Denis James
Economics, Commerce and Industrial Relations Group
3 November 1997
Contents
Major Issues Summary
Introduction
Public Finance Principles and Tax
Assignment
Tax Assignment in Australia
A Brief History of Taxation in
Australia
Vertical and Horizontal Distribution in Australia
Tax Assignment in the Federal Republic of
Germany
Horizontal Equalisation
Horizontal Tax Distribution
Horizontal Fiscal Equalisation Federal Supplementary
Allocations
Tax Assignment in Canada
A Brief History of Taxation In Canada
Horizontal Fiscal Equalisation in Canada
Conclusion
Endnotes
Glossary of Terms
Related Publications
-
- On 5 August 1997, the High Court of Australia declared State
tobacco franchise fees to be unconstitutional. In 1995-96, these
fees raised $4.9 billion and represented 16 per cent of State
taxation revenue.
-
- In response the Commonwealth agreed to immediately implement a
package of measures to provide a safety net for State revenues. The
measures involve the Commonwealth increasing its taxes on the
affected products and providing the revenue so raised to the
States. However, these arrangements are to be regarded as a
stop-gap solution and are to be subject to review within six months
from their implementation date.
-
- The Prime Minister announced, on 13 August 1997, the
establishment of a Taxation Task Force to prepare options for
reform of the taxation system. The Task Force has been asked to
give consideration to a broadly based indirect tax to replace some
or all of the existing indirect tax bases. The Prime Minister has
also directed the Task Force to address the issue of reforming
Commonwealth-State financial relations.
-
- Given the political focus being directed at these two issues,
it is the aim of this paper to outline the assignment of taxation
responsibilities in the Federal Republic of Germany and Canada
(both of which are federations which impose broadly-based
consumption taxes) and to draw comparisons with Australia.
-
- The Australian Constitution gives little guidance as to the
allocation of taxing powers between the Commonwealth and the
States. In the early years of Federation, the States had very poor
tax bases following the ceding of their customs and excise raising
powers to the Commonwealth. However, by the beginning of World War
II, the States were reasonably financially self-sufficient due to
their sharing with the Commonwealth of the income tax base.
However, with the Commonwealth taking over sole responsibility for
income taxation since 1942, the States have reverted to very
limited taxes, especially since High Court interpretation of
section 90 of the Constitution has prevented them from imposing any
form of sales tax on goods.
-
- As a result, in Australia the Commonwealth levies all of the
major taxes and raises around 75 per cent of all government tax
revenues. The States therefore must derive almost one-half of their
revenues from Federal grants. However, through the provision of
these grants, Australia also implements a very sophisticated system
of horizontal fiscal equalisation between the States. The
Australian model assesses the need for such equalisation on both
the expenditure and revenue sides of State budgets. It also ensures
that the richer States are equalised down to the standard while the
poorer States are equalised up to the standard. By contrast, in
both Canada and Germany, the equalisation standard applied only
takes the revenue side of the equation into consideration.
-
- The German Basic Law (Germany's constitution) embodies the
philosophy of ensuring that each tier of government has adequate
access to financial resources. It is very specific about the
allocation of revenues from the major taxes between the Federation,
Länder and municipal governments. All three tiers of
government share in the personal income tax while the Federation
and the Länder also share corporate taxes and the proceeds
from the German value added tax (VAT). Whilst there is no
constitutional requirement to do so, a business tax is also shared
between the three tiers of government.
-
- In Germany, horizontal fiscal equalisation between the
Länder is achieved through the formula for sharing the
proceeds of the VAT, through the provision of funds from richer
Länder to poorer Länder, as well as through supplementary
payments provided by the Federation from its share of the VAT. The
German equalisation model only takes into consideration the revenue
side of Länder budgets. Moreover, equalisation payments need
only ensure that the poorer Länder are equalised to at least
95 per cent of the average revenues of all Länder.
-
- Canada had a very similar tax history to Australia up to the
beginning of World War II. The Canadian Provinces shared the income
tax bases with the Federal Government and were able to word their
legislation imposing sales taxes in such a way as to survive court
challenges. As in Australia, during the War, the Provinces vacated
the income taxing field in favour of the Federal Government.
However, whereas the Commonwealth has failed to restore access to
this base to the States, the Canadian Government allowed the
Provinces to resume income and corporate taxes in 1957. Most
Provinces currently set their own marginal income and corporate tax
rates and have these taxes raised on their behalf by the Federal
Government, although a number of Provinces impose their own taxes.
The Federal Government has provided tax room by reducing its call
on the income tax base.
-
- The Canadian Provinces do not share the Federal goods and
services tax, but continue to raise revenue from their own local
retail sales taxes and excises. Quebec has its own value added tax
and this is harmonised with that of the Federal Government.
-
- Assistance aimed at achieving horizontal equalisation is
provided by the Canadian Government. Equalisation only takes into
account the revenue side of Province budgets and currently the
poorer Provinces are equalised up to a standard represented by the
average revenues of five 'representative' (ie. neither rich nor
poor) Provinces.
-
- It is difficult to posit why these three federations have
adopted such different approaches to the question of tax
assignment. Factors which might have led to a more decentralised
approach in Germany and Canada might include the strong 'States'
house' function of the Bundesrat and the old historical, religious
and tribal origins of the German Länder. In the case of
Canada, the existence of strong, independent Provinces, especially
Quebec and more distinctive cultural differences may have ensured
that the Federal Government has had to adopt a more flexible
approach to Federal-Provincial financial relations.
On 5 August 1997, the High Court of Australia
declared State tobacco franchise fees to be invalid.(1) By
extension, this decision effectively struck down all State
franchise fees, which had been applied to petrol, diesel, alcoholic
and tobacco products and, in certain States, gas. These fees had
been imposed by the States for almost twenty years and were a
significant source of revenue to them. In 1995-96, these fees
raised $4.9 billion and represented 16 per cent of State taxation
revenue.
Even prior to this decision, Federal-State
financial relations in Australia had been characterised by a
substantial degree of vertical fiscal imbalance, that is, an
imbalance between the revenue sources available to the various
tiers of government and their expenditure responsibilities. The
States have major expenditure responsibilities in the fields of
education, health, law and order, transport and housing yet they
have very limited means of raising revenue. Resort to business
franchise fees had been one initiative taken by the States to
expand their revenue base.
The Commonwealth, on the other hand, has sole
access to the major taxes such as income tax, sales tax and duties
of customs and excise. These revenues considerably exceed the
Commonwealth's own expenditure requirements. As a result, the
Commonwealth provides a significant amount of financial assistance
to the States. This 'power of the purse' has enabled the
Commonwealth to engage in policy making in areas over which it has
no direct constitutional powers and has also given it influence
over State borrowing. On the other hand, the Commonwealth has often
argued that its financial dominance is essential for the effective
implementation of national fiscal policy. The invalidation of State
business franchise fees has therefore had the effect of increasing
the degree of vertical fiscal imbalance in Federal-State financial
relations.
On 6 August 1997, the Commonwealth agreed to
immediately implement a package of measures to provide a 'safety
net' for State revenues.(2) The measures involve the Commonwealth
increasing its taxes on the affected products and providing the
revenue so raised to the States (after deducting the cost to the
Commonwealth of administering the scheme). These arrangements are
to be regarded as a stop-gap solution and are to be subject to
review within six months from their implementation date.
The High Court decision has not only highlighted
the imbalance in revenue raising capacities of the Commonwealth and
the States, it also highlights the narrowness of the indirect tax
base in Australia. In 1997-98, Commonwealth indirect tax
collections (sales tax, excises and customs duties) were expected
to amount to $31.1 billion. Already, Federal excise on refined
petroleum, tobacco and alcoholic products was expected to be $13.5
billion. To this might be added the amount of customs duty levied
on these products and sales tax on alcoholic products. The taxation
of these three products therefore already accounts for around
one-half of all Commonwealth indirect taxation.(3) Adding the $5
billion additional taxes on these products on behalf of the States
simply illustrates more clearly the dependence of our indirect
taxation system on these goods.
Addressing both of these issues the Prime
Minister announced, on 13 August 1997, the establishment of a
Taxation Task Force (with its membership drawn from the Australian
Tax Office and the Commonwealth Departments of Treasury and Prime
Minister and Cabinet) which will prepare options for reform of the
taxation system. The Task Force has been asked to give
consideration to a broadly based indirect tax to replace some or
all of the existing indirect tax bases, with any new taxation
system involving major reductions in personal income tax. As part
of this process, the Prime Minister has also directed the Task
Force to address the issue of reforming Commonwealth-State
financial relations.(4) At the same time, the Commonwealth
announced that these issues should be discussed with the States at
the November 1997 Council of Australian Governments meeting.
Given the political focus being directed at
these two inter-related issues, it is the aim of this paper to
briefly examine the assignment of taxation responsibilities between
the tiers of government in two other federal countries-the Federal
Republic of Germany and Canada-both of which also raise substantial
taxation revenues from broadly-based consumption taxes. For
purposes of comparison, tax assignment in Australia will also be
outlined.
Federal structures will vary, both between
countries and within any country over time, reflecting a wide range
of political, legal and historical factors. However, it is possible
to theorise on a set of public finance principles which might form
the basis for an appropriate allocation of expenditure
responsibilities and access to sources of taxation revenue.
Russell Mathews, one of Australia's principal
writers on Federal-State financial relations, argues that the
following factors may be relevant in determining which level of
government is best qualified to accept responsibility for
particular functions(5)
-
- access to information sources
-
- responsiveness to those affected by government decisions
-
- political accountability for decisions taken
-
- effects on stability and growth
-
- capacity to administer the function
-
- the existence or otherwise of economies of scale
-
- capacity for contributing to economic equality and social
justice and
-
- the possibility of encompassing all relevant 'spillover'
effects into the decision making process.
On the basis of these criteria, the federal
government should have a prime responsibility for activities with
an international, interstate or national character. Such functions
are likely to be more efficiently and economically undertaken by
the central government. State governments could address these
functions, but only through complicated, co-ordinated policy
agreements. The states, on the other hand, would be given
responsibility for providing those functions which are closest to
the individuals within their jurisdictions.
The central government, on the above criteria,
might be seen as the more appropriate level at which to set
economic stabilisation and growth priorities and to oversee the
process of intergovernmental and interpersonal transfer payments.
It is, however, by no means certain that the high degree of
vertical fiscal imbalance found in Australia is necessary for the
effective conduct of fiscal policy. Fiscal policy still appears to
be an effective instrument in other federations characterised by a
lower degree of fiscal centralisation.(6)
Services of a national nature, such as post and
telecommunications services, might also be provided by the central
government. The states would be more concerned with policies
affecting the allocation of resources within their own
jurisdictions. In concrete terms, this might include the provision
of such services as law and order, education, health, housing,
community services, transport and regional economic development.
