what is done with the money – namely, ways to improve educational outcomes for all students.</p>
<hr>
<p><strong>Further reading:</strong> <a href="https://theconversation.com/topics/reforming-the-federation">The Reforming the Federation series</a></p><img src="https://counter.theconversation.com/content/27369/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kevin Gould has received funding for doctoral research from Central Queensland University.</span></em></p>The federal budget reignited debate over federal-state relations with a decision to cut $80 billion funding for the state responsibilities of schools and hospitals over the coming years. So how can federal-state…Kevin Gould, Researcher in Economics of Education, CQUniversity AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/272592014-06-05T20:40:16Z2014-06-05T20:40:16ZFederal-state health relations: can anything be salvaged?<figure><img src="https://images.theconversation.com/files/50083/original/wy669w8v-1401774950.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The chances of a single level of government taking charge of Australia's health system are slim.</span> <span class="attribution"><span class="source">AAP/Quentin Jones</span></span></figcaption></figure><p><em>The federal budget reignited debate over federal-state relations with a decision to cut $80 billion funding for the state responsibilities of schools and hospitals over the coming years. So how can federal-state co-operation in health make Australia a better country?</em></p>
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<p>Maybe there is a parallel universe where the Commonwealth and states work in harmony to improve the health and health care of Australians. But that is a vision unlikely to be realised in Australia for years to come, after the 2014 federal budget took a <a href="https://theconversation.com/abbott-draws-up-new-battlelines-in-the-fight-over-federalism-26743">wrecking ball</a> to trust in Commonwealth-state relations.</p>
<p>Instead, the <a href="http://www.aph.gov.au/parliamentary_business/committees/house_of_representatives_committees?url=haa/./healthfunding/report.htm">blame game</a> is back, and the states can now blame Commonwealth cuts for service shortfalls. But what if we could start again and redesign Australia’s system for delivering health care?</p>
<h2>What do health professionals want?</h2>
<p>Ask clinicians and they will give you a litany of Commonwealth-state disjunctions that they see in day-to-day practice. Their panacea is often that a single level of government should be responsible for the whole health care system. That is usually the Commonwealth because of its access to more secure revenue growth. The benefits of state responsibility in terms of <a href="http://www.caf.gov.au/Documents/AustraliasFederalFuture.pdf">potential for innovation</a> and local political accountability are forgotten. </p>
<p>Doctors often want the Commonwealth to take over responsibility for health care because they see how tight state budgets are. These budgets are a victim of the federation’s endemic problem of <a href="http://www.taxreview.treasury.gov.au/content/Paper.aspx?doc=html/publications/papers/report/section_10-06.htm">vertical fiscal imbalance</a>. </p>
<p>Transferring responsibility to the Commonwealth would better align revenue and expenses. The states opposed a greater Commonwealth role when the Rudd government <a href="https://theconversation.com/will-the-buck-stop-with-rudd-on-fixing-the-hospital-system-15571">suggested it</a>. The Abbott government, however, is pursuing the reverse direction.</p>
<p>So the chances of the single government option occurring in Australia are slim. A continuation of the current dual responsibility is inevitable. How, then, can it work better?</p>
<h2>Assessing the idea of ‘reciprocal interdependence’</h2>
<p>In countries with both single and multiple funders, the health system suffers from the most complex of co-ordination problems. It exhibits what organisational theorist James Thompson calls <a href="http://books.google.com.au/books?id=YhHo7aHmBGMC&printsec=frontcover&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false">“reciprocal interdependence”</a>: in other words, the outputs of one system are the inputs of another, and vice versa. </p>
<p>Australia has dozens of examples. One is that inadequate primary care – the Commonwealth’s responsibility – causes increased (and <a href="http://www.safetyandquality.gov.au/wp-content/uploads/2009/01/Potentially-preventable-hospitalisations-A-review-of-the-literature-and-Australian-policies-Final-Report.pdf">potentially avoidable</a>) public hospital admissions and increased emergency department presentations, for which the states pay. </p>
<p>Also, better rehabilitation and geriatric care in state public hospitals could reduce Commonwealth costs in residential aged care.</p>
