E LAW - MURDOCH UNIVERSITY ELECTRONIC JOURNAL OF LAW
VOLUME 1 NUMBER 4 (DECEMBER 1994)
Copyright E Law and/or authors

Review of Western Australian State Taxes 1994
Chapter 9 FEDERAL-STATE FINANCIAL RELATIONS

Introduction
Vertical Fiscal Imbalance in Australia
The Grants Methodology
Tied Grants
Inter-Governmental Financial Relations in Context

Improving the Current Situation
1. Reducing the vertical fiscal imbalance
a. Reducing expenditure responsibilities
b. Increasing revenue raising capacity
2. Changing the grants distribution methodology

Conclusion
Bibliography

INTRODUCTION

This chapter discusses the current system of inter-governmental financial
arrangements and their impact on taxation policy. It sets out the reason
behind the arrangements, the way grants are distributed and their operation
in the federal system. The findings show that taxation policy objectives at
the State level are affected by the principle of fiscal equalisation
underlying the current scheme, and by the legal and political realities
faced by the States. It appears that the satisfactory solution to this
would require the Commonwealth to give the States greater access to tax
revenue, while this may not cure the problems completely, it would
nevertheless minimise their effect.

VERTICAL FISCAL IMBALANCE IN AUSTRALIA

One of the major characteristics of federalism is the co-existence of two
main levels of government in one system, both having the capacity to raise
revenues and the responsibility to carry out various functions. Ideally, a
federation should be in a state of vertical fiscal balance, which entails a
matching of expenditure responsibilities and taxing powers, enabling each
level of government to be financially self sufficient.[1] In practice
however, such matching may not naturally flow from the legal framework
under which the federation operates. Vertical fiscal imbalance arises where
one level of government has financial resources exceeding its needs, whilst
the other lacks sufficient resources to carry out its functions.[2] In
Australia, at federation, the Commonwealth and the States had concurrent
powers over all forms of taxation, apart from excise and customs duties
which are exclusively controlled by the Commonwealth.[3] That produced a
relatively small vertical fiscal imbalance; the States own-source revenue
catered for about 90% of their expenditure.[4] During the Second World War,
however, the Commonwealth introduced legislation[5] which replaced separate
State and Federal income taxes with a single uniform tax throughout
Australia.[6] As a result, the States lost a source of tax which represented
over 45% of their taxation revenue, yet their expenditure responsibilities
basically remained the same.[7] Since then, Australia has been in a state of
"chronic vertical fiscal imbalance".[8] The States in 1992-1993 raised only
49% of the total revenue required to meet their expenditure needs, with 51%
being provided by Commonwealth grants.[9]A common solution addressing
vertical fiscal imbalance in federalism is a scheme of inter-governmental
grants as a corollary to the allocation of taxing powers.[10] The main
drawback of this scheme is that it severs the link between revenues and
expenditure in a way which, at the State level, "impairs the responsiveness
of government to public demands and is not conducive to accountability".[11]
Thus

     "State leaders not only avoid the responsibility of having to
     make unpopular taxing and other decisions but gain positive
     political advantages as champions of State's interests against
     what they claim is a remote and parsimonious Federal Government
     in Canberra."[12]

Nonetheless, this is the approach taken in Australia via section 96 of the
Commonwealth Constitution, which gives the Commonwealth the power to
provide financial assistance to any State upon any terms and conditions it
thinks fit. The total amount paid by way of these grants, called `the
pool', is set by the Commonwealth in the context of its overall budget
deliberations.

THE GRANTS METHODOLOGY

The distribution of `the pool' among the States is based on the
recommendations of the Commonwealth Grants Commission ("CGC").[13] Its main
objective is to determine the distribution of general revenue grants that
would be necessary to enable each State to provide the average standard of
State-type public services while making the average effort to raise revenue
from its own sources.[14] The formal methodology for determining State's
expenditure needs and revenue raising capacity, entails a number of steps,
the first of which is the construction of a standard budget,[15] being (for
the purposes of discussing revenue) the range of revenues normally the
responsibility of States.[16] Secondly, to determine standard revenue, the
total own source revenue collected by the eight States (including the
Territories) in the particular revenue category are summed and divided by
their total population.[17] Thirdly, the standard revenue raising effort[18] is
determined for each category of revenue by summing the total own source
revenue collected by the eight States and dividing by the sum of their
revenue bases.[19] The State's standardised revenue is determined by
multiplying the standard revenue raising effort for a particular tax, by
the State's revenue base for that tax.[20] The difference between the State's
standardised revenue (its implied capacity) and standard revenue is the
amount it needs, in that category of revenue, to bring it up to the
national standard (average). The sum of each States' standardised revenue
for all the revenue categories is subtracted from its aggregate
standardised expenditure (its implied expenditure needs) which, along with
certain other adjustments, determines the per-capita relativities of each
of the eight States.[21] All these figures are expressed in per-capita terms
to enable comparison.

