Tax competition between the states seems to be a dirty word among some economists. It is argued that a bidding war between states to lower tax rates or increase exemptions from tax merely shuffles business activities across borders, with no benefit for Australia as a whole. This has been referred to in the literature as "unproductive" or "destructive" competition.
These negative connotations overlook the bigger picture of the benefits from lower tax. In a federal system, states are under pressure to lower their taxes to discourage productive activities shifting elsewhere.
Lower taxes encourage businesses to invest and expand their operations, and to employ more people. A reduction in inefficient taxes also delivers efficiency gains.
The only group members disadvantaged are state government representatives who could otherwise levy excessive taxes.
To establish how competitive a state is on the tax front, we have developed a state business tax calculator. This calculator estimates the amount of taxes paid by a business if it were to operate in any of the six states.
Using a method employed by the World Bank, our calculator finds that Western Australia holds the position of the lowest taxing state. A business in Western Australia would have expected to pay about $195,600 in payroll tax, land tax and stamp duties in 2008. This is about 6 per cent below the average of all states.
Queensland is close behind, levying close to $197,400 in taxes, and is in turn followed by Victoria.
At the other end of the scale, NSW holds the dubious honour of being the highest taxing state in the Commonwealth. A business operating in NSW would pay more than $222,000 in tax. This is about 14 per cent above the taxes levied in Western Australia. The rustbelt states of South Australia and Tasmania also impose high taxes.
State taxes tend to be more inefficient, at least compared with those raised federally.
In particular, transaction-based taxes can distort the transfer of assets to their highest valued use. A federal Treasury paper issued in August stated that they can also impair price signals, affecting all those who engage in the market.
Our analysis shows that small businesses tend to incur a disproportionate burden from state taxes.
This is because stamp duties in some states have low exemption thresholds. Very large businesses also pay a relatively high state tax burden.
Each state, even the low-taxing jurisdictions of Western Australia and Queensland, have their own priority areas for reform. Some would benefit by targeting specific taxes, such as payroll or property taxes, while the high-tax states urgently need to cut their tax liabilities on a broad scale.
Every state could benefit from a reduction in transaction-based taxes, including those scheduled to be abolished under an agreement with the Commonwealth.
Such tax reductions, combined with cutbacks in inefficient state spending, are likely to yield significant benefits in an uncertain economic climate. It would reduce cost pressures on business, giving them the confidence to kick-start investment and employment.
State governments have nothing to lose, and everything to gain, from such reforms.
ADVERTISEMENT
No comments:
Post a Comment