<p>Budget night rhetoric suggested that a neat dividing line between the Commonwealth and the states could be established. Public hospitals would be on the state side. But even ignoring the issues of reciprocal interdependence, some public hospital services, such as specialist medical outpatient clinics in public hospitals, are direct substitutes for Commonwealth-funded activities.</p>
<p>Reciprocal interdependence requires effective co-ordination. This can occur in two complementary ways: government can ensure that health structures talk to each other, and that financial incentives are aligned. All the talk in the world will not lead to effective co-ordination if financial incentives pull in the wrong directions.</p>
<h2>Breaking promises and agreements</h2>
<p>Effective talk – such as joint decision-making - requires trust. Negotiations rely on agreements being adhered to. But decisions in the budget meant that an <a href="http://www.federalfinancialrelations.gov.au/content/npa/health_reform/national-agreement.pdf">existing signed agreement</a> – the National Health Reform Agreement – between the Commonwealth and the states was torn up. </p>
<p>The agreement, announced in 2011, was a good one. It introduced better alignment of financial incentives: the Commonwealth would share the costs of growth in demand on state public hospitals. So good was this policy that the Coalition made an <a href="http://lpaweb-static.s3.amazonaws.com/13-08-22%20The%20Coalition%E2%80%99s%20Policy%20to%20Support%20Australia%E2%80%99s%20Health%20System.pdf">explicit commitment</a> before the election to support it:</p>
<blockquote>
<p>A Coalition government will support the transition to the Commonwealth providing 50% growth funding of hospital services as proposed.</p>
</blockquote>
<p>Further, pre-election, the Coalition claimed that only they had “the economic record to deliver” on that promise. </p>
<p>However, the Coalition government’s first budget negated this commitment. It abolished the commitment to meet 50% of the cost of public hospital activity growth and replaced it by simply indexing in line with population growth and CPI from 2017-18. This resulted in a budget saving of <a href="http://www.budget.gov.au/2014-15/content/bp2/html/bp2_expense-14.htm">nearly A$1.2 billion</a> at the expense of the states collectively.</p>
<p>If both the Commonwealth and the states are sharing the cost of growth, then both have an interest in moderating growth. The Commonwealth could mount a business case to invest in prevention and primary care to reduce its costs from increased hospital admissions. States would be assisted to meet the future challenges of public hospital cost growth, but still have an incentive to control growth.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/50086/original/gccppt8q-1401778659.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/50086/original/gccppt8q-1401778659.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=397&fit=crop&dpr=1 600w, https://images.theconversation.com/files/50086/original/gccppt8q-1401778659.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=397&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/50086/original/gccppt8q-1401778659.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=397&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/50086/original/gccppt8q-1401778659.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=499&fit=crop&dpr=1 754w, https://images.theconversation.com/files/50086/original/gccppt8q-1401778659.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=499&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/50086/original/gccppt8q-1401778659.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=499&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The National Health Reform Agreement, signed by the Commonwealth and the states under the Gillard government, was torn up in the budget.</span>
<span class="attribution"><span class="source">AAP/Julian Smith</span></span>
</figcaption>
</figure>
<h2>Talk is cheap</h2>
<p>In order to turn talk into actions, the first step is to reduce the trust deficit. This would require the Commonwealth to restore its commitment to share in the cost of hospital growth. If 50% is too high, a slightly lower rate, say the current 45%, would still create an alignment of interests.</p>
<p>With more trust, joint decision-making and pooling of funds could have the potential to iron out the disjunctions caused by the overlapping boundaries of Commonwealth and state responsibilities. New governance structures and legally binding agreements might be required.</p>
<p>But a gabfest of talk and financial alignment won’t be enough if states don’t have adequate fiscal capacity to meet the needs for which they are responsible. The Commission of Audit <a href="http://ncoa.gov.au/report/phase-one/part-b/6-reforming-the-federation.html">proposed</a> a realignment of income tax. <a href="https://theconversation.com/raise-the-gst-the-conversation-we-have-to-have-25202">Increasing or broadening the GST</a> and <a href="http://www.smh.com.au/federal-politics/political-news/states-should-look-at-payroll-tax-rise-says-treasury-boss-20140520-38mlw.html">increasing payroll tax</a> have also been mooted. </p>
