State income taxes

News.com.au reports:

Yesterday Mr Turnbull outlined what he called a “once in a generation reform” toredesign the tax system for the first time in 74 years.

The plan involves the federal government cutting its own income tax and giving the states the ability to collect their own taxes.

While details have not yet been revealed, some have suggested the federal government could give the states 2 per cent of the income tax rate, which Mr Turnbull said would raise about $14 billion for the states.

When asked whether this was actually “double taxation”, Mr Turnbull said “no”.

He said the plan could mean different states had different rates of income tax, but they already had different rates of land tax, payroll tax and stamp duty.

“The fundamental question is this: Are we sick of the blame game, are we sick of the finger pointing, are we sick of states not being responsible for much of the money they spend?” Mr Turnbull said.

“What we are proposing is that we begin a grown up conversation, a rational conversation, about a solution that does not involve any new or it doesn’t involve any additional tax.”

Mr Turnbull described the plan as a change to the way income tax was allocated.

“It is too easy for states and territories to just go to the federal government ATM and too easy for them to just blame the Commonwealth for not having enough money,” he said.

“It will deliver a better government because people, politicians and parliaments will be more responsible for more of the money they spend.

“They will have to be answerable to their voters for the money they spend.”

The proposal has both good and bad aspects to it.

The good is that there might be competition between states to have the lower income tax rate. People may move to states with a lower tax rate.

Also it would force state government to live within their means, rather than just demand Canberra fund everything.

The bad is that most governments like spending, and over time you may get all states increasing their income tax rates and Australians may end up paying more tax than ever.

You could set a maximum rate for state income tax, but if you do this would become the de facto rate for all.