State Revenue

CHAPTER 5

COMMONWEALTH-STATE FINANCIAL RELATIONS

The reduction of the vertical imbalance between the Commonwealth and the States and an increase in State tax powers should not be a major near-term priority of the Victorian Government.

The most dominant and controversial aspect of State revenues is the high degree of reliance on grants from the Commonwealth Government.  In 1990-91 nearly 50% of Victoria's estimated general government revenue comes from the Commonwealth in the form of general and specific purpose grants.  This "vertical imbalance" between the State's own tax raising efforts and its spending is high in comparison with other federal jurisdictions.  Clearly, it reduces the link between expenditure and revenue decisions of the State Government and thereby diminishes its accountability.  However, while the significance of this imbalance may be acknowledged, the priority that should be given to reducing it by the Victorian Government is more questionable.  The view taken in this Report is that it is not a major factor affecting the efficiency of the State's spending and that the most important priority is to reduce the State's spending, debt and tax burden.

From the perspective of the Commonwealth Government and national economic requirements the reduction of the imbalance is also likely to command a relatively low priority.  The Victorian Government needs to take this into account in assessing its budgetary options.

There are four main reasons for this conclusion.

First, the national economic situation calls for economic policies that involve restraint in national spending and, as a key component of that, a reduction in the size of government.  While competition between the States in reducing taxes might produce this over time, the Commonwealth will likely take the view that the most effective way of achieving it in the near term would be through a continuation of the restraint imposed in recent years on its assistance to the States and on borrowings by State authorities.  Although initially the effects of this restraint were substantially offset by the rapid growth in State tax revenues arising from the "boom" in asset sales and prices (with the result that the burden of States' taxes has increased from 5 to 6% of GDP over the past 5-6 years), as the assets market declined, the restraint in Commonwealth assistance has forced all States to effect major reductions in their outlays.  In fact, States' outlays have been reduced by about 2.5 percentage points of GDP over the same period, which confirms that reductions in Commonwealth assistance have not simply been offset by increases in State's taxes, as is sometimes said.  Moreover, with the reduction in the States' own revenue base following the recession, and the likelihood that it will increase much more slowly when the economy recovers, the Commonwealth doubtless views favourably the fact that its policy of limiting assistance and borrowings is now pushing States such as Victoria not only into further expenditure restraint but into privatisation measures of various kinds.

In these circumstances the Commonwealth seems unlikely to give priority to giving the States' access a broader based tax.  It is relevant also in this context that one of the original rationales for an increase in States' tax powers derived from the argument that State Governments needed to have access to additional broad based taxes if they were to be able to expand the services which they supply to the community.  That was, indeed, the basis on which the Commonwealth transferred pay-roll tax to the States in 1971.  However, circumstances have changed dramatically since then and there is now growing acceptance of the need to reduce rather than expand the role of government, including State governments.

It is also relevant that the fact that States' access to broad based taxes is limited to the unpopular pay-roll tax acts as an inhibition on increases in States' tax rates.  This is particularly true in Victoria, where the burden of State taxes on businesses has become a major political issue.  Arguably, if the Victorian Government had had access to another broad based tax, it would have increased the rates of that tax ⁽¹⁾ rather than moved over the past two years to restrain expenditure and sell State assets.  The Commonwealth will be aware that, if the States had access to another broad based tax, a substantial amount of revenue could be raised by a small adjustment in the rate so that the increased burden would be widely spread and subject to minimal resistance.  Tax competition between States would thus likely be least effective in the case of an alternative broad based tax.

Second, the practical difficulties of the States accessing a broad based tax are not inconsiderable or free of controversy.  Unless clear benefits of a substantial nature are likely to be forthcoming, it would seem inappropriate therefore to divert State political and bureaucratic energies away from more important issues which are facing the State Government

The most popular option for an alternative broad based State tax is a consumption tax.  However, the Constitutional prohibition on State excises would make it difficult to arrange for the States to access such a tax on a basis that would give individual States effective decision-making powers, even assuming that the Commonwealth does eventually proceed with the establishment of such a tax. ⁽²⁾

The other main option -- a State income tax -- is already legally available to the States and successive Victorian Governments have tended to favour such a State tax. ⁽³⁾  It would certainly be practicable to move to a Canadian type arrangement where each Province effectively imposes a rate on top of the Federal rate, with the overall rate thus varying as between the Provinces.  The Commonwealth would then make a broadly offsetting reduction in its financial assistance grants to the States.  Further, the States could then use their access to the income tax field to substitute income tax for some of the more unpopular State taxes, such as pay-roll tax.