The allocation of functions within Australia matches this model
reasonably well.
Even more theoretical is the question of the
appropriate assignment of taxation powers amongst the various
levels of government. The criteria which are frequently cited
are(7):
-
- the distribution of taxing powers should be related to
expenditure responsibilities and borrowing powers
-
- taxes on bases with high mobility as between state
jurisdictions should be reserved to the federal government (eg.
death duties, company income tax)
-
- taxes designed primarily to achieve economic stabilisation or
redistributive functions should be assigned to the central
government
-
- all levels of government need to impose particular taxes and
charges to achieve desirable resource allocative decisions in the
community (eg. road user charges)
-
- a central government should be able to impose tax on either an
origin-basis or a residence basis, while states should only levy
residence-based taxes (eg. states could have access to personal but
not corporate income tax) and
-
- regard should be had to the administrative convenience on the
part of the collecting authority and the payer of the tax.
Unfortunately, while these criteria look
appealing in theory, they are difficult to apply in practice.
However, when considering the tax assignment systems in the
countries discussed below, these criteria do provide some yardstick
against which the revenue assignment arrangements found in those
countries might be compared.
When Australia's founding fathers framed the
Constitution in the late 1800s, it is unlikely that they could have
foreseen the extent to which the Commonwealth would come to
fiscally dominate the States. The Constitution was designed to
conserve the powers of the States while reaping the benefits which
would flow from federation. It was for this reason that the
Constitution does not specify powers for the States. These powers
were taken as given. Only the powers available to the Commonwealth
were carefully defined and the majority of these powers were only
granted on a concurrent basis with the States.(8) Only where
commonsense dictated that certain functions were unambiguously of a
national nature were the requisite powers granted exclusively to
the Commonwealth. Some of these functions include the right to
raise armies, matters relating to coinage, power over territories
and over Commonwealth places. The Constitution also cedes to the
Commonwealth exclusive power to impose duties of customs and
excise, although the definition of an excise has been one of our
most vexed legal questions.
It would appear then, that the framers of our
Constitution viewed the roles of the Commonwealth and the States as
co-ordinate. Each level of government would carry out the tasks for
which it was most suited and each would have access to the
financial resources necessary for the exercise of these functions.
That such an outcome has not eventuated must imply that our
founding fathers were either myopic or overly optimistic about the
political processes which would develop over successive
generations. It must have been obvious to them that as the nation
developed, imbalances were bound to occur between the powers
exercised by the various tiers of government and the available
financial resources. However, the Constitution gave very little
guidance as to the mechanisms which could be put into place to
handle these developments. Even though the Constitution provided
guidelines for protecting the revenue of the States, these
provisions ceded ultimate power over Federal-State financial
arrangements to the Federal Parliament. These provisions can be
found in sections 86 to 97 of the Constitution.
Three sections in particular deal with the
provision of revenue to the States. Section 87 states:
During a period of ten years after the
establishment of the Commonwealth and thereafter until the
Parliament otherwise provides, of the net revenue of the
Commonwealth from duties of customs and excise not more than
one-fourth shall be applied annually by the Commonwealth towards
its expenditure. The balance shall, in accordance with this
Constitution, be paid to the several States, or applied towards the
payment of interest on debts of the several States taken over by
the Commonwealth.
This section recognised that the main taxation
revenue available to the colonies had been customs and excise
revenue. The power to raise such revenue was now to be transferred
exclusively to the Commonwealth. It was further recognised that the
overwhelming bulk of government functions would continue to be
performed by the States. However, the Commonwealth Parliament saw
fit to abandon this transitional provision at the earliest possible
opportunity.
Section 94 was also designed to give guidance on
the matter of intergovernmental financial transfers. This section
states:
After five years from the imposition of uniform
duties of customs, the Parliament may provide, on such basis as it
deems fair, for the monthly payment to the several States of all
surplus revenue of the Commonwealth.
This also reflected the view that the resources
of the Commonwealth were likely to exceed its expenditures.
However, the Commonwealth did not take long to subvert the intent
of this section of the Constitution by setting up a succession of
trust funds into which any 'surplus' could be paid, hence ensuring
that no such surplus would, in an accounting sense, eventuate.
Faced with relatively heavy defence and social security
expenditure, the Commonwealth in 1908, set up a pension trust fund
into which it could pay all 'surplus' revenue and the States were
only paid their three-quarters share of customs and excise revenue
(as per section 87). In 1910, even the section 87 provision was
abolished and the States grudgingly accepted annual per capita
payments from the Commonwealth. This represented a significant
decline in the level of Commonwealth grants to the States.
The remaining important section of the
Constitution dealing with intergovernmental transfers is section
96. This section states:
During a period of ten years after the
establishment of the Commonwealth and thereafter until the
Parliament otherwise provides, the Parliament may grant financial
assistance to any State on such terms and conditions as the
Parliament thinks fit.
One can only wonder if the founding fathers had
any inkling at all as to the power that they were providing the
Commonwealth under this section. Not only has it been instrumental
in allowing the Commonwealth to extend its influence into areas
which were not assigned to it under the Constitution, but also
allowed the Commonwealth, in the early 1940s, to gain sole access
to the income tax base, hence ushering in the period of
Commonwealth financial domination of the States.
With the Constitution providing no longer term
solution to the question of intergovernmental fiscal relations, the
development of policies and institutions to address this issue has
been left up to political processes. These processes have not,
however, been particularly happy ones. While at times they have
reflected genuine attempts at co-operation and co-ordination,
unfortunately they have also all too often reflected political self
aggrandisement, suspicion, self-interest (often of a short-sighted
nature) and ideological conflicts. There have been many occasions
on which the problems of fiscal federalism could have been
addressed, but mostly these attempts have been thwarted by
conflicting objectives on the part of the Commonwealth and the
States or, as often happened, between the States themselves.(9)
The Constitution has been of little assistance
in the assignment of tax powers in Australia. The Commonwealth's
power to tax is found in section 51 (ii) of the Constitution. Such
power is certainly concurrent with the taxing power of the States,
except in relation to the imposition of duties of customs and
excise which, by virtue of section 90 of the Constitution, is an
exclusive power of the Commonwealth.
With the exception of customs and excise duties,
therefore, the States can, legally, have access to any tax base,
including income taxation. The High Court has ruled that section
109, which ensures that where Commonwealth and State laws are in
conflict Commonwealth law will prevail, would have limited
application in the taxing field. For that reason, it is possible
for the Commonwealth and the States to impose taxes on the same tax
base. Such taxes would not be interpreted as being in conflict with
each other, but would be seen as a sharing of the available tax
base.
The Constitution does require (sections 51 (ii)
and 99) that any tax imposed by the Commonwealth does not
discriminate between any States or parts of States. In this
respect, the imposition of taxation by the Commonwealth must be
'uniform'.
Despite the apparent scope that the Constitution
grants to the States to impose tax on a great variety of tax bases,
in reality, the Commonwealth has been able to rely on High Court
interpretations of the powers bestowed upon it by certain sections
of the Constitution, most notably sections 96 and 90, to
effectively prevent the States from fully exploiting their taxing
potential.
Section 96 has been used to great effect by the
Commonwealth since 1942 to exclude the States from the income
taxing field. In that year, the Commonwealth reached agreement with
the States that they should cede to it their income taxing powers
on a 'temporary' basis. At the time, the various States imposed
their income taxes at very different levels. The Commonwealth
wished to raise income taxes to finance the War, but found itself
in a quandary. If it set its income tax at a uniform high level,
this would impose a serious burden on those inhabitants in States
with high income tax. Imposing low Commonwealth tax would not yield
sufficient revenue.
The solution was for the Commonwealth to impose
a uniform, high rate of tax and reimburse the States for the income
tax that they would have forgone. Later, in 1946, the Commonwealth
informed the States that it would retain the sole income taxing
position, but would make appropriate tax reimbursement grants to
the States on condition that they did not attempt to reimpose their
own taxes. The High Court ruled, in 1957, that the imposition of
this condition on the provision of general revenue assistance to
the States was a valid use of section 96. Thus, in this manner the
Commonwealth has effectively excluded the States from a major
potential source of taxation revenue.
A further major constraint on the States'
ability to exploit a significant tax base has been the High Court's
interpretation of section 90 of the Constitution. Section 90
states:
On the imposition of uniform duties of customs
the power of the Parliament to impose duties of customs and of
excise, and to grant bounties on the production or export of goods,
shall become exclusive...
Although economists make a clear distinction
between an excise, which is applied at the point of production of a
good, and a sales tax, which is applied at the point of wholesaling
or retailing, the High Court has effectively ruled that a tax
applied anywhere in the production and distribution chain is a 'tax
on production' and hence an excise, to be applied exclusively by
the Commonwealth. This view found its strongest expression in the
August 1997 Ha and Hammond decision referred to in the
introduction.
The upshot of the High Court's interpretation of
section 90 is that the States have effectively been denied access
to any meaningful taxes on the sale of goods. This probably makes
the Australian States unique, since in most other federations,
sales taxes are an important source of State revenue. It remains to
be said, however, that the States might have more success in
applying taxes on services. To date, however, the States have not
really attempted to explore this field, the imposition of various
taxes on the provision of banking and insurance services being the
only major application.
A Brief History of Taxation in
Australia
Just prior to Federation, the main revenues
available to the colonies were customs and excise duties. Upon
Federation, the power to raise such duties was ceded to the
Commonwealth. Over the next ten years, therefore, there was a need
for considerable grants to the States to compensate them for the
loss of this revenue source. The States, which had always levied
small amounts of income tax, began to develop this as a primary
source of tax revenue. Of course, the States also derived a
reasonable amount of non-tax revenue from other sources, such as
railway profits, land sales and royalties. The Commonwealth entered
the income taxing field for the first time in 1915, but this did
not constrain the States from further exploiting this tax base.
In 1909-10, total State revenue amounted to $52
million. Commonwealth grants to the States made up 31 per cent of
this revenue ($16.2 million). State taxation made up a further 15
per cent ($8 million). Taxation revenue comprised, in the main,
income tax and estate tax receipts ($2.5 million and $2.6 million
respectively). Just over half of State own revenue was derived from
non-tax sources, with railway profits and land sales making up the
bulk of these receipts.
By 1918-19, the States were becoming more
independent financially. Grants from the Commonwealth had declined
to only 17 per cent of State revenue. Total tax receipts of $23.9
million represented 32 per cent of revenue. Of this amount,
approximately one-half was derived from income tax. Again,
substantial revenues were also raised from the profits of the
railways and other public enterprises.