<p>States have other potential tax opportunities. The Commonwealth doesn’t tax superannuation fund earnings, and <a href="http://grattan.edu.au/publications/reports/post/budget-pressures-on-australian-governments-2014/">someone should</a>. </p>
<p>The more dramatic of these opportunities will be needed if we can’t get more co-operative arrangements, with shared responsibility, to work. All options need to be on the table to reduce state exposure to Commonwealth vicissitudes and to meet the state share of health care cost growth.</p>
<p>For taxpayers, an ideal system would mean an efficient system in terms of the cost of doing things and the choices about how we invest our health care dollars. For consumers, it would mean a system where necessary services are available and the Commonwealth and states work to ensure continuity of care. </p>
<p>More importantly, it would mean consumers are not used as the rope in a Commonwealth versus state tug-of-war. Sadly, the recent short-term budget fixes don’t provide a good ground for any of that.</p>
<hr>
<p><strong>Further reading:</strong> <a href="https://theconversation.com/topics/reforming-the-federation">The Reforming the federation series</a></p><img src="https://counter.theconversation.com/content/27259/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stephen Duckett does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The federal budget reignited debate over federal-state relations with a decision to cut $80 billion funding for the state responsibilities of schools and hospitals over the coming years. So how can federal-state…Stephen Duckett, Director, Health Program, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/273292014-06-04T20:27:33Z2014-06-04T20:27:33ZA reformed federation to match the needs of modern Australia<p><em>The federal budget reignited debate over federal-state relations with a decision to cut some $80 billion in funding for the state responsibilities of schools and hospitals over the coming years. So how can federal-state co-operation – in governance arrangements – make Australia a better country?</em></p>
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<p>Given the challenges, real and imagined, of making Australia’s existing federal system work, it is appropriate to ask whether we should have federalism at all. Or more generally, if we were designing a constitutional system for modern Australia, how should we structure it?</p>
<p>For such an exercise, we need to do two things: agree upon some basic principles and make a reasonable case for their implementation. For any plausible redesign exercise, both are necessary.</p>
<p>Alternatively, designing an ideal system might have some merit as a liberating thought exercise. For example, in <a href="http://en.wikipedia.org/wiki/The_Republic_(Plato)">Plato’s Republic</a> private property and private families are abolished to ensure citizens
are totally dedicated to the public good. But such exercises are of limited value for embedding institutional design in political practice. They may even be dangerous if taken literally by tyrants.</p>
<p>Australia is a liberal democracy and Australians committed liberal democrats, albeit with a certain commitment to egalitarianism and fairness. Their fundamental principles are liberty and equality. These two principles need to be blended in ways that maximise freedom while ensuring equality.</p>
<p>Democracy entails the people ruling, and this has to be done for a large population occupying a vast continent. People enter political societies and constitute its government to ensure and advance their preservation and well-being. Governments need to be structured accordingly, with appropriate powers but also safeguards against abuse of power.</p>
<p>To operate effectively, governments need revenue to fund their operation and policies. This has to be done in ways that are both democratically accountable and operationally effective.</p>
<h2>How many tiers of government?</h2>
<p>From the vast literatures of public policy and finance, two principles stand out: policies should as far as possible be governed at a level appropriate to their character and “natural” domain; and their financing be matched – that is, governed at the same level. The principle of subsidiarity is prominent in European political discourse and was recently <a href="http://www.ncoa.gov.au/report/phase-one/part-b/6-1-roles-responsibilities-and-duplication.html">endorsed by the Commission of Audit</a>. Its report affirms that:</p>
<blockquote>
<p>Policy and service delivery should, as far as practicable, be devolved to the level of government closest to the people receiving the services.</p>
</blockquote>
<p>How many levels or <a href="http://www.aec.gov.au/about_aec/Publications/Fact_Sheets/three_lvls.htm">tiers of government</a> should Australia have? The obvious answer is many rather than one, for maximising democratic and policy effectiveness. Having multiple levels better approximates matching policy governance with policy domains. Multiple levels expand democratic access, while also checking the potential abuse of power by oppressive majorities and unitary government.</p>