However, as indicated the Commonwealth is unlikely to favour a move by the States to access a broad based tax even in the near term and we believe that, for reasons discussed below, any such future move should be conditional on the States agreeing to constitutional restraints on State Governments increasing tax rates without specific reference to the electorate.  It might also be noted that, whether an increase in income tax to finance the reduction or elimination of (say) pay-roll tax would produce net benefits for the community as a whole is not completely clear.  While there is widespread acceptance of the view that pay-roll tax discourages employment, the issue is not clear-cut. ⁽⁴⁾  On the other hand, the disincentive effects on labour supply of increasing an income tax with a progressive rate scale are well documented.  Also, there could be adverse efficiency effects if States were to move away from a uniform basis of assessment, as some of the Canadian Provinces have done.

Third, a number of State taxes are levied in fields which are either already taxed by the Commonwealth for widely accepted reasons (such as alcohol, petrol and tobacco) or which would be taxed by a broad based consumption tax (services such as those involving transfers of real estate, shares and money).  Thus, while there may be room for improvement in the structure and rates of many State taxes, the fields of taxation to which they apply should not necessarily be regarded as inappropriate.  Even in the case of pay-roll tax, it needs to be noted that it is imposed at much higher rates in most overseas countries.  Against this background, there is room for doubt as to whether, even if the States were given access to a broad based tax, that would in practice lead to much reduction in the burden of taxation in most of the fields presently covered by State taxes.

Fourth, it should be noted that the States' reliance on Commonwealth grants for a substantial proportion of their revenues has not prevented tax competition between the States.  It is too rarely acknowledged that, as this Report brings out, there are quite substantial differences between States in the severity of taxes and in the level of services which they provide.  Further, the principles used by the Commonwealth Grants Commission in determining the distribution of the financial assistance grants do not inhibit such competition, that is, if (say) Victoria wishes to reduce its taxes that does not reduce its share of the grants.  The fact that there has not been more tax competition is more a reflection of the failure of State politicians to escape the clutches of the local pressure groups and to identify the benefits of smaller State governments for the State as a whole.  But, given that State taxes are 6 percent of GSP, the scope is there for any Victorian Government that wants the State to become more competitive.

Accordingly, this Report does not advocate that a major change in Commonwealth-State financial relationships, involving a reduction of the so-called vertical imbalance, and an increase in State tax powers, should be a policy priority of either the Victorian Government or the Commonwealth Government.  Rather, the focus should be on reducing the role of the State Government with a view to, inter alia, reducing the burden of State taxes.

The Commonwealth is likely to intensify the pressure on the States to undertake spending and other reforms

As noted, the national economic situation calls for economic policies that involve restraint in national spending and, as a key component of that, a reduction in the size of government and a return to net public sector saving.  To this end, we believe that the Commonwealth Government is likely to intensify the restraint on Commonwealth grants to the States, which has been eased somewhat since 1988-89, when total grants increased by only 1.5%.  The increases of 8.8% in 1989-90, and the estimated increase of 8.7% in the current financial year, ⁽⁵⁾ have provided substantial real growth at a time when real growth in national spending needed to be cut back.  Moreover, it is now evident that, contrary to the need for the public sector to be a substantial net saver, the public sector will be a net borrower in 1990-91 to the extent of some 2-3% of GDP.

Under those circumstances the Commonwealth seems likely to cut States' grants in real terms in 1991-92 and, hence, to abandon the real terms "guarantee" on the financial assistance grants, thereby exerting pressure on the Victorian Government to step up the pace of reform. ⁽⁶⁾  It would also be in the interests of the Victorian community if the Commonwealth were able to reduce any inclination for the Victorian and other State Governments to respond to their present "shortage" of funds by increasing State taxes, thereby adding to the difficulty of reducing the rate of increase in the C.P.I.

