From Wartime Expedient to Enduring Element of Fiscal Federalism : Centralised Income Taxation in Australia since World War II

In the midst of World War II, the Australian federal Labor government effectively appropriated the states’ income tax systems, with the understanding these would be returned after the war. A state challenge on constitutional grounds in the courts was unsuccessful. The appropriation suited Labor’s agenda of centralising economic powers indirectly after it failed on constitutional grounds to achieve it directly and following the war Labor made it clear the income tax would remain as a federal impost only. The ascension to power of a conservative coalition in 1949 brought an offer to share the tax base with the states, allowing reinstatement of state taxes, but the states were divided in their response and the federal government never actually promised to reduce federal taxes if states reinstated their taxes, making actual implementation impossible. In the mid-1950s, two states challenged unsuccessfully the federal appropriation again in the courts, this time seeking to overturn the grant distribution scheme underpinned by the tax appropriation. Since that time, various conservative governments have notionally offered to return the income tax base to states and Labor governments have resolved to block it. The conservative offers have faltered in part because of state divisions and in part because the offers have not been matched by concrete proposals to make room for state tax, suggesting federal conservative politicians may actually share their Labor counterparts’ goal of a fully centralised income tax, albeit for different reasons