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Increasing income tax the right choice for a sustainable NDIS

Certainty of funding is important and that’s why an income tax levy or premium is the way to go. Image from

While an income tax increase may be hard to sell to some people in the community in the lead-up to a federal election, it’s the right choice for a sustainable National Disability Insurance Scheme (NDIS).

From July 1 next year, the Medicare levy will increase by 0.5% to partly fund the NDIS, taking the Medicare levy to 2% and adding an extra $1 per day to the Medicare levy of an average worker on A$70,000.

But the move is a risk for the Gillard government because it gives the Coalition, if elected in September, the power to delay or veto the scheme.

Politics of the NDIS

Revised estimates suggesting a higher-than-expected budget deficit seem to have precipitated today’s announcement. The government has deflected discussion about the budget deficit to focus on funding of this landmark reform, which has broad community support.

This leaves the opposition in the confusing position of supporting the reform, but arguing against its implementation. With a definite funding proposal, the opposition now has to be clearer about whether it will actually support the scheme. The prime minister has issued a challenge along these lines, saying she will bring the legislation in before the election if the opposition will support it.

If the legislation is delayed, the NDIS becomes an election issue. And if the opposition gains power, Joe Hockey will be able claim a mandate for not going ahead with the scheme.

In times of budget surpluses the argument for disability support reform was often couched (unsuccessfully) in the terms that “times are good, we can afford it”. This has always been a problematic argument, as it implies that supporting people with disabilities to have choices and fully engage in their community is a luxury, not a right.

The opposition’s arguments put the NDIS back into the “luxury” basket, with the very real risk that this opportunity for meaningful and landmark reform may be lost.

Other options to fund the NDIS

The Productivity Commission’s 2011 report Disability care and support outlined a number of options to fund the NDIS.

One option was a hypothecated tax (a tax for which the proceeds are earmarked for a particular program); this was seen as an acceptable option, but not recommended on the grounds that a fully hypothecated tax could lack flexibility.

The Medicare levy is a type of hypothecated tax, but one that does not raise sufficient revenue to fully fund health care. Increasing it by 0.5% to 2% as proposed will not raise sufficient funds to fully fund the NDIS. The increase is expected to raise A$3 billion a year, which is just under 40% of the estimated A$8 billion a year cost of the NDIS.

Because this extra levy is not fully hypothecated, problems of inflexibility of funding use will not arise. However the Productivity Commission recommended against this on the grounds that increasing the Medicare levy could exacerbate any existing inefficiencies in the income tax system in the absence of other tax reforms.

The benefit of the Medicare levy is that it has broad support, as it makes the purpose of the revenue raising clear, and health care is valued. Likewise, an increase in the levy specifically to fund the NDIS could also have broad support.

An alternative option – and the one recommended by the Productivity Commission – would be directing general revenue into a (legislated) fund. This allows the option of partly (or fully) funding the NDIS through other tax reform, rather than just effectively increasing income tax.

Fight for state support

The NDIS trial is due to start in New South Wales, South Australia, Tasmania and Victoria in July, with the ACT joining a year later. The trial has been funded from consolidated revenue, with the states also contributing, after a lot of argy-bargy late last year. Western Australia and Queensland are still to sign up to the NDIS.

Under the proposed increase to the Medicare levy, Gillard has earmarked 25% of the funding pool to support states and territories to set up the scheme. This may be a political necessity, but it may dilute the advantages of a national scheme set up to ensure best practise and equitable and efficient access for all Australians. A fully national scheme will be more transparent, with corresponding incentives for good governance.

The inevitable political wrangling over which level of government should pay how much, and the likelihood that this would reduce the certainty of the scheme, was a key reason the Productivity Commission suggested that the Commonwealth should be responsible for full funding of the NDIS. This would make the scheme more secure, and funding more certain.

There is a long and sorry history in disability support of cost shifting and responsibility denial between the state and federal governments. So any joint funding and responsibility arrangements would need to be carefully legislated.

Social equity

Just under half (45%) of Australians with disabilities live in or near poverty, compared with an OECD average of 22%. So while the current debate is focused on the economic value of the NDIS, we can’t ignore the social justice and equity.

Australia also fares badly for unemployment outcomes, with just 31% of people with disabilities participating in the labour force, compared with 83% of the general population. Primary carers tend to work fewer hours than non carers, and have significantly higher rates of depressive illness.

This is a critical time for the NDIS, and public awareness and support will be crucial.

An additional levy on personal income tax, labelled as an insurance premium for the NDIS, sends a clear message about what the revenue is being raised for and that everyone is covered if need be. It spreads the costs and risks of disability. And it avoids the current situation where disproportionately high costs fall on a randomly selected group that happen to have a disability.

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