Adoption of a Federation Budget approach would assist in a more equitable sharing of the "burden" of restraining government spending and would also inhibit States from increasing taxes

The prospect of the States undertaking spending and efficiency reforms would be enhanced if the Commonwealth and the States were to adopt a Federation Budget approach to 1991-92.  The basic idea of such an approach would be for the Commonwealth and the States to each seek to agree at the annual Premiers Conference on objectives for spending, borrowing and taxes in the succeeding financial year and possibly beyond.  Thus, instead of the Premiers Conference discussing only one part of the Commonwealth and one part of the States' budgets, there would be a discussion and attempt to agree on the broad parameters of the budgets of all the governments.

Such an approach would allow the Commonwealth to press the States to give undertakings in regard to limiting increases in taxation.  The Commonwealth could indeed make its grants conditional on the States agreeing to specific limits on taxation.  For their part the States could press the Commonwealth to exercise the same restraint on its "own purpose" outlays as it was seeking to impose on the grants to the States. ⁽⁷⁾  In recent years this has been noticeably absent, with the Commonwealth passing most of the burden of expenditure restraint to the States.  Overall, a Federation Budget approach would be designed to have the States accept greater responsibility for national economic management and to take more account of national economic requirements in framing their own policies.

The Victorian Government should press the Commonwealth to reduce specific purpose grants and reduce duplication

The initiative for a Federation Budget would probably need to come from the Commonwealth Government.  But, although it would be designed to bring the States under closer Commonwealth control in terms of macro-economic policy, the Victorian Government could take advantage of such an approach to seek a reduction in Commonwealth involvement at the micro level.  Victoria and other States should in any event press the Commonwealth to reduce specific purpose grants in areas such as education, health and transport (with offsetting adjustments in general purpose grants) and, hence, reduce duplication between the Commonwealth and the States by passing back full responsibility to the States in a range of areas where Commonwealth politicians have judged it appropriate to intervene.  Such action would also give States more flexibility in determining their own spending priorities.  These are matters which will be taken up in the next Report.

Again, however, the home base should be the front line of attention for Victoria, especially having regard to the fact that in any Federation the central government is likely to insist that it is "vital" to have national, rather than differing regional, standards in some areas.  There may also be instances where central government action would produce "spill-over" benefits whose availability would inhibit action by any one State Government.

It is also relevant here that, although the Commonwealth "interferes" in many areas of State activity by providing specific purpose grants which are subject to conditions, around 50% of Commonwealth grants are for general purposes. ⁽⁸⁾  Accordingly, States have substantial scope to allocate resources as between different areas of their activity, and, at the margin, can determine the overall priority as between one area of activity and another.  For example, in the case of transport the States spend more than four times the amount they receive from the Commonwealth in specific purpose payments.  The Victorian Government may thus be regarded as substantially accountable to its electorate for determining the priority attached to one activity as against another. ⁽⁹⁾

VICTORIAN TAXES

There have been major additions to Victoria's tax regime

Contrary to the popular impression, there have been major additions to Victoria's taxing regime over the past twenty years.  Payroll tax was transferred to the States in 1971 and a tobacco franchise tax was introduced in most States in 1974.  Financial institutions duty was introduced in 1982/83 and in 1983 Victoria required certain public enterprises to pay an asset based "dividend" to replace a levy imposed on sales.  These "new" taxes accounted for over 40% of Victoria's total tax receipts in 1989/90.

The burden of Victorian taxation has increased

The new taxes have been exploited by Victoria and, while some of the additional revenue went to replace that lost from the abandonment of estate duty as a result of inter-state competition, there has been a general upward trend in the overall burden of State taxation.  Thus, between 1981-82 and 1990-91 (est) the overall burden of Victorian taxation (including "dividends" paid by public enterprises) has increased from 4.7% to an estimated 5.9% of GSP. ⁽¹⁰⁾

Moreover, while Commonwealth grants to Victoria have declined from 7.2% of GSP in 1986/87 to an estimated 6.4% of GSP in 1990-91, the latter figure is only slightly lower than when the present Labor Government came to office in 1982.