<p>Four levels seem appropriate: local, regional or state, national and international. Advanced liberal democracies including Germany, Canada and the United States have the first three and incomplete aspects of the fourth. </p>
<p>This fourth level has regional as well as multinational dimensions. For example, the European Union for Germany and the American Free Trade association for the United States and Canada. Developing international governance in an increasingly globalised world is a major current challenge.</p>
<p>In particular, should Australia have states? The answer is yes in light of the political principles and comparative practice cited above. </p>
<p>Then why have prominent Australians, including a number of prime ministers, periodically <a href="http://www.theage.com.au/news/National/Australia-doesnt-need-states-Howard/2005/03/24/1111525290189.html?oneclick=true">called for their abolition</a>? There are two main reasons: Commonwealth hubris – prime ministers think they know best and would prefer to exercise all the power; and a desire for uniformity – treating all Australians everywhere in the same way.</p>
<h2>Who should do what?</h2>
<p>What should states do? They should be responsible for all the middle-order policies: infrastructure and regional development, including overseeing metropolitan cities; health; education; and aspects of welfare that are neither national nor primarily local.</p>
<p>Obviously, states should not be responsible for such patently national matters as defence, citizenship, immigration, currency, marriage and major redistribution via welfare provision and taxation. Nor should the national government be precluded from contributing to certain national aspects of state policy through concurrency or sharing of powers. </p>
<p>As far as possible, revenue-raising or taxation powers should match expenditure responsibilities, allowing for redistribution to needy regions and individuals by the national government.</p>
<p>The unitary option of centralised national government with administrative devolution is an inferior option, more appropriate for 20th century nation-building. The 21st century demands are for enhanced local democracy and greater global governance to deal with such issues as atmospheric carbon reduction.</p>
<p>Power is moving down and up from the national level. National governments that do not adapt are like Gulliver, too big to do the small things in the diminutive land of Lilliput and too small to do the big things in the land of giants, as Canadian political economist <a href="http://www.queensu.ca/iigr/about/Fellows/Courchene.html">Tom Courchene</a> has pointed out.</p>
<p>Of course, multiple-level governance requires a sophisticated and discerning people. It also requires flexibility in constitutional design to allow development and accommodate changing democratic and technological needs and demands. </p>
<p>In a long-established system such as Australia’s, starting completely afresh is not practicable. Improving the existing federal system is feasible: that requires attention to the principles sketched above and political will on the part of the people and their leaders.</p>
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<p><strong>Further reading:</strong> <a href="https://theconversation.com/topics/reforming-the-federation">The Reforming the Federation series</a></p><img src="https://counter.theconversation.com/content/27329/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Brian Galligan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The federal budget reignited debate over federal-state relations with a decision to cut some $80 billion in funding for the state responsibilities of schools and hospitals over the coming years. So how…Brian Galligan, Professor of Political Science, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/272382014-06-03T20:29:32Z2014-06-03T20:29:32ZFederation frozen in time fails as a model of accountable government<figure><img src="https://images.theconversation.com/files/50041/original/6dw2jb66-1401754962.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">There is now a large disparity between the respective responsibilities of the Commonwealth and the states and their relative capacities to fund those responsibilities.</span> <span class="attribution"><span class="source">AAP/Alan Porritt</span></span></figcaption></figure><p><em>The federal budget reignited debate over federal-state relations with a decision to cut some $80 billion in funding for the state responsibilities of schools and hospitals over the coming years. But how did we get to a situation where there is such a vast disparity between federal and state responsibilities and funding capacities?</em></p>
