If one waits long enough, one might witness the spectacle of the policy wheel turning full circle on payroll tax. In June 1971, prime minister John Gorton transferred the commonwealth payroll tax to state governments. This was to be the "growth tax" the states needed to fund police, schools and hospitals on the back of a High Court ruling invalidating state receipts duties.
In many ways the move was also a political fix for a beleaguered PM with a reputation for being a centralist. Tensions between Gorton and state premiers escalated after the commonwealth rejected the return of income tax powers to the states. Gorton's main political rival, William McMahon, was also receptive to the states' overtures for more fiscal autonomy.
The state governments welcomed their new taxing powers with open arms, and quickly raised the tax rate. By the 1980s payroll taxation was the top tax earner for the states and territories. With the economic good times through most of the '80s, the payroll tax collection machine kept chugging along despite concerns raised by some business groups and economists about the anti-employment effects of the tax.
By the 1991-92 recession these concerns had reached a crescendo. With one million Australians unemployed, federal Opposition leader John Hewson proposed, as part of his GST reform package, that payroll taxes be abolished with compensatory grants given to the states.
It was estimated at the time that the abolition of payroll tax would create about 200,000 jobs. However, the 1993 federal election result meant this policy reform proposal never got off the ground. One of the consequences of the rejection of the payroll tax plan was that it took Australia almost 15 years to improve on the October 1989 unemployment rate of 5.2 per cent.
Almost 40 years after Gorton's devolutionist tax move, a recession is again putting pressure on governments to reduce taxes on jobs. RMIT economist Sinclair Davidson proposed a payroll tax relief measure where the commonwealth compensates the states for not levying the tax. As Davidson points out, workers retained because of a payroll tax relief would continue to pay income taxes and not receive unemployment benefits so the compensation to the states would be notionally self-financing.
Removal of taxes that directly dampen employment growth would also be far more effective in retaining jobs than a debt-fuelled government spending spree that increases future tax liabilities.
Unfortunately, the silence from the state governments responsible for levying payroll tax is deafening. While NSW, Victoria, South Australia and the Northern Territory announced marginal payroll tax rate reductions in their last budgets, these changes were not based on a desire to head off impending job losses.
To their credit, state oppositions have made positive noises about payroll tax relief. The NSW Opposition has called for a reduction in the state's payroll tax rate from 5.75 per cent to 4.89 per cent, while the Queensland Opposition is waging its election campaign with a payroll tax rebate scheme. Others have called for relief through changes in payroll tax thresholds.
Despite the calls for change, no further announcements of payroll tax cuts have been made in the past six months as the global economic maelstrom has hit home.
State governments might argue that budget deficits limit their room to move but it was their reckless spending during the boom years, far in excess of real per capita or economic growth benchmarks, that has led them to where they are. Therefore, cuts to wasteful expenditure should be used to finance additional payroll tax relief.
When Gorton transferred payroll tax to the states, the headline tax rate was only 2.5 per cent. If the states start reducing payroll tax today, and keep it up during the next boom, we may find that the low tax policy wheel has truly turned full circle.
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