The process of equalisation measures the effects of differences between the
States in their capacity to raise revenue.[22] Therefore, for example, it
takes account of differences in the distribution of natural resources and
certain types of economic activity.[23] The distribution methodology does not
aim to equalise the incidence of taxes on individuals in each State, but
rather, it aims at equalising the fiscal needs of a State if it were to
adopt standard revenue and expenditure policies. In other words, the
methodology focuses upon what each State would have raised if it made an
average revenue raising effort, and not upon the actual revenue raised by
the State.

Where a State does not levy a tax, it will forego that revenue directly,
but, for the purposes of assessing the amount of equalisation needed, it is
deemed to have been able to levy the tax at the standard rate. For
instance, the Northern Territory does not impose a land tax, but, because
its standardised revenue (ie. its implied capacity) is less than standard
revenue, it is assessed as needing the difference between those two amounts
to achieve equalisation.[24] Conversely, where a State levies a tax at a
higher rate than the standard rate, its standardised revenue will still be
determined by reference to the standard rate. For instance, Western
Australia has in the past raised more Land Revenue (primarily land tax)
than it was assessed as having the capacity to raise, yet, was still
assessed as needing an additional amount to achieve equalisation.[25] These
`anomalies' arise because the CGC methodology equalises fiscal capacity
around an essentially arbitrary standard. What is important within each
revenue category is the needs of each State relative to the others, not the
absolute level of needs.[26] Overall, the incentive whether or not to levy a
tax and at what rate will depend on the particular circumstances faced by
the State.[27]

There are a number of ways that the equalisation principle can be
undermined, and any under-assessment of a State's revenue base relative to
the other States will advantage it to the extent that it will result in an
under-assessment of its capacity to raise revenue relative to those States.
Where a State can levy a tax without it being subject to equalisation, it
obtains a direct revenue benefit, without any possible losses by way of the
distribution methodology. These so called `grant design' faults may arise
from time to time and provide the State with a temporary benefit. A past
example of such a fault was Queensland's use of revenues from the rail
haulage of Black Coal (not subject to assessment) to raise a de facto
mineral royalty.[28] Regular reviews in which the States participate,
however, assist in identifying these `grant design' faults and reducing, if
not eliminating, their effects.Also, a State with little relative capacity
can introduce a tax merely to induce a redistribution of revenue away from
the other States.[29] The fiscal effect of such a tax is likely to be
extremely small though as standard revenue will be equal to the State's
actual revenue divided by the populations of the eight States. As such, the
cost of administering such a tax would be likely to exceed any fiscal gain
by way of grants.

A report published by the CGC in 1991 concluded that there was little or no
hazard to efficiency by way of any `grant design' faults in the present
system.[30] However, one potentially significant way in which the CGC's
current methodology could continue to undermine fiscal equalisation is the
exclusion of certain Public Trading Enterprises (PTEs) from the standard
budget. The CGC concluded that the PTEs are by their nature, commercial,
and capable of fully recovering their costs.[31] Consequently, under the
existing methodology the impact of PTEs on the process of equalisation is
limited to the Statutory Corporation Levies paid by certain PTEs to the
State government's Consolidated Revenue Fund. This approach relies on a
very significant presumption, but the differences in the way that States'
fund and operate their PTEs has consequential effects on the State's budget
as well as on consumers. As Chapter 7 of this Review highlights, the
charges levied by PTEs can easily be characterised as taxes and on that
basis, there is a good case for them being subject to equalisation.

Although the CGC makes no direct judgments about the efficacy of State's
policies nor does it compel the States to spend or tax in a particular
way,[32] its methodology is capable of creating incentives for State's to
adopt taxing policies which will optimise their gains by way of
Commonwealth grants.

TIED GRANTS

The payment of grants by the Commonwealth to the States may be seen as a
natural response to vertical fiscal imbalance, but in reality, reference to
the aggregate value of grants overstates the extent of vertical fiscal
imbalance in Australia. Approximately 54% of Commonwealth grants to Western
Australia in 1994 were in the form of tied grants.[33] These tied grants may
only be spent in ways specified by the Commonwealth and as such, may be
seen as a de facto transfer of expenditure responsibility to the
Commonwealth. An implication arising from the presence of tied grants is
that the States would be forced to increase the load on their own tax base
in order to provide for their own expenditure priorities.[34] Thus, the
inter-play of revenue need, the narrowness of the tax base and the high
degree of tied grants, may operate, at the state level, to subsume taxation
policy considerations.