From 1929 until the beginning of World War II,
the Commonwealth provided around 14 per cent of total State and
local revenues. It would be fair to say, therefore, that just prior
to the War, the financial resources raised by the States themselves
were basically sufficient for them to meet their own expenditures.
In 1938-39, for example, total State and local revenues were $216
million. Of this, 14 per cent was provided as grants from the
Commonwealth. Tax receipts represented 61 per cent of revenue, with
income taxes representing around one-half of those receipts. Other
significant taxes were estate duties and taxes on motoring.
As has already been mentioned above, this
situation changed dramatically in 1942. On 23 February 1942, the
Treasurer appointed a Committee to consider the question of the
Commonwealth becoming the sole income taxing authority for the
duration of the War, and for reimbursement payments to be made to
the States upon their retirement from the income taxing field. The
Committee presented its report on 28 March 1942 and recommended
that for the duration of the War and one year afterwards, the
Commonwealth government should be the sole authority to impose
taxes on income and that the States should be duly compensated. In
May 1942, legislation was introduced in the Federal Parliament to
give effect to this recommendation and a uniform income tax scheme
came into operation on 1 July 1942.
Four State Governments challenged the validity
of this legislation, but it was upheld by the High Court.
Interestingly enough, in its 1942 decision the High Court ruled
that the Commonwealth had priority in the imposition of income tax,
that is, that the States could only levy income tax on incomes
after Federal income tax had been paid. This left the States with
very little room to manoeuvre and they had to comply with the
Commonwealth's scheme. Of course, by 1957 when the High Court
reversed its decision on priority, the Commonwealth had such a grip
on the income taxing field that it would have been politically very
difficult for the States to have applied their own income taxes in
any significant way.
Later in 1942, the Commonwealth Government, in
agreement with the States concerned, also established a uniform
entertainments tax on a similar basis and provided for annual
reimbursement grants to be paid to the five States which previously
had levied entertainments tax.
By 1942-43, therefore, State and local taxation
receipts had fallen from 61 per cent of total revenue just prior to
the War to 28 per cent. Even then, around one-half of this amount
was local government rates. The only two significant tax bases
available to the States themselves were estate and gift duties and
motor taxation. Around 36 per cent of revenue was derived from
Commonwealth grants and, fortunately for the States, they were
still able to derive significant income from their business
undertakings.
At a Premiers' Conference in January 1946, the
States were informed that the Commonwealth proposed to continue
uniform taxation indefinitely. A formula approach was adopted to
the distribution of tax reimbursement grants which continued to be
provided on condition that the States made no attempt to re-enter
the income taxing field. This left the States with little
alternative other than to devise new forms of taxation, although
the States did make various attempts between 1950 and 1970 to
regain access to the income tax base ('access' being used in a
practical sense, since there was never much doubt that the States
had a legal right to impose such taxation).
The States moved very slowly to expand their tax
bases in the 1950s. When the Commonwealth ceased to impose land tax
during 1952-53, the States were slow to increase their own land
taxes, and only Victoria, Western Australia and Tasmania reimposed
entertainments tax when the Commonwealth withdrew from that field
in 1953-54. Even today, the land tax imposed by the States exempts
residential and rural land, so it can be argued that no real
attempt has been made to fully exploit this tax base. Stamp duties
were also expanded to some extent during this period.
As mentioned above, various attempts were made
by certain States to regain access to income taxing powers. In July
1952, the Commonwealth informed the States that it was willing to
discuss with them the possibility of them resuming State income
tax. A report entitled Resumption of Income Tax by the
States was prepared by Commonwealth and State Treasury
officers and the matter was discussed at Premiers' Conferences in
February and August 1953. No agreement could be reached between the
Commonwealth and the States on the extent to which the Commonwealth
should withdraw from the income taxing field and the subject was
consequently dropped.
In 1955 and 1956, Victoria and NSW again
challenged the right of the Commonwealth to use section 96 to
effectively exclude the States from the imposition of income tax
and asked the Court to rule on the matter of Commonwealth priority.
The Court ruled unanimously in 1957 that the Commonwealth could use
section 96 to make the provision of financial grants conditional
upon the States not levying income tax but negated the principle of
Commonwealth priority.
In September 1964, the Victorian Government
announced its intention of introducing a 'marginal' income tax, to
be payable by individuals living in Victoria and to operate from
the beginning of 1965-66, and requested the Commonwealth to collect
the tax on its behalf. The Commonwealth refused to accede to this
request. Victoria indicated that it would not collect the tax
itself but raised the matter at the June 1965 Premiers' Conference.
None of the other States supported the idea of a 'marginal' income
tax and the matter did not proceed.
On 19 January 1970, the Premiers of all States
signed a document entitled The Financial Relationships of the
Commonwealth and the States. This document, among other
things, requested that State and Commonwealth Treasury officers be
instructed to devise a scheme whereby the States should have access
to income tax, broadly along the lines of the system operating in
Canada. At the subsequent Premiers' Conference in February 1970,
the Prime Minister rejected this proposal out of hand, citing a
number of objections. These included macro-economic policy making
considerations, the 'equitable' treatment of all Australians
brought about by uniform taxation, the budgetary problems that
would be faced by the States as income tax receipts fluctuated and
the problems that would arise in the process of calculating
equalisation grants by the Commonwealth Grants Commission.
Nevertheless, the Commonwealth did attempt to
assuage the States by increasing their financial assistance, by
agreeing to assist with State debt, and by agreeing to co-operate
in identifying potential 'growth' taxes that the States might
apply. It was this last agreement which, combined with the High
Court's invalidation of State receipts duty on certain types of
transactions, ultimately led to the transference of payroll tax
from the Commonwealth to the States in June 1971.(10)
The attempt by the States to gain access to the
income tax base in 1970 was the last significant action on their
part to resume such taxation until the series of Special Premiers'
Conferences conducted in the early 1990s, as will be discussed
below. When the Commonwealth attempted to allow the States to levy
marginal income tax surcharges or rebates under the Income Tax
(Arrangements With the States) Act 1978 as part of the Fraser
Government's New Federalism policy, the offer was declined. This
Act was eventually repealed by the Hawke Government in 1989.
There have been various interpretations of the
States' reticence to impose such marginal income taxes in the
1980s. On the one hand, it might be argued that the States are
quite comfortable receiving grants from the Commonwealth, which can
then be blamed for any financial shortcomings the States might
face. The reticence of the States to fully exploit tax bases such
as taxes on services and land tax and the abolition by them of
estate and gift duties is often presented as further evidence of
this acquiescence. Certainly, in a number of States, such as NSW,
the marginal tax rates were portrayed for political reasons as a
form of 'double taxation'. This would have made it difficult for
such States to take up the offer at a later date.
On the other hand, it can be argued that the
Fraser Government did not make sufficient 'tax room' for the States
to impose marginal income taxes. The Commonwealth made no attempt
to retreat from the income taxing field to give the States the
political space to impose their own taxes. Nor did the Commonwealth
retreat sufficiently to force the States to take compensatory
taxing measures.
The last major attempt by the States to gain
greater access to the income tax base occurred in the early 1990s.
In the communique from the October 1990 Special Premiers'
Conference, Heads of Government agreed that a fundamental review of
Commonwealth-State financial arrangements was needed. In conducting
such a review, the Commonwealth and the States recognised "the need
to address the question of vertical fiscal imbalance with a view to
reducing that imbalance while recognising the necessity for the
Commonwealth to have adequate means to meet its national
responsibility for effective macro-economic management". It should
be noted that the Commonwealth had only reluctantly yielded to
State pressures for the question of vertical fiscal balance to form
part of the Hawke Government's New Federalism process. While the
Commonwealth was prepared to countenance an in-depth investigation
of the issues, it was not prepared to make any hard and fast
commitment to substantially alleviating the problem, especially
through any transfer of income taxing powers to the States.
A Working Group of senior Commonwealth and State
treasury officials was established to review the distribution of
Commonwealth and State government taxation powers. The principles
guiding such a review were, among others, that appropriate
arrangements should:
-
- enable each level of government to have access to reliable
sources of revenue which are, so far as possible, commensurate with
expenditure responsibilities and national responsibilities for
macro-economic management
-
- ensure a rational allocation of revenue powers between levels
of government that further improves the efficiency, effectiveness,
equity and simplicity of the Australian tax system
-
- maintain revenue neutrality on a national basis and
-
- reflect an acceptance of the principle of fiscal
equalisation.
The Committee produced a report for
consideration at the November 1991 Special Premiers' Conference to
be held in Perth.(11) However, just prior to this Conference, the
States approached Prime Minister Hawke with a plan for the
imposition of a marginal State income tax. This plan was attacked
by former Treasurer, Mr Keating(12), who had recently moved to the
backbench and, following considerable political debate within the
Government, the Prime Minister refused to countenance the proposal.
In the process, the Working Group report was consigned to the
wastebasket. With the Commonwealth being perceived as downgrading
its commitment to allow a full and meaningful debate on the problem
of vertical fiscal imbalance, the States boycotted the proposed
November Special Premiers' Conference and held their own Premiers'
and Chief Ministers' Meeting in Adelaide, also in November.
At that meeting, the Premiers and Chief
Ministers reiterated their support for a national income tax
sharing scheme based on providing States and Territories with
access to the personal income tax base and with a corresponding
decline in financial assistance grants. The Premiers pointed out
that the Working Group had identified a figure of 6 per cent
(amounting to some $10 billion) of the personal income tax base as
a maximum figure for collections to be provided to the States
without impinging on fiscal equalisation arrangements between the
States.(13) Furthermore, they noted that the scale of tax sharing
proposed by the States was assessed by Commonwealth and State
treasury officials as being unlikely to adversely impact upon the
effectiveness of the Commonwealth's macro-economic policy
responsibilities. Finally, the Premiers proposed that a panel of
independent experts from Australia and overseas should be invited
to undertake an objective assessment of a range of options,
including the States' proposal, to reduce vertical imbalance.
It is quite clear that the Premiers' proposals
were designed to keep the issue of vertical fiscal imbalance at the
forefront of the discussions on Federal-State reforms, especially
in view of the equivocating approach being taken by the
Commonwealth on the issue. It was within this environment that the
Premiers and the Commonwealth next met on 11 May 1992 in Canberra,
with Mr Keating as Prime Minister. A position paper by Premiers and
Chief Ministers was circulated prior to this meeting.(14) This
paper set out two main options for redressing what the States
perceived as the problem of vertical fiscal imbalance.
