I had an enjoyable chat with Steve Austin on 612 ABC Brisbane radio this morning regarding two topics, Queensland’s underwhelming population growth rate and the State income tax proposal from the Commonwealth Government:
Fewer people moving interstate to Queensland
The discussion was prompted by my post on Good Friday afternoon, which observed that, based on ABS population estimates, Queensland has fallen to 5th place in rates of population growth among States and Territories. Yesterday, Steve asked me a good question regarding this post on LinkedIn: “what does this reveal?” I replied that it revealed a few things, including our under-performing economy (related in part to the mining downturn), excessive regulation that is constraining business investment, and a failure to properly manage population growth since the 1990s, which has reduced liveability in Queensland. At the same time, conditions in NSW and Victoria relative to Queensland have improved, meaning we are not seeing the same levels of interstate migration as we once did (see chart below). I expanded on these points and gave some examples in the interview this morning. I suggested South-East Queensland nearly running out of water in the late 2000s is a good example of a failure to properly plan for growth, and it is an example which must have raised doubts about Queensland’s desirability as a place to live in the minds of many people down south.
Steve and I also chatted about the Commonwealth Government’s proposal for the States to be given back their income tax powers so they can fund health and education expenditures without Commonwealth assistance. As I told Steve (so long as the Commonwealth reduces its income tax take, so there is no overall increase in income tax revenue) I think this is a good idea. It would end the blame game associated with vertical fiscal imbalance: the large disparity between what the States raise from their own-source revenue and what they spend, with the difference being made up in grants, largely from the Commonwealth (e.g. see the composition of Queensland revenue in the chart below). So the States could no longer blame the Commonwealth for (allegedly) under-funded State services, and the Commonwealth, in response, would no longer have to blame the States for poor fiscal management. As I noted to Steve, this is not a radical new proposal, but rather one that has been discussed in policy circles for several decades, at least since the time of the Fraser Government (1975-83).
As well as ending the blame game, the proposal would promote competitive federalism. Better managed States could levy lower State income taxes for the benefit of their residents. While poorly managed States might see people leaving for better managed States with lower tax rates, providing further incentive for good fiscal management.
My old friend and Treasury colleague Joe Branigan greeted the Commonwealth’s proposal with much enthusiasm on Twitter: “Finally a PM dealing with roots not branches…” Well said, Joe. This is a commendable policy proposal that would substantially improve the governance of our Federation.
Queensland Economy Watch 
The Government should concentrate less on raising taxes, and much more on not wasting the tax payer dollars they collect. The government continues to throw billions of tax-payer ‘free’ money at every rorter and charlatan who claims they can (mis)manage a training college, spell innovation, or scam the health consumer.
Thanks for the comment, Katrina. I’m against the rorts, too. I don’t see the Commonwealth’s proposal as being about higher taxes, but a reallocation of tax revenue from the Commonwealth to the States, to better align revenues and expenditure responsibilities. The vertical fiscal imbalance I referred to has been a long-standing problem and the root cause of the unedifying blame game we constantly see.
I heard the interview – nice to have you back on 612.
Yes, thanks! It was good to catch up with Steve and chat about some of my favourite topics.
Gene
Interesting post. I’m not a public finance person, so perhaps you could explain the implications for
horizontal fiscal equalisation between the states.
You suggested the overall income tax burden across Australia remains the same, but state income taxes effectively substitute for Commonwealth income taxes across the board (but we just created 8 new tax departments to collect the same/similar amount of money).
The Commonwealth Grants Commission’s assessment of relativities and subsequent shares of Commonwealth revenues suggests NSW, Victoria and WA would have scope to engage in competitive federalism without being any worse off than they currently are (as they currently cross-subsidise the other state and territories and that cross subsidy would be reduced).
But wouldn’t jurisdictions like Queensland have no choice but to charge higher income taxes (which you infer they can’t because the overall tax take cannot increase), or cut service levels? After all Queensland receives about 12.8% more in Commonwealth tax revenue through grants and GST revenues than is actually collected in the State.
I struggle to see how competitive federalism is compatible with a desire for equal access to government services across the country.
What is being proposed seems to be more like the USA model where every state also has income tax powers On top of Federal taxes). If you look at the individual states in the USA, there is no evidence to suggest the growth states have achieved this through competitive federalism (e.g. slashing income taxes to encourage migration, investment, or trigger economic growth). The three individual states that are really booming (California, New York and Texas) have maximum marginal state income tax rates of 13.3%, 8.82% and 0% respectively. Eyeballing the other states, the average looks like about 6-7%. So clearly California and NY have not been hampered by higher state taxes and Texas just does’t need them (plenty of energy royalties).
To me, the current chatter about state income taxes is just a bit of a diversion so we don’t talk about the real problem; inefficient spending and investment by all levels of government.
Jim, you always ask the tricky questions! For the reasons you identify we’d still need horizontal fiscal equalisation (HFE). I think you can have both greater accountability through States raising more revenue themselves and HFE. NSW and Victoria clearly have an easier task than Qld raising money via income tax due to higher income taxpayers, so arguably Qld should then get a greater share of the GST revenue. Thanks for the comment.
I think the system we have currently is so complex it would be hard to merely shift the govt to which the tax is paid. On any given year a person could have $40k or $50k or more worth of work related deductions and other losses on property, interest etc, which govt would these be claimed against, state or federal, would all these deductions be allowed under the new arrangement, would I have to complete 2 tax returns, It would be as complex as the introduction of the GST and simply employ thousands of more accountants. In a place as big as Australia I don’t know why we don’t look at local govt as a means to supply more services and charge through the local system and bypass the states all together, health would be an obvious candidate and could be funded directly, as well as other services.
Thanks, Glen. Yes, good point about the complexity of the current system. I expect the ATO would still collect the tax so you wouldn’t need to complete two tax returns.
Grateful for an update of where Queensland is in terms of ratings by the international credit agencies. What is the size of the debt now, and where does debt servicing stand in terms of the overall budget? I have the impression that it ranks third below health and education. As you know, we now have a Green councillor for Gabba Ward. He has a law degree, but I doubt anyone would claim the Greens are strong on economics. A few factoids would come in handy…He is also talking about rent controls, sigh….
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Hi Robyn, that update is a good idea, thanks. Please give me a day or two to get around to it!