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Creative taxation: A sign of a failing federation

This was originally published on 11th August, 2017, and republished on 4th January, 2022.

This week found Jay Weatherill, the Premier of South Australia, once again attacking Australian banks, this time on the back of the Commonwealth Bank recording a nearly $10 billion profit, while being accused in the same week of money laundering. Weatherill’s aggression towards the banking sector comes during his government’s campaign to get a new bank levy through the state parliament, just as the federal government did earlier in the year. Unlike the federal levy, which had near unanimous political support, this state levy is being opposed by the state opposition and Nick Xenophon’s party, while the banks are in a far greater state of discontent than they were when the federal levy was introduced.

So, what’s actually going on?

Jay Weatherill looking very happy. (Photo: AAP)

Once upon a time, before Australia was even federated, South Australia had the potential to be the most prosperous colony on the continent. Its fertile soil, abundance of minerals and geographic position meant that it was well placed to be a primary producer and manufacturer. By the turn of the century, this had not eventuated, and the small, under-utilised colony voted for federation as a way to get investment in its industry. As time went on, however, its population did not grow like the other mainland states did, leaving it behind in the emerging services sectors, and its smaller, awkwardly distributed geographic area left it unable to compete with the big primary producers on either side of it in farming and mining.

Instead, manufacturing became ever more important to its continued economic success, but Paul Keating came along and turned Australia into a nation of free traders, and with that came the steady outflow of manufacturing to other countries, as Australian manufacturers could no longer compete. South Australia was left with no industry. The end.

Later this year, the last car to be produced in Australia (as far as we know) will roll off the assembly line in Holden’s factory in Elizabeth, and the end of car manufacturing in Australia will have enormous flow-on effects in the South Australian economy. As it is, the SA economy is comfortably the second smallest of all the Australian states, with no obvious job prospects on the horizon. Such an occasion has traditionally been where governments would come to the rescue with ‘nation-building’ projects and the like, but the South Australian government is already running at full tilt with such things, and with a small-and-shrinking economy, its own revenues aren’t on an upward trend either. Contrast this with Australian banks, swimming in money ala. Scrooge McDuck, and you can see why a state government would be tempted to take a slice of their enormous pie.

The problem with implementing a levy like this, of course, is that there are five other states in the country not implementing that levy, and there is a chance that businesses and banks will decide to do their operations in another state. The chances of this happening on such a large scale that the levy will be ineffective is minute, but the perception of it may be more harmful. What should be more concerning, though unsurprising, is the need for a state government to be implementing such creative taxation in the first place. If states are to function like they are designed to in the Australian constitution, they should have the taxation powers to back it up. But instead, Australia is faced with a failing federation.

The Australian government of 2017 is larger than ever before, and for reasons that have little to do with population growth, and much to do with the expansion of federal government oversight into policy areas that were traditionally in the purview of the states, the most obvious being health and education. This inevitably means there is departmental overlap at state and federal level, and it is no longer clear which government is responsible for what (a convenient excuse when something goes wrong, if nothing else).

Since federation, the federal government has sought to expand, and has succeeded in doing so with the assistance of the High Court, which has continuously ruled in favour of the federal government whenever the states have challenged its expansion. The most recent example of this was in industrial relations, which had been a state government responsibility until the introduction of WorkChoices by the Howard government in 2006. The High Court ruled that the federal government did, in fact, have power over IR, and though the legislation was repealed by the Rudd Labor government, the federal government did not hand back industrial relations to the states.

The final days of Holden's Elizabeth factory are upon us. (Photo: InDaily)

At one fell swoop, the federal government has enormously expanded its own income, and ripped the states of much of their own. The states had not yet fully realised their subservient position, however, and it would take another 50 years before they did so. That realisation came with the implementation of another Howard-era policy: the GST. The method of its implementation was almost exactly the same as that of the federal income tax, except instead of preventing the states from introducing their own goods taxes, it instead forced them to eliminate a vast array of other small taxes they collected in return for a GST grant from the federal government. The states, already feeling the pinch of increased costs without the revenues to fund them, reluctantly acquiesced, and set about eliminating their own revenue streams.

Nearly two decades on, and the states are now reduced to endless squabbling over their respective slices of the GST pie. For South Australia, now a virtual vassal state of the federal government (along with Tasmania), any reduction in their generous GST helping would be a disaster. Hence the bank levy.

The instruments of the Australian federation — the governments and the parliaments — were not designed to cope with the federation being bent so badly out of shape. Centralisation has led to paralysis, as I briefly mentioned in my WA election preview, as the federal parliament has far too much to legislate on, and the slightest movement in one direction or another on any remotely important issue will cause such an uproar in one part or another of the nation that governments dare not risk it, preferring instead to incrementally change unimportant policy areas, and sell them as crucially important. The public — not being stupid — can see right through this, and quite rightly criticises the federal government for not getting things done, regardless of who is in power. Couple this with the immense similarity between the two major parties, and you have a recipe for immense dissatisfaction.

Meanwhile the states, robbed of their main powers and revenues but still expected to provide a large number of basic services, have to also fiddle around with unimportant policy and sell them as being crucially important, while either pleading with the federal government for more money, selling themselves down the river or creating new taxes that technically don’t mess with the GST agreement. None of these three options are long-term solutions, of which there are really only two: abolish the states, or fully restore them, with their powers and revenues, to their position in 1901.

Until one of these two things happens, expect more angry premiers defending their most recent band-aid solution to their severed limb problem.


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