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<p>A significant underlying structural concern was highlighted in the <a href="https://theconversation.com/abbott-draws-up-new-battlelines-in-the-fight-over-federalism-26743">most recent stoush</a> between the Commonwealth and the states in the wake of the federal budget. There is now a large disparity between the respective responsibilities of the Commonwealth and the states and their relative capacities to fund those responsibilities.</p>
<p>While the Commonwealth <a href="http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/5506.0Main%20Features82012-13?opendocument&tabname=Summary&prodno=5506.0&issue=2012-13&num=&view=">raises approximately 80%</a> of total government revenue, the bulk of the responsibility to deliver services in critical areas such as health and education falls on the states. </p>
<p>To understand why Australia has this huge disparity, we need to examine the legal and historical developments that have taken place on both sides of the revenue-expenditure ledger since Federation in 1901.</p>
<h2>Customs and excise</h2>
<p>The capacity of the states to generate their own sources of revenue has dwindled since Federation. The explanation can in part be found in certain design features of the <a href="http://www.austlii.edu.au/au/legis/cth/consol_act/coaca430/">Australian Constitution</a>. The influence of these features has been further exacerbated by a number of highly influential decisions of the early High Court, such as in the <a href="http://www.austlii.edu.au/au/cases/cth/HCA/1942/14.html">First</a> and <a href="http://www.austlii.edu.au/au/cases/cth/HCA/1957/54.html">Second</a> Uniform Tax cases, which have predominantly found in favour of the Commonwealth.</p>
<p>At Federation, the framers gave the Commonwealth an <a href="http://www.austlii.edu.au/au/legis/cth/consol_act/coaca430/s90.html">exclusive power</a> to impose duties of customs and excise. As a consequence, the states were almost immediately locked out of any revenue that might have come from imposing tariffs or other financial trade barriers. This was significant at the time, since customs and excise were the primary mechanism of raising taxation revenue. </p>
<p>More recently, the Commonwealth’s exclusive power over duties of customs and excise has taken on an even greater significance. This is because in a line of cases beginning with <a href="http://www.austlii.edu.au/au/cases/cth/HCA/1949/67.html">Parton v Milk Board</a>, the High Court has given this provision a very wide interpretation.</p>
<p>The outcome has been to prevent the states from levying any broad-based consumption or sales taxes, such as a GST of their own.</p>
<p>To some degree, the framers of the Constitution predicted that by giving the Commonwealth exclusive power over duties of customs and excise, it might end up with a significant amount of money that it didn’t need. </p>
<p>As a result, the framers inserted into the Constitution a provision known as the <a href="http://www.austlii.edu.au/au/legis/cth/consol_act/coaca430/s87.html">“Braddon clause”</a>. This clause said that the Commonwealth could keep only a quarter of the money it raised from duties of customs and excise. The rest had to go to the states or be used to pay off their debts. </p>
<p>But the framers also harboured doubts about what the financial landscape might look like in the years beyond Federation. Not wanting to lock the Commonwealth and the states into a financial situation they had not foreseen, they limited the compulsory operation of the Braddon clause to just ten years after Federation.</p>
<p>Consequently, the Commonwealth is no longer constitutionally required to distribute to the states the surplus it makes on duties of customs and excise.</p>
<h2>Income taxes</h2>
<p>In 1942, the Commonwealth <a href="http://www.peo.gov.au/learning/closer-look/governing-australia/uniform-tax-case-1942.html">started imposing income taxes</a> in a way that prevented the states from doing so. Initially this was intended to be just a wartime measure. However, in the same year and in response to a challenge from the states, the High Court sanctioned the Commonwealth’s use of its taxation power to the exclusion of the states. </p>
<p>Emboldened by this validation, the Commonwealth continued to levy income taxes exclusively even after the war. Today this represents the single largest tax base in Australia.</p>
<p>The above measures have resulted in a windfall for the Commonwealth at the expense of state revenues. In contrast, the states have been relegated to relatively minor tax revenue sources, such as taxes on gambling, insurance, property and employers’ payrolls. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/50048/original/75y7rctr-1401755902.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/50048/original/75y7rctr-1401755902.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/50048/original/75y7rctr-1401755902.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/50048/original/75y7rctr-1401755902.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/50048/original/75y7rctr-1401755902.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/50048/original/75y7rctr-1401755902.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/50048/original/75y7rctr-1401755902.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The High Court has historically reaffirmed the Commonwealth’s dominance in collecting the lion’s share of taxation revenue.</span>
