The Devil Is in the Detail : The Distributional Consequences of Personal Income Tax Sharing in the Australian Federation

The March 2014 Report of the National Commission of Audit and the Commonwealth's tax reform and federalism discussion papers published in the first half of 2015 provided some early insights into the Coalition Government's agenda for reforming the national tax system and fiscal federalism. One proposal with potential to facilitate state tax reform and potential to partly address the vertical fiscal imbalance in the Australian federation is to encourage states and territories to introduce personal income tax levies or surcharges on the same tax base as the federal income tax. Granting states access to the personal income tax base could address a number of widely recognised policy problems. A modest state personal income levy could be used to replace inefficient state level transaction taxes, improving efficiency and equity within the national tax system. A more ambitious option would be for the Commonwealth to cut the federal income tax, creating the tax space for the states to use the federal income tax base to raise a significant portion of revenue. However, if such a levy is based on taxpayers' state of residence (which is required to create inter-jurisdictional competition), then, based on the experience of other federations such as the United States and Canada, per capita revenue will vary considerably from state to state. This article outlines these policy design issues before using ATO income tax data to present an analysis of how revenues from different state income tax levies and surcharges would be distributed across the Australian federation and what issues this raises for the introduction of a state income tax in Australia