CHART 5.1
REVENUE, TAXES & GRANTS VICTORIA, 1981-1991
(as Percentage of Gross State Product)

Sources:

Australian Bureau of Statistics 5501.0, 28 March, 1991,
Australian Bureau of Statistics 5204.0,
Australian Bureau of Statistics 5220.0.

Notes:

⁽¹⁾ Taxation is defined here to include taxes, fees and fines plus "dividends" paid to the general government sector which are classified by the Australian Bureau of Statistics as property income.

⁽²⁾ Estimates for 1990-91 for tax revenue and GSP are the author's estimates and assume tax receipts are $407m less than the Budget estimate.

That is, comparing the present situation with that which existed when the Government assumed office, the increase in the burden of taxation has partly been to finance additional spending and only partly to replace "lost" Commonwealth grants.

Taxes on assets transfers and franchise taxes have increased in importance

As to the composition of Victoria's taxes, pay-roll tax now constitutes around 30% of total tax revenues and the rate of tax has been progressively lifted from 2.5% in 1971 to its present 7%.  However, the granting of extensive exemptions has not meant a commensurate increase in the over-all burden of payroll tax and there has in fact been a reduction since 1981-82 in the relative importance of the tax as a source of revenue.  The importance of taxes on transfers of assets (shares, money and property) has, by contrast, increased under the Labor Government, as has the relative importance of franchise taxes (on petrol, tobacco and alcohol).

TABLE 5.1:
COMPOSITION OF STATE TAXATION ⁽¹⁾

	1981/82	1990/91 (2)	Difference
Payroll	32.4	28.0	-4.4
Property Taxes	6.5	7.1	0.6
Land Taxes	5.4	6.2	0.8
Finance and capital	13.5	20.1	6.6
Stamp Duties	13.5	15.3	1.8
Financial Institutions Duty	0.0	4.8	4.8
Excise (3)	4.1	3.8	-0.3
Gambling	9.8	8.2	-1.6
Insurance	7.1	4.5	-2.6
Motor Vehicle (4)	11.9	7.0	-4.9
Franchise	8.5	12.1	3.6
Other	1.4	0.2	-1.2
Dividends (5)	0.0	4.8	4.8
Fees	0.8	2.7	1.9
Fines	1.3	1.5	0.2
TOTAL	100.0	100.0	0.0

Sources:  Australian Bureau of Statistics Taxation Revenue, 5506.0 April 1990 plus dividends reported as property income from Australian Bureau of Statitistics 5501.0, 28 March 1991

Notes:

⁽¹⁾ State taxation is defined herein to include taxes, fees and fines plus dividends paid to general government and classified by the ABS as property income.

⁽²⁾ Estimates for 1990-91 are the author's estimates based on data from Victorian Budget document No.4 1990-91.

⁽³⁾ Principally revenue from charges levied on statutory authorities and based on revenue.

⁽⁴⁾ Includes registration fees, stamp duty on registrations, drivers' licences and road transport and maintenance tax.

⁽⁵⁾ Property income paid to general government from State trading enterprises, which is primarily composed of dividends levied on asset values and not included by the ABS in taxes, fees and fines.

Although a high proportion of Victoria's taxes are paid by businesses in the first instance, the incidence is borne by individuals, including those who operate small businesses as sole proprietors or partnerships

Victorian taxes mostly fall in the first instance, on businesses, an estimated 75% being received from that quarter.  This "strategy" is doubtless partly designed to take advantage of the fact that, as State taxes are a deductible business expense, some 39% of the cost is borne by the Commonwealth and, hence, by payers of Commonwealth taxes.  In addition, the imposition of taxes on businesses rather than individuals allows the State Government to limit its unpopularity, particularly as there are extensive exemptions for small businesses.

However, any notion that the final incidence of State taxes is borne by business would be misleading.  Taxes levied on business inevitably end up by being either passed on to consumers or back to shareholders and operators of small businesses as sole proprietors or partnerships.  Either way it is the individual that bears the ultimate burden at the same time differences between States in rates of State Taxes do affect the competitiveness of business.

