Fixing funding in the Australian Federation: issues and options for state tax reform

The structural pressures confronting the federal budget are well documented. Given the political risks associated with reducing the federal deficit by either increasing taxes or reining in expenditure at a national level, the Commonwealth has outlined its intention to freeze (in real terms) tied grants to the states from 2017. If implemented, this strategy will see Commonwealth transfers to the states decline from a peak of 29% of federal expenditure in 2001 to a projected 21% in 2024. Cost shifting on this scale is unprecedented in the Australian federation and arguably heralds a new era of ‘fend-for-yourself federalism’. The potential significance of this move is exacerbated by the current budgetary context and the concurrent reviews of the national tax system and Australian federation. This article presents an analysis of tax and funding reform options available to the states that could bolster own-source revenues and fill the funding gap left by the Commonwealth while enhancing the efficiency of the national tax system.