The maintenance of a corporate welfare state comes at a hefty long-term price

The latest edition of my state business tax study, showing South Australia as the highest taxing state for this year, highlights the limitations of the State Government's activist approach to economic development.

A defining feature of South Australian economic policy has been the extent to which successive state governments have doled out subsidies and other incentives in an attempt to encourage firms to either expand in, or relocate to, the state.

In 2005 a state parliamentary committee found total state government assistance to industry totalled $661 million over the 10 years to 1998-99.

Since that period, the government has expended at least $496 million on industry and regional development programs.

The State Government has expressed every intention of continuing with this approach, with Treasurer Kevin Foley recently nominating defence, mining and renewable energy as industries to be targeted for future development.

While the "picking winners" approach to economic development might satisfy the political appetite for press and photo opportunities, the maintenance of a corporate welfare state comes at a hefty long-term price for the broader South Australian economy.

For a start, the state's industry policy experience has been littered with numerous, high-profile failures that distort resource allocation and cost taxpayers.

The notorious Multi-Function Polis project failed to get off the ground despite a decade of effort and $100 million of taxpayer funding.  The government also provided support to establish an SA base for the Collins Class submarine fleet, which has been plagued by mechanical problems representing a drain on public finances.

Mitsubishi announced the closure of loss-making motor vehicle manufacturing plants in Adelaide despite years of money funnelled from taxpayers.

In the ultimate case of policy lessons not being learnt about the futility of selective industry policy, the state and federal governments responded by announcing a $30 million South Australia Innovation and Investment Fund.

The subsidisation of perceived winners also costs non-beneficiary businesses as state taxes would tend to be higher than they need otherwise be as a consequence of picking industry winners.

The State Business Tax Calculator estimates taxes paid by a business if it were to operate in any of the six states.

Using a method employed by the World Bank, the report shows an SA business would pay $247,437 in payroll tax, property taxes and stamp duties in 2009.

According to my analysis, SA is the highest taxing state with the tax level about 5 per cent above the states' average.  Even more disconcerting is that business taxes are about 11 per cent above that of the lowest taxing jurisdiction of WA.

The key contributors to SA's unenvied result are above-average property taxes, high insurance duties and hefty motor vehicle registration fees.

Indeed, SA imposes the highest land tax and insurance duty impost of the six states.

Given the narrowness and inefficiency of existing state tax bases, the high-taxing approach pursued by the Rann Government represents a significant impediment for the ability of existing businesses in SA to compete on the national and world stage.

The confirmation of SA's status as the highest taxing state in Australia clearly demonstrates the cargo-cult mentality to economic development does not work.

The better approach to build a state economy would be to cut taxes, a low-cost strategy to attract investment and cultivate a long-term productive industry base without the price tags of big government spending and inefficient market distortions.

With a critical state election looming, how the major parties respond to my findings will go a long way toward establishing their credentials on state taxation.

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