The first option was the income tax sharing plan
that had been previously proposed by them. The details of this plan
were:
-
- the States would be accountable for an identifiable component
of national personal income tax
-
- the State component would be set at approximately six cents in
the dollar of taxable income for the first three years, with a
corresponding reduction in financial assistance grants.
-
- after three years, any proposed changes to the States'
component rate, either individually or collectively, would be a
matter for agreement between the Commonwealth and the States
and
-
- income tax would continue to be collected by the Australian Tax
Office under a single tax regime determined by the
Commonwealth.
The States emphasised that these arrangements
would be revenue neutral with no effect on the rate of personal
income tax paid by individuals, that is, there would be no 'double
taxation'.
The second option proposed was as follows:
-
- total grants, excluding grants for on-passing, should be a
fixed share of total Commonwealth taxation revenue, broadly in line
with that applying in the early 1980s and sufficient to
re-establish, over time, a revenue base for the States commensurate
with their expenditure responsibilities
-
- a guarantee that total payments, excluding grants for
on-passing, in any year do not fall below the 1991-92 level in real
per capita terms with
-
- the above arrangements to be adjusted, where appropriate, to
reflect changes in functional responsibilities.
At the Heads of Government Meeting in May, no
decisions were taken on these matters. As the communique from that
meeting points out, in discussing the paper prepared by the States
on Commonwealth-State financial relations, the Commonwealth
acknowledged that the States needed to be adequately resourced and
that the predictability, flexibility and growth of State funding
were agreed objectives. However, these objectives continue to
remain unmet.(15)
With the exclusion of the States from the field
of income tax, they have made some attempts to improve their tax
position. During the 1960s, some States imposed surcharges on motor
vehicle third party insurance premiums. All States imposed gambling
taxes of various forms, such as on horse racing betting turnover,
or poker machines. In recent years, gambling taxes applied to
casinos have also been an important source of State revenue.
The States had also been collecting stamp duty
on various financial transactions. In the 1960s they attempted to
extend these stamp duties to virtually all business receipts. The
0.1 per cent receipts duty was an attempt on their part to impose
some form of taxation on turnover, as a surrogate for a
broadly-based consumption tax. In 1969, however, two cases were
heard before the High Court which led to a decision by the Court
that stamp duties imposed by a State on receipts in respect of
sales, at any stage from manufacture to consumption, of goods
produced in Australia were duties of excise.
This effectively invalidated any attempt to
impose receipts duties on transactions involving goods.
Interestingly enough, the Court did not invalidate duties imposed
on receipts of wages or salaries. This helped clear the way for the
States to take over payroll taxes in 1971, although it was
understood by the States that if they were to attempt to impose
receipts duties on all incomes, this would be regarded as a proxy
income tax and would breach the conditionality associated with the
provision of financial grants from the Commonwealth.
With the invalidation of the receipts duties,
the States looked for other ways of overcoming the High Court's
interpretation of section 90. The States' next approach was that of
business franchise taxes. Such taxes were applied by requiring the
vendor of a particular commodity to be licensed. The tax then takes
the form of a licence fee. The fee usually consisted of a flat-rate
amount plus some ad valorem component, usually expressed
as a percentage of turnover over some specified preceding
period.
Such a tax had long been applied by the States
on the suppliers of liquor, who have to be licensed to engage in
such trade. It became obvious that such a scheme might be extended
to other commodities and, to date, such business franchise fees
have been levied on the sale of petroleum products, tobacco
products, liquor and, in certain States, gas. An attempt by
Victoria to impose a similar type of tax on oil pipelines was found
by the High Court to be in breach of section 90 in August 1983. Of
course, all business franchise taxes were struck down in the 1997
Ha and Hammond decision.
The only other major tax imposed by the States
in recent times has been the financial institutions duty. This is a
transactions duty rather than a stamp duty in its traditional
sense. It applies to receipts by all financial institutions, not
just banks. In NSW and Victoria, the financial institutions duty
was introduced on 1 December 1982, while South Australia and
Western Australia followed suit as from 1 January 1983. Tasmania
introduced a slightly different scheme as from 20 December 1983.
Queensland has no financial institutions tax.
It might be noted that, even in the area of
financial institution taxation, the States initially had to share
the field with the Commonwealth. The Commonwealth introduced its
own bank account debits tax, which applied from 1 April 1983. This
is a tax on all debits charged to any bank account arising from
cheques being presented, periodic debits, interest charged and bank
fees. It also applies to certain accounts with cheque drawing
facilities at savings banks, building societies, credit unions and
the like. However, in his 19 July 1990 speech to the National Press
Club entitled Towards a Closer Partnership, the Prime
Minister announced that the Commonwealth would relinquish the bank
accounts debits tax to the States. This was done as from 1 January,
1991.
Certainly, however, the States have abandoned a
number of taxes which they used to apply. The most important of
these was estate and gift duties, a tax which they also shared with
the Commonwealth. In 1976-77, these taxes were raising around $250
million for the States. Queensland started the process by
abolishing its gift and death duties from 1 January 1977. The other
States felt that, for both political and practical purposes, they
would have to follow suit. Most of the other States therefore
abolished their duties over the period from 1977 to 1982. Victoria
took a little longer to phase out its duties. They ceased as from 1
January 1984. The Commonwealth also vacated this field as from 30
June 1979.
Table 1 shows the distribution of taxation in
Australia as at 1995-96. As shown in Table 1, the Commonwealth
raises around three-quarters of all taxation in Australia. Yet,
Commonwealth outlays for its own purposes represent only around 60
per cent of total general government outlays. As a result, the
Commonwealth is required to make substantial financial payments to
the States to enable them to fulfil their expenditure functions.
Given the paucity of the taxation bases available to the States,
the assistance provided by the Commonwealth to the States
(currently in excess of $34 billion ) represents around 45 per cent
of State general government revenues. As can also be seen from
Table 1, the major source of tax income to local government is
property tax, generally in the form of rates. Local government also
raises funds from various fees.
Table 1. Commonwealth, State and Local Government Taxes
in Australia, 1995-96
Tax
|
Revenue ($m)
|
Percentage
|
Commonwealth:
|
|
|
Personal income tax
|
60 414
|
39.71
|
Company tax
|
18 252
|
12.00
|
Fringe benefits tax
|
3 031
|
1.99
|
Superannuation tax
|
1 634
|
1.07
|
Withholding tax
|
1 349
|
0.89
|
Petroleum resource tax
|
791
|
0.52
|
Sales tax
|
12 955
|
8.51
|
Excise duties
|
12 849
|
8.45
|
Customs duties
|
3 124
|
2.05
|
Primary industry charges
|
753
|
0.49
|
Broadcasting fees
|
149
|
0.10
|
Other taxes, fees and fines
|
1 058
|
0.70
|
Total Commonwealth
|
116 359
|
76.48
|
State:
|
|
|
Payroll tax
|
7 088
|
4.66
|
Land tax
|
1 483
|
0.97
|
Other immovable property taxes
|
360
|
0.24
|
Stamp duties
|
4 165
|
2.74
|
Financial institutions taxes
|
1 904
|
1.25
|
Gambling tax
|
3 306
|
2.17
|
Taxes on insurance
|
1 730
|
1.14
|
Motor vehicle taxes
|
3 454
|
2.27
|
Franchise taxes*
|
4 903
|
3.22
|
Other taxes fees and fines
|
1 967
|
1.29
|
Total State and
Territory
|
30 360
|
19.95
|
Local:
|
|
|
Taxes on property
|
5 010
|
3.29
|
Fees and fines
|
418
|
0.27
|
Total local
|
5 428
|
3.57
|
TOTAL TAXATION
|
152 147
|
100.00
|
-
- These taxes were abolished in 1997 and replaced by equivalent
Commonwealth taxes.
Sources: Commonwealth Budget
Paper No. 1, 1997-98 and Australian Bureau of Statistics,
Taxation Revenue Australia, 1995-96 (Cat. No. 5506.0).
Vertical and Horizontal Distribution in
Australia
Given the assignment of taxation
responsibilities in post-war Australia, mechanisms have had to be
put into place to ensure that the States have access to the
resources necessary to meet their expenditure responsibilities.
This has been achieved in Australia through the provision of
general purpose and specific purpose grants to the States. For the
most part, these grants have been determined by the Commonwealth
and have tended to reflect its own priorities. The only recent
attempt at more co-operative federal financial relations was the
period between 1976 and 1985, when the States and local government
were guaranteed a specified share of Commonwealth taxation
revenue.
Between 1976-77 and 1980-81, the States received
tax sharing grants (a major component of general purpose revenue
assistance), expressed as a proportion of Commonwealth personal
income tax receipts. After a transitional year in 1981-82, the
States received a share of total Commonwealth taxation receipts
from 1982-83 until 1984-85. Tax sharing was abolished from 1985-86
and replaced with a financial assistance grants system which is
still current today. Local government also received a legislated
share of Commonwealth personal income tax collections between
1976-77 and 1984-85.
Not only has the Commonwealth had responsibility
for addressing the vertical fiscal imbalance, it has also accepted
sole responsibility for ensuring horizontal fiscal equalisation
between the States. As early as 1910, some of the smaller States in
the Commonwealth pointed put that they were unable to provide the
same standard of service as the richer States. The Commonwealth
therefore began to provide Special Grants to Western Australia,
Tasmania and, later, South Australia to assist them with their
budgetary difficulties. However, the provision of these grants was
somewhat ad hoc. In 1933, following the development of
strong secessionist movements in both Western Australia and
Tasmania, the Commonwealth Grants Commission was established to
devise a methodology for formulating recommendations aimed at
ensuring that the smaller States were adequately funded.
Over time, the Commission's methodology has
changed significantly. In the early years, the Commission's
recommendations were designed simply to provide additional grants
to the poorer States so as to enable them to provide services close
to the same level as the other States. This methodology has since
been developed into a very sophisticated model aimed at ensuring
that fiscal capacity is equalised across all States and
Territories. The model assesses the relative fiscal needs of the
States by comparing both their capacities to raise revenue and
potential difficulties faced by them in the provision of services.
Each State is compared with a standard based on the finances of all
States and Territories and fiscal needs are expressed as a set of
per capita relativities which are then used in the distribution of
general revenue assistance.(16)
Unlike the Australian situation, the German
Basic Law (Grundgesetz) not only specifies the basis upon which the
financial relations between the Federation and the Länder are
to be organised, but is also prescriptive as to the assignment of
powers to make tax legislation and, in the case of income and
corporate profits tax, how such taxes shall be distributed between
the tiers of government. Also, unlike Australia, the Basic Law
gives constitutional recognition to municipalities (Gemeinde) or
groups of municipalities and specifies how this level of government
too shall share the proceeds of certain taxes.