INTER-GOVERNMENTAL FINANCIAL RELATIONS IN CONTEXT

Apart from the effects flowing from the CGC's methodology itself, there are
other more important factors capable of undermining the objectives of
taxation policy at the State level.

As stated above, the States are disabled from imposing excise duties. These
taxes are potentially one of the best sources of revenue, achieving a
greater degree of equity, efficiency and simplicity than the current mix of
progressive Commonwealth income taxes, and relatively narrowly based State
direct and indirect taxes.[35] In addition, the nature of the democratic
system and the need for governments to be responsive to the electorate's
wishes operates as a constraint on Government's pursuit of rational
taxation policy objectives. It must be acknowledged that the States
themselves have been responsible for a considerable amount of the narrowing
of their tax base by the adoption of significant exemptions, particularly
in the fields of payroll tax and land tax.[36] As set out above, the States
are not Constitutionally prevented from levying income tax, but the
presence of the Commonwealth in this field means that it has an effective
monopoly. This monopoly is primarily enforced by the Commonwealth's ability
to fully offset the amount the State might raise by its own income tax by
making reductions in the grants paid via section 96.[37] Whilst this would
have a revenue neutral effect on the State government, it would result in
an increase in the amount of income tax payable by individuals within the
State. Furthermore, the increase in the tax burden on incomes would
heighten the degree of inefficiency and vertical inequality already
existing in the current system.[38] Thus, little practical opportunity exists
for the State to engage in vertical competition with the Commonwealth for
the income tax base.

Among the States themselves there is currently little horizontal
competition, with taxes on relatively mobile activities showing a high
degree of commonality, particularly of rates.[39] However, application of
uniform taxes applied at uniform rates would impact differently on each
State because of the differences flowing from their particular nature and
the scope of their economic activities. Harmonisation may result in the
State adopting a tax mix capable of undermining taxation policy
objectives.[40] It can be argued that the absence of competition between the
States and the Commonwealth as well as the lack of interstate competition,
enables the State and Commonwealth Governments to maximise their tax yield.
The clear incentive for the States to participate in this arrangement is
the guarantee of capturing a share of these economic rents via the grants
paid by the Commonwealth. The price for participating in these arrangements
is to forgo open competition for those revenue bases which are relatively
mobile, and allowing their taxes to be equalised.

IMPROVING THE CURRENT SITUATION

The foregoing analysis shows that the operation of the current grants
methodology in conjunction with the Australian legal and political
environment operates to undermine, at the State level, the concept of
accountability and the objectives of taxation policy. As a response to
that, the following two solutions may be considered.

(1) Reducing the vertical fiscal imbalance

To reduce the vertical fiscal imbalance it may be necessary to reduce the
States' current level of dependence on grants. In other words, there may be
a need to increase the matching between the States' expenditure
responsibilities and revenue raising capacity. This could be achieved in
two ways

(a) Reducing expenditure responsibilities

The current tax base can remain intact if the States responsibilities are
reduced. Thus, the States might use section 51(xxxviii) of the Commonwealth
Constitution to refer some of their powers to the Commonwealth. However,
this remedial approach faces a major barrier. The States may not wish see
their power base being eroded by losing legislative responsibility for
activities traditionally regarded as theirs.[41] This option would be limited
to activities the States considered insignificant and thus would have
little impact upon the overall matching of expenditure and revenue.

(b) Increasing revenue raising capacity

If the expenditure responsibilities are to remain the same, then in order
to reduce vertical fiscal imbalance, revenue raising capacity could be
increased in the following ways.

(i) The States' tax base could be increased if they gain access to excise
duties allowing the imposition of tax on commodities.[42] That requires that
section 90 of the Commonwealth Constitution be amended (or re-interpreted
by the High Court). Although possible,[43] such an event is not to be
regarded as achievable in the short term, and therefore, is incapable of
curing the current state of vertical fiscal imbalance.[44](ii) If the
Commonwealth reduces its individual income tax rates, the States could
introduce legislation enabling them to impose their own individual income
tax.[45] The proposed State tax would still be administered and collected by
the Commonwealth, and would have the same incidence, but the rate of the
tax would be set by the State. This would enable the State to effect its
tax mix by varying the rates of income tax and other own-source taxes. The
revenue effect would be offset by a reduction in the level of grants
distributed, resulting in revenue neutrality.