Victoria is a relatively high tax State

An inordinate amount of attention is paid by Victorian political parties and the media to the question of whether Victorian taxes are higher than those in N.S.W.  The reality is that both States impose taxes at rates which are higher than the average for the States -- and which should be lower.  On the definition of taxation used by the Commonwealth Grants Commission, Victoria's revenue from taxes is considerably higher than if its rates of taxation were imposed at the average rates for the States, and its taxes are also more severe than N.S.W.

TABLE 5.2:
STATE TAXES PER HEAD, 1989-90

	Actual $	Standard $	Difference $
New South Wales	1084	1081	+0.3
Victoria	1109	1029	+7.7
Queensland	705	912	-22.7
Western Australia	932	914	+2.0
South Australia	775	782	-0.9
Tasmania	824	684	+20.5

Source:  Commonwealth Grants Commission, 1991 Update.  Includes land revenue as well as receipts classified as taxes by the Commission.

Part of the debate about Victorian versus N.S.W. taxes arises from the fact that there are differences between the definition of taxes used by the Commonwealth Grants Commission and that used by the ABS.  The Commission includes as taxes all taxes that are used in financing States' current expenditure whereas the ABS purports to include all taxes and ABS figures show per capita tax collections in N.S.W. as being 7-10% higher than in Victoria.  However, the ABS does not count as a tax the "dividends" which the Victorian Government requires some public enterprises to pay and which were introduced in 1983 in lieu of the levy which was then imposed on sales of those enterprises and classified by the ABS as a tax.  Given this, and given that these "dividends" have often exceeded the profits earned by the enterprises, it appears that the Grants Commission's inclusion of them as a tax is the more realistic procedure for policy analysis and decision-making purposes. ⁽¹¹⁾

If these "dividends" are included in the otherwise more comprehensive ABS figures, the difference between Victorian and NSW per capita tax collections narrows markedly.  If allowance is also made for the fact that NSW has a higher taxable capacity (with the result that taxes imposed at the same rate in NSW will yield more per head than in Victoria), it appears that, overall, Victoria's tax severity may be fractionally lower than N.S.W.'s.  This appears to be the case even after the significant increases in tax rates in the 1990-91 Victorian Budget.

TABLE 5.3:
STATE TAXES PER HEAD

	ABS Estimate (1)		ABS Estimate (Adjusted) (2)
	1989-90	1990-91	1989-90	1990-91
New South Wales	1411	1486	1272	1340
Victoria	1309	1393	1239	1319

^(l) Based on Australian Bureau of Statistics estimates published in 5501.0, 28 March adjusted to include estimated "dividends" paid by public enterprises

⁽²⁾ Adjusted to allow for NSW higher taxable capacity on the basis of the Grants Commission's 1989-90 estimates of capacity to raise taxes and land revenue as published in their 1991 Update.  It is assumed that relative taxable capacity is unchanged in 1990-91.

TAX REFORM -- VICTORIA

A major objective should be to reduce the overall burden of Victoria's taxes

The most appropriate "reform" in Victoria's tax system would be to reduce the overall burden.  That would, in itself, reduce the concern that is expressed about the "inefficiency" of State taxes.

However, given the extent of Victoria's debt problem, we propose that priority should be given in the near term to stopping the further growth of Victorian public sector debt, which involves bringing public sector receipts and expenditure into balance.

A further step would then be to start reducing debt by moving into surplus while at the same time also starting to cut taxes, that is, the public sector should become for a period a net saver.  (This is discussed further in Chapter 6).  The move to public sector balance and then to surplus should be achieved not by increasing taxation but by a combination of cuts in current spending and a combination of improvements in the efficiency of public trading enterprises and, over time, their privatisation in whole or in part.

Changing the structure of Victoria's tax system

As already noted, under the present Government increased emphasis has been put on taxes which fall initially on businesses.  In addition, there has been an increase in the exemption levels so as to minimise the initial impact of taxes on small businesses and individuals, with a resultant narrowing of the tax base of a number of taxes.  This is especially true of pay-roll tax.