It is not surprising that the Basic Law is
specific in this respect. When the German constitution was being
drafted in the immediate post-war years, it was an aim of the
allied powers overseeing the process to ensure that political power
in Germany remained decentralised. Not only does the Basic Law
protect the rights of the States, it also provides for the
existence of an upper house in the Federal Parliament, the
Bundesrat, to represent the Länder. The Bundesrat is perhaps
the most powerful States' house of any federal country.
The basic philosophy underlying German
federal-state relations has been summarised in an official
publication of the Finance Ministry as follows:
In order for a federal state to function, a
distribution of public revenues amongst the tiers of government
commensurate with the responsibilities of each tier must be
ensured. Both tiers-Federation and Länder-must, measured
against their expenditure responsibilities, be sufficiently
provisioned that no tier is financially dependent upon the
other.(17)
The relative tax powers of the Federation and
the Länder are set out in Article 105 of the Basic Law. In
terms of the ability to legislate on taxation, the Federation has
exclusive power to make laws concerning customs duties and fiscal
monopolies (such as the former brandy monopoly).(18) The Federation
has concurrent powers to legislate on all other taxes, the revenue
from which accrues to it wholly or in part. The Federation may also
legislate in tax matters where the matter cannot be effectively
regulated by the legislation of individual Länder, where
regulation by one Land may prejudice the interests of other
Länder or where the maintenance of legal and economic unity
calls for federal legislation. Most importantly, however, federal
legislation on taxes, the revenue from which accrues wholly or in
part to the Länder or municipalities, requires the consent of
the Bundesrat.
The Länder have legislative powers:
-
- where the preconditions for concurrent legislation by the
Federation do not exist
-
- where the Federation does not avail itself of its concurrent
rights
-
- over local consumption and expenditure taxes so long as these
are not identical to those taxes levied by the Federation.
-
- over the imposition of church tax.
In practice, the Federation has significantly
exercised its legislative competence in the areas of exclusive and
concurrent taxation so that only a relatively limited scope remains
for the Länder to derive taxation income through their own tax
measures.
Notwithstanding the legislative competence of
each tier of government, the apportionment of actual tax revenues
between the tiers of government is specified in Article 106 of the
Basic Law. Revenue from the following taxes accrue to the
Federation:
-
- the yield from fiscal monopolies
-
- customs duties
-
- excise taxes (on such commodities as tobacco, coffee, tea,
salt, petroleum products, etc.) but not on beer
-
- road freight tax
-
- capital transactions taxes, insurance tax and tax on bills of
exchange
-
- non-recurrent levies on property
-
- income and corporation surtaxes
levies applied within the framework of the
European Union The Länder, on the other hand, derive revenue
from the following:
-
- wealth tax
-
- inheritance tax
-
- motor vehicle tax
-
- beer tax
-
- taxes on gambling establishments.
The municipalities may derive tax income
from:
-
- taxes on real property
-
- local taxes on expenditure (such as dog licences, excises on
drinks, etc)
However, as provide by Article 106 para.(3), the
most important taxes, income tax, corporate profits tax and value
added tax (VAT) are shared between the Federation, the Länder
and, in the case of income tax, the municipalities.(19)
The Basic Law prescribes that revenue from
income tax must be shared equally between the Federation and the
Länder although a share of income tax must also be passed on
to the municipalities. As a result of these provisions, the
Federation and the Länder both receive 42.5 per cent of income
tax collections, while the municipalities receive the remaining 15
per cent.
Corporate profits tax must also be shared
between the Federation and the Länder on an equal basis. The
municipalities do not share in this tax, with the result that 50
per cent of the tax accrues to each of the Federation and
Länder. Whilst there is no constitutional requirement to do
so, a business tax (Gewerbesteuer) is also shared between the three
tiers of government, with the Federation and the Länder each
receiving 12.5 per cent and the municipalities receiving 75 per
cent.
Whilst the Basic Law is specific about the
allocation of the income tax and corporate profits tax, it is less
prescriptive about the VAT. Article 106 para.(3) states that
revenue from the VAT shall accrue jointly to the Federation and the
Länder, but provides that the respective shares in such
revenue shall be determined by federal legislation requiring the
consent of the Bundesrat. Interestingly, the principles governing
this distribution are specified in the Basic Law as follows:
1. The Federation and the Länder shall have
an equal claim to funds from current revenue to finance their
necessary expenditure. The amount of such expenditure shall be
determined on the basis of periodic reviews.
2. The requirements of the Federation and the
Länder shall be co-ordinated to establish a fair balance, to
prevent excessive burdens on the taxpayer and to ensure equal
living conditions in the federal territory.
The distribution of the VAT revenue is thus the
'moveable' component in the process of vertical equalisation
between the Federation and the Länder. Basically, it can be
said that the vertical distribution of taxation between the levels
of government reflects the distribution of responsibilities. Thus
the distribution of the VAT requires periodic renegotiation. The
shares must be renegotiated if the income and outlays of the
Federation and the Länder should significantly change.
Despite the existence of these guidelines for
the allocation of the VAT, in practice, they can be very difficult
to implement. In fact, there exists between the Federation and the
Länder constant bickering over the appropriate allocation. The
determination of the VAT shares is one of the most difficult
problems in financial relation between the Federation and the
Länder. The problem is that there is no objective measure for
ensuring that 'necessary' outlays are met from appropriate current
revenues. The question of what responsibilities on the part of the
Federation or the Länder really are necessary is a matter for
political assessment and is not objectively measurable. However,
since legislation relating to the distribution of the VAT tax
requires the approval of the Bundesrat, the Federation and the
Länder must agree. The difficulties surrounding the
distribution of the VAT shares have led to a series of agreements
being negotiated. Since 1986, the shares have been 65 per cent for
the Federation and 35 per cent for the Länder.
Apart from these tax sharing arrangements, the
financial constitution also provides other instruments in the area
of vertical fiscal balance. These include:
-
- excess burden equalisation-where there are short term
additional expenditures or reduced incomes as a result of federal
legislation, the Länder can receive an additional allocation
from the VAT revenue without the need for a renegotiation of the
VAT agreement
-
- special burden equalisation-where the Federation has set up
particular establishments within the Länder or municipalities
(such as defence bases) thus causing these governments to incur
greater outlays or reduced incomes (eg. due to lower land tax from
which the Federal establishments are exempt) the Federation shall
grant necessary compensation
-
- federal supplementary allocations to financially weak
Länder as part of the horizontal fiscal equalisation
process
Horizontal Equalisation
Article 107 of the Basic Law sets out, firstly,
the basis for the distribution of the total pool of revenue
available to the Länder amongst the individual Länder
(horizontal tax distribution) and secondly, the achievement of
horizontal fiscal equalisation in a narrower sense.
Tax distribution and equalisation amongst the
Länder occurs in a series of steps. In accordance with Article
107, three different possibilities are presented:
-
- a larger share of the Länder component of the VAT may be
provided to tax poor Länder
-
- equalisation payments from financially stronger to financially
weaker Länder, ie. the actual Länder fiscal
equalisation
-
- supplementary allocations from the Federation to financially
weaker Länder.
Horizontal Tax
Distribution
The basic principle underpinning horizontal tax
distribution is that tax income will be available to individual
Länder in the same proportion as taxes are raised in those
Länder by the taxing authorities. This distribution on the
basis of geographic revenues applies to Länder taxes and the
income and corporation tax.
There has to be some adjustment to the
geographic basis of tax distribution in the case of corporate and
PAYE income tax instalments, especially where these are paid by the
central office of a company operating in several Länder. Under
separate federal legislation, it has been decided that the
corporation tax may be allocated amongst Länder according to
the location of the various branches while the income tax is
calculated on the basis of the residence of the employee.
The Länder distribution of the VAT tax is
not determined on a geographic basis. In accordance with Article
107 para.(1), at least 75 per cent of the revenue is distributed on
a per capita basis. Up to 25 per cent of the Länder component
serves the purpose of providing additional allocations to the
fiscally weak Länder. The current arrangements enable the
fiscally weak Länder to attain up to 92 per cent of the
average per capita revenues of all Länder.
Horizontal Fiscal
Equalisation
Following the distribution of taxation, the
relative fiscal strength of the individual Länder, measured in
terms of their available revenues, determines the starting point
for actual horizontal equalisation. It might be noted that on the
basis of different historical and structural characteristics there
are significant differences in the fiscal strengths of the
individual Länder.
In order that the fiscally weaker Länder
can reasonably perform their responsibilities and in order to
achieve the equality in living conditions guaranteed in the
constitution, Article 107 para.(2) prescribes that fiscally
stronger Länder should make payments to fiscally weaker
Länder. Note that this equalisation approach is revenue
oriented only and does not take into account the special fiscal
responsibilities of individual Länder. In this respect, the
philosophy of horizontal equalisation in Germany is akin to that in
Canada. Neither of these countries has the full fiscal equalisation
approach of Australia, which addresses both the revenue and
expenditure sides of the equation.
It might be further noted that the Basic Law
only requires that the financial disparities amongst the
Länder are 'reasonably equalised'. On the basis of current
fiscal equalisation legislation, the fiscally weak Länder need
only be equalised to at least 95 per cent of the average per capita
revenue of all Länder.
It follows, therefore, that current equalisation
arrangements only lead to an alleviation, rather than an
equalisation, of fiscal situations. The German view is that this is
not necessarily a bad thing, since it ensures that the Länder
remain responsible for their own fiscal decisions (at the margin).
The system also encourages the fiscally weak Länder to seek
their own fiscal solutions as well as ensuring that the capacity
for other Länder to pursue their own initiatives and improve
their performance is not significantly prejudiced. In particular,
the horizontal equalisation system aims to ensure that no Land is
able to formulate its own budgetary policy at a cost to the
Federation or to other Länder.
Federal Supplementary
Allocations
Article 107 para.(2) also allows for the
provision of federal supplementary allocations
(Bundesergänzungszuweisungen) to fiscally weak Länder.
Increasing resort to this measure has been made since the financial
reforms of 1969. From 1988 the federal supplementary allocations,
as set out in the Fiscal Equalisation Law (Finanzausgleichsgesetz),
have been 2 per cent of VAT revenue. They have therefore grown at
the same rate as VAT revenues. These allocations are paid out of
the Federation share of VAT revenue.
The determination of Länder eligible for
federal supplementary allocations is based on their actual fiscal
circumstances and include Bremen, Niedersachsen,
Nordrhein-Westfalen, Rheinland-Pfalz, Saarland and
Schleswig-Holstein. Bremen has been included since 1986. Since 1988
Bayern has not received any supplementary allocations.
