Bank tax threat highlights broken GST

02 October, 2017

The threat of a WA bank tax by the State Government is another example of why the GST formula is completely broken.

Chamber of Commerce and Industry WA (CCI) Chief Economist Rick Newnham said today’s threat by the State Government to introduce a bank tax if the GST calculation isn’t fixed, highlights the perverse incentives the GST distribution has created for states.

“A bank tax is being threatened because it is a revenue source that won’t be distributed away from WA to other states via the GST. This is despite it clearly being bad for economic growth, bad for business investment, and bad for job creation – otherwise it wouldn’t be touted as a threat,” Mr Newnham said.

“The GST formula should encourage states to generate additional revenue by developing their economy, not by raising taxes.”

CCI has made recommendations to the WA Government to fix the state’s budget deficit by reducing government spending without new or increased taxes.

We have also written to Commonwealth Treasurer Scott Morrison to outline our concerns regarding the Commonwealth Grants Commission’s (CGC) proposed recommendation for future relativity calculations which was announced last week, whereby states would keep 50 per cent of all future mining royalty rate increases.

“Just as the CGC’s proposed recommendation would create a strong incentive for state governments to raise royalty rates to capture additional revenue, the current GST model encourages states to put up taxes that aren’t captured by the GST, but punishes them for forging ahead and developing new industries,” Mr Newnham said.

“CCI’s submission to the Productivity Commission has called for the GST system to be reformed to a partial equalisation model, which would restore incentives for states to develop underutilised industries and boost national economic growth, without resorting to tax or royalty rate hikes. We have also called for the introduction of a GST floor, at 70 cents, to restore stability in GST revenue.”

Our submission outlined three methods to reform the GST formula, including by carving out 25 per cent of mining royalties to ensure states keep more of the revenue they generate when they fully develop their own economy, as WA has done.

“It has become increasingly clear that the current GST distribution system has created perverse incentives for state governments across the country to block industry development, which hinders national economic growth,” Mr Newnham said.

“For example, if New South Wales and Victoria developed their onshore gas sectors they could create billion dollar industries and inject millions into their own state government revenue, but because they’ve banned unconventional gas, they receive GST that would have otherwise been distributed to Western Australia and the rest of the country.

“This effectively rewards economic laziness while punishing states like WA which drive development, grow their industries, and create jobs.”