The advantage here is two-fold. Not only will this solution enhance
accountability at the State level, but it will also provide the State with
a greater scope to address tax policy objectives.[46] Alternatively, the
State may use this room to broaden its existing tax base, or to introduce
new taxes without affecting the overall tax burden.[47] For example, it may
do away with some of the existing exemptions, or re-introduce death
duties.However, this solution faces a major barrier. The creation of `tax
room' by the Commonwealth may reduce its capacity as a central government
to give effect to national macro-economics policies through the control of
the rates and receipts of income tax.[48]

(2) Changing the grants distribution methodology

To address the inherent problems in the current system of distributing
grants, the methodology itself could be changed. The following discussion
touches upon some of the alternatives.

(i) One fundamental change could be to ignore revenue raising capacity
altogether when determining a State's relative fiscal needs, and only
consider expenditure needs. This approach would reduce the incentives for
States to adopt tax policies on the basis of their impact on the
distribution of grants alone. It would, however, seriously undermine
horizontal equity between the States, as it would ignore the State's
capacity to raise its own revenue, particularly where that ability arises
from a natural absolute advantage, for example, in mineral deposits.

(ii) Continuing to assess revenue raising capacity, but using alternative
measures, would address the issue of horizontal equity, but the extent of
this effect would depend on the measure chosen. One possible measure would
be actual revenue collections, however, this would make the methodology
readily susceptible to manipulation by States seeking to maximise gains by
way of grants at the expense of tax policy objectives. Any reduction in
taxes raised by a State would still be offset to a certain degree by the
increase in its assessed needs and, implicitly, the amount of grants it
received.

(iii) An alternative to the current tax by tax approach is the assessment
of revenue raising capacity on the basis of some global measure, such as
income. This approach removes the possibility of States manipulating their
tax base to maximise benefits by way of grants. However, it fails to
recognise that the State's actual capacity to raise revenue does not
directly correspond to any global measures. While income might partially
reflect the community's capacity to pay, the State is practically and
legally constrained from taxing that source in any comprehensive way.

(iv) A further approach would entail the assessment of States' capacity to
raise revenue by reference to an objective measure of revenue raising
effort. The definition of such an objective measure would be conceptually
impossible given the differences in the conditions faced by each State, and
would effectively undermine the principle of equalisation.

(v) The scope of the standard budget could be changed to reflect a more
appropriate range of revenue sources on which to base the equalisation of
States' fiscal capacity. In particular it could be extended to include the
full impact of PTEs on the State budgets. Inclusion of all PTEs would give
recognition of the tax-like nature of the charges levied by them.
Determining the appropriate methodology for evaluating States' revenue
raising capacity would, however, be extremely difficult. The impact of
PTE's operations on the State budget will be affected by a range of factors
both within the government's control and outside of it. In these
circumstances the possibility of finding a policy neutral revenue base
would be unlikely, but it would only be necessary to find one which
minimised these effects. One possible measure of this revenue base (at
least for electricity and water) could be the quantity of output sold, with
the standard revenue raising effort determined in the usual manner.

On balance then, notwithstanding the need to broaden the scope of the
standard budget, the existing methodology represents the better means of
achieving the goal of equalisation while minimising the extent to which
States can manipulate redistribution. Some of the weaknesses that have been
identified in the current grant distribution methodology are inherent in
satisfying the goal of fiscal equalisation. The extent to which this goal
undermines the attainment of other taxation policy objectives is limited,
in that only a small proportion of the current grants are necessary to
achieve fiscal equalisation. In 1993-94, $17.4 billion was distributed to
the States, however, no more than around $3 billion would have been
necessary to achieve the degree of fiscal equalisation implicit in the
distribution of grants to the States.[49] The remaining $14.4 billion could
be seen as simply a reimbursement to the States of some of the taxation
collected in their jurisdiction by the Commonwealth, notwithstanding that
more than half of grants are now in the form of tied grants.

The Commonwealth then, may set aside a guaranteed proportion of its tax
collections to be distributed to the States.[50] At the same time, the amount
of funds redistributed through the grants process would be reduced to
offset the share of tax revenue, maintaining revenue neutrality and
minimising the negative effects of the grants methodology. This solution
would partly address the issue of accountability as the States would be
held more responsible for revenue raised on their behalf.[51] However if the
States do not have control over the definition of the tax base or the
setting of the tax rates, this solution will do little to address the
enhancement of taxation policy objectives.[52]The overall thrust of the
proposed changes would enhance the accountability of government, while at
the same time achieving improvements in the national tax mix. To the extent
that any revenue neutral adjustments in the tax mix result in changes in
the tax incidence, it is likely to generate a certain degree of community
resistance. Accordingly, introduction of the proposed changes would need to
be preceded by a significant education and promotion campaign and would
depend on the Government having the political will to proceed in the face
of vocal sectional interests.