Table 2 summarises the allocation of own taxes
and shared taxes in the Federal Republic of Germany.
Table 2. Federation, Länder and Municipal Taxes in
Germany, 1995
(DM million)
Tax
|
Federation
|
Länder
|
Municipal
|
Total
|
Wages and salaries tax*
|
120 148
|
120 148
|
42 405
|
282 701
|
Assessed income tax*
|
5 949
|
5 949
|
2 100
|
13 997
|
Interest & dividend withholding tax*
|
11 157
|
11 157
|
4 845
|
27 159
|
Business tax on individuals*
|
2 780
|
2 780
|
16 681
|
22 241
|
Income tax surcharges
|
23 689
|
..
|
..
|
23 689
|
Total individual
|
163 723
|
140 034
|
66 030
|
369 787
|
Corporation tax*
|
9 068
|
9 068
|
..
|
18 136
|
Business tax on profits*
|
1 778
|
1 778
|
10 665
|
14 220
|
Interest withholding tax*
|
224
|
224
|
2 115
|
2 562
|
Corporate tax surcharges
|
2 578
|
..
|
..
|
2 578
|
Total corporate
|
13 647
|
11 069
|
12 780
|
37 496
|
Value added tax*
|
131 388
|
103 234
|
..
|
234 622
|
Customs duties
|
7 314
|
..
|
..
|
7 314
|
Excise on mineral oil
|
64 888
|
..
|
..
|
64 888
|
Excise on tobacco
|
20 595
|
..
|
..
|
20 595
|
Excise on beer
|
..
|
1 779
|
..
|
1 779
|
Other excises
|
8 183
|
..
|
..
|
8 183
|
Gambling tax
|
..
|
2 785
|
..
|
2 785
|
Taxes on motor vehicles
|
..
|
13 806
|
..
|
13 806
|
Insurance tax
|
14 104
|
..
|
..
|
14 104
|
Other taxes on consumption
|
6 779
|
762
|
848
|
8 389
|
Total tax on goods &
services
|
253 251
|
122 366
|
848
|
376 465
|
Taxes on net wealth
|
288
|
8 143
|
5 115
|
13 546
|
Taxes on real property
|
..
|
..
|
13 744
|
13 744
|
Inheritance and gift tax
|
..
|
3 549
|
..
|
3 549
|
Financial & capital transactions
|
54
|
6 067
|
296
|
6 417
|
Total taxes on
property
|
342
|
17 759
|
19 155
|
37 256
|
Other taxes, fees and fines
|
..
|
..
|
254
|
254
|
TOTAL TAXATION
|
430 963
|
291 228
|
99 067
|
821 258
|
Denotes those taxes shared (via
legislation) between levels of government.
Source: OECD. Revenue
Statistics, 1965-1996. Paris. 1997
Since Canada became a confederation in the mid
1800s, it has had a remarkably similar history to that of
Australia.(20) However, each country took different paths in the
post-World War II period, with the result that Canada gradually
became fiscally more decentralised at the same time as Australia
was becoming more fiscally centralised.
Even though the Canadian Constitution (as set
out in the British North America Act 1867, also referred to as the
Constitution Act 1867 (as amended), and the Constitution Act 1982)
is somewhat more specific about the allocation of taxation powers
between the tiers of government than the Australian Constitution,
the actual exercise of those powers, as in the case of Australia,
has more reflected political manoeuvring between the Federal
Government and the Provinces and the impact of court
interpretations of Provincial taxation rights. However, whereas
these processes have acted to constrain the access of Australian
States to the tax base, they have actually granted wide powers to
the Canadian Provinces to levy a range of taxes.
The relative tax powers of the different tiers
of government in Canada are set out in sections 91, 92 and 92A of
its Constitution. Section 91 states:
.....the exclusive Legislative authority of the
Parliament of Canada extends to all Matters coming within the
Classes of Subjects next hereinafter enumerated; that is to
say.....91(3) the raising of Money by any Mode or System of
Taxation.
Despite the apparent carte blanche
provided to the Federal Government by this provision in the field
of taxation, section 92 states:
In each Province the Legislature may exclusively
make laws in relation to Matters coming within the Classes of
Subject next hereinafter enumerated; that is to say.....92(2)
Direct Taxation within the Province in order to the raising of a
Revenue for Provincial Purposes.
Furthermore, paragraph 92A(4) states:
In each Province, the legislature may make laws
in relation to the raising of money by any mode or system of
taxation in respect of
(a) non-renewable natural resources and forestry
resources in the Province and the primary production therefrom,
and
(b) sites and facilities in the Province for the
generation of electrical energy and the production therefrom,
whether or not such production is exported in
whole or in part from the Province.....
To appreciate the way these constitutional
provisions have influenced access to taxation sources in Canada, a
short history of Canadian taxation will now be provided.
A Brief History of Taxation In
Canada(21)
As in the case of Australia, when Canada
federated in 1867 the three main sources of revenue available were
customs duties, excises on liquor and tobacco and property
taxes.(22) By granting the central government extensive taxing
powers relative to those of the Provinces, it would appear that the
framers of the Constitution believed that the Federal Government
should be the main taxing agency, providing grants-in-aid to the
Provinces. Certainly, the Provinces had been given the exclusive
power to impose direct taxation within their own boundaries, but it
was thought that such taxation would be unpopular and limited only
to property taxation on the part of the Provinces and their
municipalities.
The Federal Government did take control of the
major revenue sources and, as in Australia, for quite a number of
years after federation, per capita federal grants in aid accounted
for more than one-half of total provincial revenues. Again, as in
Australia, the pressures on the Provinces to expand their public
expenditures meant that, by the turn of the century, a number of
Provinces had begun to impose new taxes on personal income and
corporate income, as well as introducing estate and inheritance
duties.
During World War I, the Federal Government was
forced to boost its revenue raising capacity. Parallelling
developments in Australia, the Canadian Federal Government began to
impose its own taxes on personal and corporate income. It also
introduced a 1 per cent turnover tax, designed to assist with
eliminating the federal wartime deficit. This tax was later
restructured, in 1924, to become a 6 per cent manufacturers sales
tax which, in turn, was again restructured in 1991 to become a
VAT-style goods and services tax.
During the 1930s, the Provinces again expanded
their tax bases and introduced new forms of taxation. By the end of
this decade, seven Provinces were levying personal income tax and
all but one were imposing corporate tax. It was also during this
period that the Provinces began to impose local retail sales taxes.
Whilst at first sight, these might be seen to contravene the
Provinces' power only to impose direct taxation within their
boundaries, the legislation imposing such taxes made it clear that
they were taxes on the purchasers of the goods, with the retailers
simply acting as tax collecting agencies. Whilst such semantic
devices have not saved the Australian States from High Court
disallowance of indirect taxation, in Canada such legislation has
survived court challenges. The Provinces were also able to compete
with federal excises on liquor and tobacco by establishing
Province-owned retail outlets for these products (so-called 'fiscal
monopolies'). With the growth of private motoring at this time, the
Provinces also began to impose motoring taxes and began to levy
substantial taxes on petrol.
Continuing the parallels with Australia, the
Provinces agreed to relinquish their use of personal and corporate
taxes during World War II to enable the Federal Government to have
sole access to these important bases in order to finance the war
effort. In return, they began to receive 'tax rebates'
(reimbursements) from the central government on an equal per capita
basis. These arrangements existed until 1957, although Quebec
negotiated slightly different arrangements after 1947. Quebec had
established its own personal income tax system in 1954, so in 1957
the Federal Government replaced tax rebates to the other Provinces
with a system of direct tax sharing. Under this regime, the central
government returned to the Provinces, on the basis of origin, 10
per cent of federal personal income tax, 9 per cent of corporate
income tax and one-half of federal estate tax collections.
From 1962 onwards, there have been a series of
Tax Collection Agreements negotiated between the Provinces and the
Federal Government under which the Provinces set their own tax
rates on personal and corporate incomes. These taxes are collected
by the central government and remitted to the Provinces. Unlike
Australia, the Federal government retreated from the income taxing
field to some extent to provide the Provinces with 'tax room'.
Currently, the Federal government collects personal income tax for
all Provinces except Quebec, which has continued to collect its own
tax. Corporate income tax is also collected for all Provinces
except Ontario, Alberta and Quebec, which impose their own
corporate taxes. There is some variability in the tax rates and
structures levied by the various Provinces.
It is interesting to note that the Federal
Government also vacated the field of estate taxation in 1972 to
provide greater scope for Provincial tax raising from this base.
Given the unpopularity of such taxation, very few Provinces have
imposed taxes on these intergenerational transfers of property.
One further area of revenue raising is worthy of
mention. The Constitution provides the Provinces with the exclusive
right to impose taxes on resources and minerals. This has been a
substantial source of revenue to several Provinces. Interestingly,
when Alberta and Saskatchewan were admitted to the Union in 1905,
the Federal Government withheld control of sub-surface mineral
rights from them. After much bickering, these rights were restored
in 1930 and Alberta in particular has derived a significant amount
of revenue from this source.
To summarise, the Federal and Provincial
Governments share the important personal and corporate income tax
bases. While the central government derives significant revenue
from its goods and services tax, the Provinces also access the
indirect tax base through the imposition of local retail sales
taxes. Quebec has the most sophisticated indirect system since it
also imposes a VAT-style tax. As a result, the Federal VAT has had
to be harmonised with that of Quebec.
As already mentioned, not only has there been
significant sharing of the available tax bases (except for resource
taxes), but the Canadian Government has increasingly made tax room
for the Provinces. In 1960, Federal revenues were 63 per cent of
all government revenues. By 1985, this proportion had fallen to 45
per cent. In 1960, total provincial own revenues were equivalent to
34 per cent of federal own revenues. By 1985 this ratio was 91 per
cent. These ratios have largely persisted since then. Federal own
outlays, by comparison, are around 40 per cent of total government
outlays. As a result, the question of vertical fiscal imbalance is
not a major debating point in Canada. It might be noted that,
parallel with this development, federal grants to the Provinces
have become less generous but also less tied. In fact, the specific
purpose grants system is so flexible that any Province may opt out
of a particular program but still receive compensation from the
Federal government. Currently, however, only Quebec opts out of
federal programs for health, education and, in part, welfare.
Horizontal Fiscal Equalisation in
Canada
As with the Federal Republic of Germany, the
principle of horizontal fiscal equalisation is enshrined in the
Canadian Constitution. Part III of Schedule B of the Constitution
Act of 1982 states:
36(1) .....the Government of Canada and the
Provincial governments are committed to
(a) promoting equal opportunities for the
well-being of Canadians;
(b) furthering economic development to reduce
disparity in opportunities; and
(c) providing essential public services of
reasonable quality to all Canadians
36(2) Parliament and the Government of Canada
are committed to the principle of making equalisation payments to
ensure that Provincial governments have sufficient revenues to
provide reasonably comparable levels of public services at
reasonably comparable levels of taxation.