<span class="attribution"><span class="source">AAP/Lukas Coch</span></span>
</figcaption>
</figure>
<h2>Roles and responsibilities</h2>
<p>On the other side of the ledger – the expenditure side – the constitutional division of responsibilities between the Commonwealth and the states has, for the most part, remained frozen in time.</p>
<p>At Federation, the framers conferred only a limited set of law-making powers on what was to be our new “national” level of government. Those powers covered matters that were considered to be of real national importance, such as defence, external affairs and trade with other countries. </p>
<p>Critically, however, the Commonwealth was not given power in relation to key areas of service delivery, such as health, education and local government. In these areas, it was thought that it would be more appropriate for the individual colonies – now “states” – to maintain their responsibilities.</p>
<p>Subject to some exceptions, this division of responsibilities has remained largely unchanged since Federation. But while the division of responsibilities is frozen in a legal sense, the financial burden associated with those responsibilities has increased in the same time period. </p>
<p>In response to both significant demographic changes and the rise of the <a href="https://theconversation.com/robin-hood-and-piggy-bank-what-the-welfare-state-does-for-us-25790">welfare state</a>, government spending in areas of state responsibility has dramatically increased. Education and health now account for a large proportion of total government spending in Australia.</p>
<p>As a consequence, a significant gap – known as <a href="http://www.curtin.edu.au/research/jcipp/local/docs/Vertical_Fiscal_Imbalance.pdf">vertical fiscal imbalance</a> – has opened up between the relative capacity of the two levels of government to raise revenue and their respective need to expend monies to meet their constitutional responsibilities. </p>
<p>Since 2000, the transfer of GST revenues from the Commonwealth to the states has gone some way to alleviating this imbalance. However, economists frequently <a href="http://www.smh.com.au/federal-politics/federal-election-2013/henry-warns-of-need-to-increase-taxation-20130805-2ra5w.html">note</a> that the current rate of GST is woefully inadequate to meet the future spending needs of the states.</p>
<h2>Growing Commonwealth influence</h2>
<p>As the Commonwealth’s financial dominance has grown, so has its willingness to use the fiscal imbalance to exert influence in state areas of responsibility.</p>
<p>It does this in two primary ways. First, the Commonwealth often makes financial grants to states that are tied to specific terms and conditions. The states are frequently compelled to accept the Commonwealth’s terms and conditions because they would simply be unable to fulfil their constitutional functions without the funding to which they are attached. </p>
<p>Second, the Commonwealth increasingly enters into contracts and makes direct payments to individuals and entities, bypassing the states altogether. So, for example, the Commonwealth funds a <a href="http://www.education.gov.au/national-school-chaplaincy-and-student-welfare-program">national “chaplaincy” program</a> in state schools, even though it has no general constitutional powers in relation to education.</p>
<p>The financial dominance of the central government gives it the capacity to interfere in an ad-hoc fashion whenever it suits its interests to do so. On the other hand, the capacity of the states to deliver in their areas of constitutional responsibility is significantly hindered, both by their lack of independent revenue-generating capacity and by the pressure exerted upon them by the Commonwealth. </p>
<p>Ultimately, this lack of alignment is problematic because it significantly muddies the waters for the electorate. Voters are left unsure of which level of government to hold responsible for policy failures in critical areas. </p>
<p>That presents a significant challenge to one of the fundamental pillars of our democratic system: accountability of government to the people.</p>
<hr>
<p><strong>Further reading:</strong> <a href="https://theconversation.com/topics/reforming-the-federation">The Reforming the Federation series</a></p><img src="https://counter.theconversation.com/content/27238/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Shipra Chordia receives funding from the Australian Research Council.</span></em></p>The federal budget reignited debate over federal-state relations with a decision to cut some $80 billion in funding for the state responsibilities of schools and hospitals over the coming years. But how…Shipra Chordia, Director of the Federalism Project, Gilbert + Tobin Centre of Public Law, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.