"State stand on tax 'could end GST deal'"

Tim Colebatch, Melbourne Age, 24 March 2005

Peter Costello warns his state counterparts that refusing to abolish taxes breaches their agreement and may cost them dearly.

The federal government has threatened to declare an end to its agreement to give all GST revenue to the states, after state treasurers yesterday rejected a demand by federal treasurer Peter Costello that they abolish $A2.5 billion ($NZ2.8 billion) a year of business taxes.

The annual meeting of treasurers collapsed in disagreement over Mr Costello's ultimatum. They did agree to meet again in a month, but each side said it was up to the other to come up with new proposals.

Mr Costello told journalists that the states' refusal to abolish seven business taxes after agreeing to "consider the need" for them was a breach of the 1999 agreement under which GST revenue is given to the states.

"This agreement will not be honoured if the states say they can keep GST and the indirect taxes which it replaced," he said. "That will be bringing it to an end. If there are two parties to an agreement, and one of them says they won't honour it, there is no longer an agreement."

But while repeatedly hinting at the meeting that there would be serious consequences if his ultimatum was rejected, Mr Costello refused to spell out what these would be.

State treasurers said the agreement committed them only to "review the need" for the taxes, and was not a pledge to abolish them. They said they would rather cut land tax and stamp duty on home buyers, saying that even business was not urging them to scrap the taxes on Mr Costello's hit-list, most of them little-known taxes on financial transactions.

Victorian treasurer John Brumby said he would like to cut taxes, but the taxes Mr Costello wanted it to cut were not the ones voters wanted it to cut. "Scarce state funds would be used to abolish taxes that would not be at the top of our priority list," he said.

"If you net off the loss of competition policy payments, which are $220 million a year, the fact is we are worse off under the deal. That will mean that we face extraordinary pressure on spending on health and education - which are the things we were elected to deliver."

But there were signs that the states were looking for a compromise that would involve them accepting Mr Costello's tax priorities if Canberra met more of the cost of abolishing the taxes, or allowed them more time to abolish the taxes.

NSW treasurer Andrew Refshauge, whose state would lose heavily under Mr Costello's plan, said the states might come up with an alternative proposal, but Mr Costello would have to give a lot of ground for there to be an agreement. "To expect us to cut $8.5 billion of revenue (over four years) that is now going into hospitals, into schools, into transport, and only give us $330 million in compensation - that doesn't add up," he said.

Victoria now has only two of the seven taxes, so the immediate financial consequences for the state are about $60 million a year. The long-term cost of abolishing stamp duty on business conveyances would be substantial, however.

Mr Costello refused suggestions that the states could reduce other taxes instead of abolishing the seven taxes on his list. "Every Australian knows that the GST was introduced to get rid of other taxes," he said. "The GST was never introduced for the abolition of land tax, nor did the states ever ask for it."

He said there was no need to choose between cutting land tax and removing the business taxes. "The states can do both," he said. "They can cut land tax out of booming receipts, and they can cut indirect taxes out of GST revenues."

After the meeting, in Canberra, the treasurers could not even agree what they had decided in the meeting. Mr Costello said the states had asked for time to come back with an alternative offer, while the states said they would wait for Mr Costello to put forward an improved offer.

Mr Brumby accused Mr Costello of "trying to rewrite the intergovernmental agreement". "I thought we'd discuss a sensible review of these taxes, but instead we got an ultimatum." But Mr Brumby did not rule out eventual agreement on Mr Costello's list, saying that the deal he offered was "just not a good enough deal."

Further Information

For further information contact:

• Simon Singer
• David Singer