In Canada, therefore, equalisation payments take
the form of payments from the central government to the Provinces.
However, such a process did not begin until 1957, when they were
incorporated in the tax sharing grants system operating at that
time.
The basis on which horizontal equalisation has
operated has been quite variable over the past forty years.
Certainly, equalisation has only been aimed at bringing the revenue
base of the fiscally weaker Provinces up to a standard relative to
other, richer Provinces. In this sense, the Canadian system is
closer to the German rather than the Australian equalisation model.
Canada has had to experiment with its equalisation model, both in
terms of the revenue sources chosen for comparison and which
Provinces should constitute the 'standard'.
When the system first began, the per capita
taxes chosen for equalisation were personal and corporate income
taxes, along with succession duties. The standard against which the
poorer Provinces were compared were the two richest Provinces. In
the 1960s, the number of revenue sources was increased to 29,
including income from resource taxation. Furthermore, the standard
was taken to be the average per capita revenue raised by all
Provinces.
This approach caused mayhem in the 1970s when
the boom in world oil prices significantly increased the revenues
of British Columbia and Alberta, increasing the disparity between
the revenue raisings of the individual Provinces and creating a
larger gap between the average revenues of all Provinces and those
of the poorer Provinces. Since this latter gap was the basis for
Federal government equalisation, the potential increase in
equalisation payments would have been enormous. So strong was this
effect that even the relatively rich state of Ontario would have
qualified for equalisation assistance.
Partially as a result of this, the system of
equalisation currently in place involves a comparison of 33
different revenue sources. As urged by the Provinces, the new
equalisation standard has become the average per capita revenue
performance of five Provinces-British Columbia, Saskatchewan,
Manitoba, Ontario and Quebec. This five Province standard is seen
to be a reflection of the 'normal' capacity to raise revenues,
since the poor Provinces (the Atlantic Provinces) have been
excluded along with the revenue rich Province of Alberta..
Table 3. Federal, Provincial and
Municipal Taxation in Canada, 1995
($Ca million)
Tax
|
Federal
|
Provincial
|
Municipal
|
Total
|
Personal income tax
|
65 285
|
43 149
|
..
|
108 434
|
Corporate income tax
|
14 346
|
9 055
|
..
|
23 401
|
Other income tax
|
1 523
|
..
|
..
|
1 523
|
General sales taxes
|
22 230
|
21 727
|
47
|
44 004
|
Customs duties
|
3 277
|
..
|
..
|
3 277
|
Excises
|
7 444
|
8 277
|
..
|
15 721
|
Fiscal monopolies
|
..
|
2 611
|
..
|
2 611
|
Specific taxes (esp. services)
|
933
|
1 809
|
3
|
2 745
|
Motoring taxes
|
..
|
2 639
|
..
|
2 639
|
Licences and permits
|
..
|
1 940
|
355
|
2 295
|
Property taxes
|
..
|
2 514
|
22 821
|
25 335
|
Wealth taxes
|
..
|
3 270
|
..
|
3 270
|
Estate and gift duties
|
..
|
6
|
..
|
6
|
Local business taxes
|
..
|
..
|
2 906
|
2 906
|
Other taxes and fees
|
..
|
2 004
|
1 495
|
3 499
|
TOTAL TAXATION
|
115 038
|
99 001
|
27 627
|
241 666
|
Source: OECD. Revenue
Statistics, 1965-1996. Paris. 1997
Table 3 shows the allocation of taxes in Canada.
It might be noted that in the table, general sales taxes include
the goods and services tax (VAT) of the Federal Government and
Quebec as well as the retail sales taxes of the remaining
Provinces. The specific taxes component includes such revenue
sources as taxes on insurance premiums, amusement and admission
taxes, air transportation taxes and racetrack betting tax. The
revenue derived from fiscal monopolies encompasses contributions
from Provincial enterprises involved in the retailing of goods such
as liquor and tobacco.
This paper has briefly examined tax assignment
and horizontal equalisation in Australia, Germany and Canada. These
three federations have adopted quite different philosophies and
strategies in these areas.
In the case of Germany, the Basic Law enshrines
not only the principles of tax assignment but also the basis for
horizontal equalisation. In the case of Canada, the Constitution
does not specify tax assignment in any specific way, but the
Canadian Government has put in place tax sharing measures which
ensure that the Provinces are reasonably well resourced relative to
their responsibilities, while the Constitution guarantees that
horizontal equalisation shall be carried out. The Australian
Constitution does not provide any guidelines on the allocation of
access to particular tax bases nor does it require fiscal
equalisation.
Certainly, there is quite a difference in
philosophies between these countries when it comes to addressing
vertical fiscal imbalance. The Canadian government has demonstrated
by its actions that it is prepared to allow the Provinces to have
tax room. The German philosophy is stated quite clearly in Article
106 of the Basic Law: "The Federation and the Länder shall
have an equal claim to funds from current revenue to finance their
necessary expenditure". These approaches may be contrasted to the
position adopted in Australia by Mr Paul Keating, a Federal
Treasurer for 9 years and Prime Minister for 4 years. In a speech,
as a backbencher, to the National Press Club in October 1991, Mr
Keating stated:
I have always thought that clumsy term [vertical
fiscal imbalance] misleading and designed to be misleading. It
assumes as a fact an interpretation which I think is extremely
dubious. It implies that there is a widely known and universally
acknowledged design fault in our federation. The term simply means
that the national government raises a great deal of the money that
is spent by the States. To my mind that is no 'imbalance' at
all......I have long believed that an essential Commonwealth job in
Australia is to manage the size and shape of the public sector and
it can only be done if in the end the Commonwealth has the power of
the purse.(23)
In Australia, the Federal Government has
captured the major tax bases of personal and corporate income tax.
It also has sole access to the indirect taxation of goods. It also
derives a significant amount of revenue from natural resources
through its resource rent tax arrangements. As a result, the degree
of vertical fiscal imbalance in Australia is very high. In Germany,
the major taxes-personal and corporate income tax and the VAT-are
shared with the Länder. In Canada, personal and corporate
taxes are shared with the Provinces and, while the VAT is not a
shared tax, the Provinces raise a significant amount of revenue
from their own retail sales taxes.
In Australia, fiscal equalisation is a function
undertaken by the Commonwealth. Equalisation takes the form of
providing general revenue grants to the States on the basis of
relativities assessed by the Commonwealth Grants Commission.
Nevertheless, Australia has the most comprehensive fiscal
equalisation model. Not only does the Grants Commission examine
both the expenditure and revenue sides of the budgetary equation,
but the system ensures that the richer States are equalised down to
the standard while the poorer States are equalised up to the
standard.
In Canada, it is also the responsibility of the
Federal government to provide equalisation grants to the Provinces.
However, only a partial equalisation approach is taken, in that
only the revenue side of the equation is equalised, not the
expenditure side. Furthermore, the system is designed only to
augment the revenues of the poorer Provinces-there is no attempt to
'equalise down' the richer Provinces.
While Germany may have the most co-operative and
co-ordinated approach to the sharing of tax revenues, it has the
least well developed system of horizontal equalisation.
Interestingly, the provision of equalisation assistance to the
poorer Länder is undertaken both by the Federation and the
richer Länder. Still, only the revenue side of the equation is
equalised and even then, it is only required that the poorer
Länder be equalised to a standard of at least 95 per cent of
the average revenue of the Länder as a whole.
Perhaps the most mystifying question of all is
why the different federations have adopted such different
approaches to the tax assignment issue. In the case of Germany, the
political imperatives of the allied powers immediately after World
War II played a major role in decentralising power in Germany. As
mentioned earlier, one method of achieving this was the
establishment of a very powerful States' house, the Bundesrat.
Members of the Bundesrat are not elected but are appointed by the
governments of each of the Länder. If Länder governments
change, the political complexion of the Bundesrat also changes
concomitantly. Furthermore, the Bundesrat members representing a
particular Land must vote as a block. Thus even though a party
structure exists within the Bundesrat, the interests of each
individual Land are well represented. As John Uhr (an Australian
authority on public administration) has pointed out, even though
the Australian Senate is portrayed as a States' house, decisions
are more likely to be made on a party rather than a State
basis.(24) One might wonder if this is part of any explanation of
the different outcomes in these two countries.
Other authors have posited further factors.
Stanley Winer and Allan Maslove, Professors of Public
Administration at Carleton University, Ottawa, have pointed to the
greater ethnic disparities, degree of population dispersal and
regional variation in Canada as a possible source of
difference.(25) Certainly, the existence of a strong, French Quebec
Province has ensured that the Federal Government in Canada has had
to adopt strategies to accommodate a high level of provincial
independence and to have regard to special issues. Even the
resumption of Provincial income tax sharing rights in 1957 was
prompted by Quebec's actions.
Russell Mathews argues that, while there is no
doubt that there are economic and social disparities amongst
Australia States, differences in per capita incomes amongst the
States are probably much smaller than may be observed in most other
countries.(26) Even though, on the whole, NSW and Victoria are the
most industrialised States and have substantial financial centres
in their capital cities, they still have strong primary industries
as well. The other States are all characterised by some important
manufacturing industries-foodstuff processing in Queensland, a
motor vehicle industry in South Australia, paper products in
Tasmania and so forth. All States have large natural, mineral
and/or energy resources.
There is probably much greater diversity between
the states in Canada and Germany than in Australia. There are quite
profound economic differences between the poor Atlantic Provinces
in Canada and rich provinces such as Alberta. In Germany, not only
are there significant structural economic differences between the
Länder, but they also display historical differences in terms
of religion and even tribal origins. It is quite possible that
these disparities have made the states in these two countries much
more cognisant of the need to have their particular interests
protected and therefore may have made them more resistance to
centralising tendencies within their respective federations than
has been the case in Australia.
Chart 1 sumarises the allocation of taxing
responsibility between the tiers of government in Australia, the
Federal Republic of Germany and Canada.

Source: OECD. Revenue
Statistics, 1965-1996. Paris. 1997
-
- High Court of Australia. Matter No. 845 of 1996; decision
handed down in August 1997. The decision related to two
cases-Walter Hammond and Associates v the State of NSW and
Ha and anor v the State of NSW and others. For a detailed
analysis of this decision, see James, Denis Federalism Up in
Smoke? The High Court Decision on State Tobacco Tax.