Moves in these directions run contrary to the objective of transparency, that is, they minimise the impact on the community generally of tax increases by Government.  Any notion that by imposing taxes largely on "business" the community somehow avoids their impact would, of course, be misleading.

However, unless State Governments are given access to a new broad-based tax (which, as noted, seems unlikely), they are largely stuck with the existing State mix.  Further, any attempt to cut tax rates by broadening the base of existing taxes or introducing new taxes would likely be strongly opposed.

One possibility might be to shift the burden away from land tax to other forms of taxation.  The idea that land tax is a tax on "wealth" is misleading given that over half of the tax is paid by business (and that it is a deductible expense).  Moreover, the fact that the tax base is unrelated to the current state of the economy, and to any current capacity to pay, makes it a less suitable and less efficient vehicle of taxation.

The next Report will give further consideration to individual tax reforms.

TAX REFORM -- GENERAL

There is a need to constrain the capacity of politicians to increase taxes

The usual approach to consideration of taxation reform is to evaluate the most appropriate forms of tax and the most appropriate structure in terms of efficiency, equity and simplicity.  But, while there is certainly a need for such evaluations (and for appropriate changes to improve the efficiency of taxes), there is also a need to give consideration to measures that constrain the capacity of governments to increase taxes.  This need is best highlighted, perhaps, by the Victorian Government's action in the 1990-91 Budget in increasing taxes by 16% at a time of recession and without any attempt to seek the electorate's approval.

While it may be argued that those responsible for such actions will pay the price in due course, there is also a strong ease for instituting procedures both that encourage and allow the community to play a greater role before tax changes are made, and that also "force" State Governments to give consideration both to alternative courses of action and to wider implications.  This would become particularly important were the States to acquire a new broad-based tax, where the scope for increasing "taxation by stealth" would be enhanced. ⁽¹²⁾

There are a number of possible measures that would help

There is insufficient scope in this Report to explore this important issue in depth.  However, it is worth listing some of the possible ways in which greater discipline could be applied on our State politicians:-

1. Federation Budget -- as noted, this would involve State Governments to a greater extent in national economic management and focus their attention on the wider implications of tax increases;
2. Improvements in State Budget Information -- While there has been a significant improvement in recent years in the data and structure of the budget documents published by the Victorian (and other) Governments, there is a considerable need for further improvements in a number of areas in order to allow the informed comment and analysis that will help discipline State politicians.  In particular, there is a need to publish details of tax expenditures and comparisons of tax policies with those in other States.  More generally, three year forward estimates of both expenditure and revenues should be presented with each Budget (as is now done by the Commonwealth) and regular and timely monthly statements of revenues, expenditures and borrowings should be published on a national accounts basis.
3. Constitutional constraints -- one possibility would be to amend the Victorian Constitution to require that all increases in tax rates, and all proposals for new taxes, be submitted to a referendum.  This is effectively the situation in a number of American States and Swiss Cantons.  While it may sound too "radical" for Australia, it is an approach that should be further considered and debated, particularly if serious cosideration were to be given to a new broad based States' tax.  An alternative would be to allow citizen initiated referenda that would provide scope for a referendum to reject tax increases or to agree to them for a specific purpose.  Any such move would require safeguards to inhibit vexatious use by minority groups.
4. Earmarked Taxes -- a closer connection between the raising of taxes and their spending would be established if taxes were earmarked for particular purposes.  However, while this approach has theoretical attractions, there would be considerable practical difficulties in implementing it.

