The first mistake the Gillard Government made was on the mining tax.
The Rudd government had come undone by an audacious tax grab and Gillard needed to fix the problem quickly. In the end the solution was too quick, with the Commonwealth agreeing to refund all state royalty charges.
It is clear that the Commonwealth meant to refund existing and announced royalty charges -- a sensible approach -- but that isn't the actual agreement that it signed with the miners. So the Australian mining industry faces a tax increase anyway. The real question is who gets the money?
Economists often debate the so-called incidence of taxes. By that they mean who actually bears the economic burden of a particular tax. They seldom ever debate who gets the tax revenue. That is usually quite obvious. Even the case of the GST is clear; it is a Commonwealth tax and the Commonwealth chooses to distribute the money to the states and territories.
The mining tax is going to be very different. The Commonwealth proposes to tax the miners. The poor design of the tax, however, allows the states to increase their royalty charges at the expense of the Commonwealth. As things currently stand, assuming the mining tax passes the Parliament, the Commonwealth imposes a tax and the economic benefit of the tax, i.e. the revenue, accrues to the states. The miners are no worse off, they have to pay more anyway.
Of course this isn't at all what the Commonwealth had in mind. The federal budget is in deficit and Treasurer Wayne Swan has promised, come hell or high water, that the budget will be in surplus next financial year. He needs the money for his own budget.
The argument that increases in royalty charges undermines Tony Abbott's claim that miners are already over-taxed doesn't hold water. Increases in royalty charges are not new taxes (assuming for argument sake that a royalty charge and tax is the same thing), once the mining tax is in place any increase in royalty is gouging the Commonwealth and not the miners. Over time the states will increase their own royalties to collect all the revenue that the Commonwealth hopes to earn from the mining tax.
Wayne Swan has reacted angrily to the states increasing their royalties and placing pressure on the federal budget. He has threatened to take money off the states in areas such as withholding GST payments or infrastructure spending. But is this really wise?
State government is primarily about providing services. So nurses, police and teachers are primarily funded from state government budgets.
The single largest item in the federal government budget is welfare. By defunding state governments the Commonwealth is rebalancing public spending away from the provision of services and towards the provision of welfare. I suspect the majority of taxpayer-voters would not support that choice.
Arguments that we see about the mining tax in the next while are going to be between the Commonwealth and the states as to who gets the loot, not about whether the tax itself is a good or bad reform. Of course, that is how the debate will be framed but that isn't the essence of the argument.
The other complicating feature is that the mining tax is yet to pass the Parliament. Given current uncertainties it may never pass, and the Coalition have promised to repeal it. In that instance the States will (probably) have increased revenue from the increased royalties. Both ways the miners get to pay more and the states end up with the loot. (A slight complicating feature is that the Commonwealth Grants Commission will redistribute the money between the states, but still the Commonwealth may lose out).
This is not what the Commonwealth ever intended. The mining tax was initially formulated on the run and was poorly planned and poorly executed; the Gillard iteration was formulated in a panic and the unintended outcome has been to enrich the states at the expense of the Commonwealth. That is good for the states, but doesn't help the federal budget get back into surplus.
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