Department of the Parliamentary Library. Current Issues Brief No. 1
1997-98. 13 August 1997.
- For details of this package, see the Treasurer's Press Release,
Constitutional Invalidation of State Business Franchise Fees:
Temporary Commonwealth Safety Net Arrangements. No. 85. 6
August 1997.
- Furthermore, the remaining indirect taxation falls exclusively
on goods. The sale of services is free of any taxation.
- Prime Minister's Press Release. Taxation Reform. 13
August 1997.
- Mathews, R. Comparative Systems of Fiscal Federalism:
Australia, Canada and the USA. Centre for Research of Federal
Financial Relations. Reprint Series No. 69 ANU 1985
- See, for example, Barwise, K. and Castles, F.G. The "New
Federalism", Fiscal Centralisation and Public Policy Outcomes.
Discussion Paper No. 27. Public Policy Program. ANU. September
1991. Also see Castles, F.G. Political Decentralisation and the
Post-War Political Economy. Vital Issues Seminar. Department
of the Parliamentary Library. 2 September 1997.
Examining OECD countries in the post-war period,
Castles states that his 'findings suggest that...fiscal
decentralisation leads to superior macroeconomic outcomes (higher
economic growth and lower inflation) and lower public expenditure
right across the board.' (Castles, 1997. p.3)
Note, however, that in certain countries,
macroeconomic policy making is a co-ordinated process between the
levels of government. In Germany for example, the Economic
Stabilisation Law (Gesetz zur Förderung der Stabilität
des Wachstums der Wirtschaft) adopted in 1967 sets up a number of
bodies tasked with co-ordinating the economic actions of the
federal, state and local governments.
- McLure, Charles E. ed. Tax Assignment in Federal
Countries. Centre for Research on Federal Financial Relations.
ANU 1983.
- To say such powers are concurrent means that they may be
exercised by both the Commonwealth and the States. Section 109 of
the Constitution, however, ensures that where Commonwealth and
State laws are in conflict, Commonwealth law will prevail to the
extent of any inconsistency.
- For a brief discussion of these influences at work, see
Mathews, R and Grewal, B. The Public Sector in Jeopardy.
Centre for Strategic Economic Studies. Victoria University. 1997.
p. 772ff.
- The Commonwealth instituted payroll tax in 1941, initially to
cover the cost of the Commonwealth's child endowment scheme.
- Taxation and the Fiscal Imbalance Between Levels of
Australian Government: Responsibility, Accountability and
Efficiency. Report of the Working Party on Tax Powers to the
November 1991 Special Premiers' Conference.
- Keating, Hon. P.J. The Commonwealth and the States and the
November Special Premiers' Conference. Address to the National
Press Club. 22 October 1991.
- See Premiers' and Chief Ministers' Meeting:
Communique. Adelaide, 21-22 November 1991. p. 13. This
observation is obviously the basis for the 6 per cent marginal
income tax rate recommended by the Premiers, although it is
difficult to reconcile the 6 per cent figure with the $10 billion
figure. In 1989-90, the personal income tax base was $197 billion.
Six per cent of this is almost $12 billion.
- Commonwealth-State Financial Arrangements. A Position Paper
by Premiers and Chief Ministers. May 1992
- The Commonwealth has attempted to meet these objectives since
1994-95 by providing the States with a three year, rolling
guarantee that their general revenue funding would be escalated
each year by the rate of inflation and by the rate of national
population growth, ie. a real per capita guarantee has been
provided. Certainly, these 'guaranteed' payments have been made.
However, in 1994-95, the Commonwealth abolished over $300 million
in general purpose capital grants, while over the three years from
1996-97 to 1998-99 the States have 'agreed' to pay around $1.5
billion in 'fiscal contributions' to the Commonwealth. These
measures, along with cuts to specific purpose payments to the
States can hardly be regarded as contributing to the establishment
of predictability, flexibility and growth in State funding.
- This discussion of the provision of grants to address vertical
and horizontal imbalances has been abbreviated. A detailed
description of the processes involved may be found in James, Denis
Commonwealth Assistance to the States Since 1976.
Department of the Parliamentary Library. Background Paper No. 5,
1997-98. 20 October 1997.
- Bundesministerium der Finanzen. Finanzverfassung der
Bundesrepublik Deutschland. Bonn. 7. Januar 1991. 2. Auflage.
- It is important to note the distinction between the ability to
legislate in taxation matters and the roles of the Federation and
the Länder in the administration of taxation. Only customs
duties, fiscal monopolies, excise taxes subject to federal
legislation and levies imposed within the framework of the European
Union are administered by federal revenue authorities. All other
taxes are administered by Land authorities. The organisation of
these authorities and the uniform training of their civil servants
is regulated by federal legislation.
- What is described as 'income tax' in this paper is actually
comprised of two taxes-the wages tax (Lohnsteuer) and the assessed
income tax (Einkommensteuer).
- Unlike Australia, where most of the functions of the
Commonwealth and the States are concurrent, the Canadian
Constitution is much more explicit about the allocation of
responsibilities within the confederation. As a general rule, the
powers assigned to the Federal and Provincial governments are
exclusive, with federal paramountcy applying in those instances
where powers do conflict. The Federal Government has exclusive
powers in areas such as defence, unemployment insurance and aged
security. The Provincial and municipal governments have exclusive
powers in such fields as health, education, welfare services, civil
rights and local government. Only a few responsibilities are
concurrent eg. agriculture, immigration, the environment and
contributory pensions. Interestingly, all residual powers are
assigned to the Federal Government.
- This section of the paper draws on material provided in Thirsk,
Wayne R. Tax Assignment and Revenue Sharing in Canada in
McLure, Charles E. ed. Tax Assignment in Federal
Countries. Centre for Research on Federal Financial Relations.
ANU 1983.
- The Canadian Union currently comprises ten provinces and two
territories. The process of federation, however, has been drawn out
over a period of years. In 1867 the Union was formed by the
federation of the Provinces of New Brunswick, Nova Scotia, Ontario
and Quebec. In 1870, the territories of Rupert's Land and the
Northwest Territories were admitted to the Union. A new Province,
Manitoba, was carved out of the Northwest Territories and also
admitted in 1870. The colony of British Columbia joined the Union
in 1871. In 1873, Prince William Island was admitted while two more
new Provinces, Alberta and Saskatchewan were excised from the
Northwest Territories in 1905. Newfoundland was the last found
Province-it entered the Union in 1949. The carving out of the ten
Provinces has still left two territories-the Yukon Territory to the
north of British Columbia and the Northern Territories in the
northern part of the country.
- Keating, the Hon P. The Commonwealth and the States and the
November Special Premiers' Conference. Address to the National
Press Club. 22 October 1991. pp. 1-2.
- Uhr, John The Canadian and Australian Senates: Comparing
Federal Political Institutions in Hodgins, B.
ed. Federalism in Canada and Australia.
Peterborough. pp. 130-146.
- Winer, Stanley L. and Maslove, Allan M. Fiscal Federalism
in Australia and Canada: A Brief Comparison of Constitutional
Frameworks, Structural Features of Existing Fiscal Systems and
Fiscal Institutions. Mimeo. November 1995.
- Mathews, R. Regional Disparities and Fiscal Equalisation in
Australia. Reprint Series No. 30. Centre for Research on
Federal Financial Relations. ANU. Canberra. 1980.
Council of Australian Governments (COAG):
The Council of Australian Governments comprises
the Prime Minister, Premiers and Chief Ministers. A non-voting
representative of local government is also a member. COAG was
established in 1992 to facilitate the discussion of important
Commonwealth-State issues at a heads-of-government level. It meets
irregularly.
Equalisation grants:
See horizontal fiscal equalisation.
Fiscal capacity:
The financial capacity of a State to meet its
responsibilities. This will reflect the adequacy of the various tax
bases available to that State, as well as the existence of any
disabilities or advantages faced by that State in the provision of
services.
General revenue grant relativities:
To achieve fiscal equalisation, the Commonwealth
Grants Commission compares the fiscal capacity of each State in
turn with a standard which comprises the State concerned plus all
of the other States. The revenue needs and expenditure disabilities
faced by each State are assessed and the amount of financial
assistance required to offset these needs and disabilities is
calculated. After subtracting the amount of eligible financial
assistance received by each State, the equalisation assistance
requirement of each State is determined. These requirements are
then expressed as a set of per capita weights. The resulting set of
per capita weights are referred to as the general revenue grant
relativities.
Horizontal fiscal equalisation:
The process designed to ensure that there are
not significant fiscal disparities between the constituent states
of a federation. Achieving horizontal fiscal equalisation requires
the provision of additional financial assistance to those states
facing inherent difficulties in raising revenues from their own
available tax bases and/or relatively higher costs of providing
public services. Such assistance is normally provided by the
central government, although in Germany revenue is provided to the
poorer states by both the central government and the richer
states.
In Australia, general revenue grants to the
States are provided on the basis of per capita relativities
assessed by the Commonwealth Grants Commission. This process is
designed to provide each State with the capacity to provide
services at a standard comparable with those of the other States
but without requiring that State to impose a greater burden of
taxation.
Tax assignment:
The allocation of access to particular tax bases
by each tier of government in a federation. In some federations,
the constitution specifies which tax bases will be exclusively
available to each tier of government while, in other federations,
the tax bases are shared by the different levels of government.
There is, however, often a poor correlation between the allocation
of taxing powers set out in a country's constitution and the actual
pattern of taxation which evolves within that country as a result
of political and other processes.
Tax base:
The object upon which taxation is levied. Common
tax bases are income, value of production, sales of goods,
payrolls, land, etc.
Uniform taxation:
Under the Constitution, the Commonwealth is
required to impose its taxation so as not to discriminate between
any States or any parts of States. Prior to 1942, in addition to
Commonwealth income taxation, the States also imposed their own
income taxes, with quite different tax regimes applying. In 1942
the States vacated the income taxing field in favour of the
Commonwealth, thus creating a uniform, national income tax system
under the control of the Commonwealth.
Vertical fiscal imbalance:
An imbalance between the expenditure
responsibilities of each tier of government and the own-source
revenue resources available to that tier. Australia is
characterised by significant vertical fiscal imbalance since the
Commonwealth raises around 75 per cent of all general government
revenues but is only responsible for around 60 per cent of all
general government outlays.
James, Denis Federalism Up in Smoke? The
High Court Decision on State Tobacco Tax. Department of the
Parliamentary Library. Current Issues Brief No. 1, 1997-98. 13
August 1997.
James, Denis Commonwealth Assistance to the
States Since 1976. Department of the Parliamentary Library.
Background Paper No. 5, 1997-98. 20 October 1997.