The debate at today's tax forum between the Commonwealth and states over taxing powers is one we need to have. This is because, as NSW Treasurer Mike Baird observed, the feasibility of any major taxation reform plan cannot be divorced from the inherently unworkable division of spending and revenue raising responsibilities between governments.
The tale of the tape for Australian fiscal federalism, with its extreme level of vertical fiscal imbalance by international standards, is well known.
Expenditure responsibilities are relatively decentralised, albeit less so over time, with the states responsible for most areas of service provision, including the big-ticket item of health care which is expected to absorb even more of the states' funds as the population ages.
On the other hand the revenue-raising role in our federation is mainly one for the Commonwealth, a development that has come about in two parts.
First, legal interpretations made by the High Court, which for example spelled the end of state petrol, liquor and tobacco franchise fees in the late 1990s, have seen the Commonwealth wrest exclusive powers to tax goods and services.
Second, the centralisation of taxing powers reflects the legacy of history, in which the Commonwealth took over the states' income taxes during World War II but has not handed these taxation powers back.
One consequence of decentralised spending combined with centralised revenue raising has been the much-unloved political blame game, including state complaints that the Commonwealth isn't doling out enough grant money for state politicians to fund services in their electorates.
Another, more valid, complaint has been recently expressed by Victorian Treasurer Kim Wells when he insisted that any tax reform not trample on states' policy autonomy or budget certainty.
In a reflection of the age-old political law that ''shackles follow shekels'', the Commonwealth has increasingly imposed conditions upon states receiving grants that fund state services and fill state budgetary holes.
While suggestions by Commonwealth politicians that they are accountable to Australian taxpayers for how monies are spent are legitimate, the policy conditions increasingly attached to Commonwealth grants means that the lower levels of government have become largely unresponsive to the needs of local businesses and citizens.
And this loss in state policy autonomy has come at a great cost to the Australian economy, with state governments far less capable of crafting innovative policy reforms to bolster productivity and economic growth.
The role of the Grants Commission in effectively redistributing the ''growth dividend'' revenue gains from any unilateral state reform to other jurisdictions does not help matters, either.
A significant focus prior to the tax forum has been the need to relegate the existing suite of inefficient state taxes, particularly on financial and other transactions, as an imposition of the past.
As the many submissions to the forum have stated, these taxes tend to contribute only marginally to the states' revenue base but come at the great cost of significant compliance burdens to business and individual taxpayers.
While the elimination of the worst state taxes would likely produce a long-term dividend for economic growth, something would need to replace these foregone taxes if budget neutrality is to be maintained.
Some commentators have drawn inspiration from the stalled Henry tax review to raise the prospect of new state taxes and charges, such as motor vehicle congestion fees, to replace the alcabala of economically inefficient stamp duties.
However, such pea and thimble revenue swaps would have questionable efficiency effects, and do very little to resolve the fundamental problem of decentralised expenditure and centralised taxation as mentioned above.
The ideal approach to tax reform would be to transfer at least income-taxing powers from the Commonwealth back to the states, with the Commonwealth funding the loss of income taxes by reducing its own spending.
A return of income taxes to the states would provide them with adequate funds for service delivery and infrastructure development, and retool them with meaningful autonomy to creatively tailor public services for the benefit of state residents.
Decentralised taxation would also set in train competitive impulses between jurisdictions in efforts to attract mobile labour and capital from other states and from countries in the Asia-Pacific region.
This suggested reform also recognises that the Commonwealth should play a constructive role in resolving the states' revenue problem and fixing federalism at the same time.
It would be natural to perceive the expected byplay between federal Treasurer Wayne Swan and the state treasurers as a political stoush between the federal Labor Party and Coalition states in a tax forum that is cynically expected to be little more than a talkfest.
But if the forum can successfully lay out a plan that ties tax reform to a reinvigoration of Australian federalism, then it will have made our system of government work much more effectively.
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