CONCLUSIONS

Our main conclusions on State revenues may be summarised as follows:-

• It is most unlikely to be a near term policy priority of the Commonwealth Government to seek to reduce the vertical imbalance between the Commonwealth and the States and to cede a major increase in State tax powers.  In these circumstances it should not be a priority of the Victorian Government either.
• The States should only be given access to a new broad based tax if they agree to some constitutional constraints on their capacity to increase State taxes.
• The Commonwealth is likely to intensify the pressure on the Victorian and other State Governments to reduce spending and improve public enterprise efficiency by tightening restraints on grants to the States.
• Adoption of a Federation Budget approach could help restrain State tax increases in response to such pressure and would assist in a more equitable sharing of the "burden" of restraining government spending.
• The burden of Victorian taxes has increased in recent years through greater utilisation of "new" taxes introduced over the past 20 years and by making business the focus of tax policy.
• Although a high proportion of Victoria's taxes is paid by businesses in the first instance, the ultimate incidence is borne by individuals.  Differences in State taxes can however, affect a State's competitiveness.
• Victoria is a relatively high tax State, as is N.S.W.  Overall there appears to be little between the two States in terms of severity of taxes.
• A major policy objective of the Victorian Government should be to reduce the burden of taxation.  However, in the near term the top priority should be to stop the further growth of public sector debt, which involves bringing public sector receipts and expenditures into balance.  A further step would then be to start reducing debt by moving into surplus while at the same time also starting to cut taxes.
• Unless State Governments are given access to a new broad based tax, they are largely "stuck" with the existing State tax mix.  Possible reforms would likely produce considerable resistance.
• The role of land tax should be reviewed given that it is not performing its supposed function as a "wealth" tax and that its incidence is often unrelated to current capacity to pay.
• Measures need to be taken to improve the community's awareness of State tax and budgetary issues, and their capacity to respond.  These include improvements in information about the budget and an examination of possible constitutional constraints on the capacity of politicians to increase taxes.

---

ENDNOTES

1.  Or, in the case of income tax, allowed the progressive rate scale to increase the effective rate.  Of course, the Victorian Government did sharply increase taxes in the 1990-91 Budget.  The suggestion here is that the overall increase in taxes in recent years would have been greater with a broad based tax.

2.  The present position of the Federal Labor Government is one of opposition to such a tax.  The Federal Opposition, however, has indicated an intention to introduce one.  It might be noted that Section 90 would not prevent the States levying a broad based consumption tax on the sale of services.

3.  It may be that one reason for this Victorian predilection, which tends not to be shared by other States, is the belief that, as the State with the second highest taxable capacity, Victoria would benefit.  However, this would only occur if there was some basic change in the equalisation arrangements, which is unlikely.

4.  Professor Geoffrey Brennan, an acknowledged world expert on taxation, has argued that payroll tax does not discriminate between labour and capital because "capital requires labour for its production and capital goods prices will tend to move in the same direction as gross-of-tax wages".  He has also argued that the States could well regard payroll tax as an alternative to a broad based consumption tax but with features that may have advantages over such a tax.  See "Issues in State Taxation", Edited by Cliff Walsh, Centre for Federal Financial Relations 1990.

5.  As per ABS 5501.0, 28 March 1991, Table 3

6.  As that guarantee was given last May subject to there being no substantive change in economic circumstances (which there clearly has been), the Commonwealth has a "let out".

7.  Commonwealth "own purpose" outlays are estimated in 1990-91 to take about the same proportion of GDP as they did when the Federal Labor Government took office in 1982-83.

8.  In addition, a substantial proportion of specific purpose payments are provided in block form and, as such, are de facto general purpose payments.

9.  The main exception is in tertiary education where the Commonwealth has the dominant role.  Commonwealth health policies also significantly constrain States' freedom to adjust their own health policies.

10.  The estimate for 1990-91 assumes that Victoria's tax receipts will be about $407 million less than estimated in the Budget and that GSP will increase by only 3.8 percent in nominal terms.

11.  Data presented in "Victorian Equity Trust:  Prospectus" Mclntosh, Hanson Hoare and Govett Ltd, 1988, shows that "dividends" paid by the State Electricity Commission of Victoria, Gas and Fuel Corporation, Melbourne Metropolitan Board of Works and Portland Smelter Unit Trust exceeded aggregate profits for these organisations during 1985/86 and it was stated that this is expected to continue through 1990-91.  The prospectus also shows that the SECV has been capitalising interest throughout the 1982-1987 period, which implies that it has been unable to meet its interest commitments.

12.  The key point here, of course, is that "small" increases in a broadly based tax will be widely spread and each increase in itself is unlikely to produce significant adverse reactions.