CONCLUSION

A crucial feature of the Australian federal system is the extent of
vertical fiscal imbalance. The extent to which it can be extinguished is
constrained by legal, political and practical factors. The response,
therefore, has been a scheme of large inter-governmental grants, the
methodology of which is dominated by the principle of equalisation among
the States. As a result, taxation policy objectives at the State level are
pushed down in the list of priorities. In view of this trade-off, there may
not be any cure-all solution. Rather, the best that can be achieved would
be a satisfactory equilibrium providing the States with wider scope to
design their taxes by reference to policy considerations.

The solution recommended is conditional upon the creation of `tax room' by
the Commonwealth. This scheme must be designed so as to ensure that
Commonwealth's control over national economic policies is not rendered
ineffective. The States then could increase their revenue raising capacity,
either by imposing personal income tax or by broadening their current tax
base. While this may lead to a reduction in the degree of Commonwealth
control over State activities, it will result in an important enhancement
in accountability and taxation policy objectives. Also, as fiscal
equalisation remains an important goal in Australia's federal system,
grants should continue to be made by the Commonwealth although their size
could be significantly reduced. The methodological basis on which those
grants were distributed, however, should be changed, by broadening the
scope of the standard budget.

BIBLIOGRAPHY

COLLINS REPORT: Report of The NSW Tax Task Force 1988. Review of the State
Tax System: Tax Reform and NSW Economic Development, Vol. 1, NSW Government
Printer, Sydney.

COLLINS, D.J., "Competition and Harmonisation in State Taxation", in Walsh
C (Ed.), Issues in State Taxation, Centre for Research on Federal Financial
Relations - Australian National University, Canberra, (1990).

COMMONWEALTH GRANTS COMMISSION, Report on General Revenue Grant
Relativities 1993 - Volume I: Main Report, Australian Government Publishing
Services, Canberra, (1993).

COMMONWEALTH GRANTS COMMISSION, 59th Report 1992, Australian Government
Publishing Service, Canberra, (1992).

COMMONWEALTH GRANTS COMMISSION, Report on General Revenue Grant
Relativities - 1994 Update, Australian Government Printing Service,
Canberra (1994).

COMMONWEALTH GRANTS COMMISSION, Report on General Revenue Grant
Relativities: Volume 1 Main Report, Australian Government Publishing
Services, Canberra, (1988).

COMMONWEALTH GRANTS COMMISSION, Report On Issues In Fiscal Equalisation:
Volume 1- Main Report, Australian Government Publishing Service, Canberra,
(1990)

COURT REPORT - Report of Court, R., MLA Premier of Western Australia,
Rebuilding the Federation, WA Government Printer, WA, (February 1994).

LANE, W.R., Financial Relationships and Section 96, Centre for Research on
Federal Financial Relations - Australian National University, Canberra,
(1975).

MATHEWS, R., A Fractured Federation? Australia in the 1980s Allen & Unwin,
Sydney, (1981).

MATHEWS, R., Changing the Tax Mix: Federalism Aspects, Centre for Research
on Federal Financial Relations - Australian National University, Canberra,
(1985).

MATHEWS, R., Federal Balance and Economic Stability, Centre for Research on
Federal Financial Relations - Australian National University, Canberra,
(1978).

MATHEWS, R., The Mythology of Taxation, Centre for Research on Federal
Financial Relations - Australian National University, Canberra, (1984).

MATHEWS, R., Comparative Systems of Fiscal Federalism: Australia, Canada
and the U.S.A., Centre for Research on Federal Financial Relations,
Australian National University, Canberra, (1985).

MAXWELL, A., Federal Grants in Canada, Australia, and the United States,
Centre for Research on Federal Financial Relations - Australian National
University, Canberra, (1974).

MOORE, D., Developments in Commonwealth - State Financial Relations, Centre
for Research on Federal Financial Relations - Australian National
University, Canberra, (1986).

NIEUWEEHUYSEN REPORT: Committee of Inquiry into Revenue Raising in
Victoria, (1983). Report, (2 volumes), Victoria Government Printer,
Melbourne.

WALSH, C., "State Taxation and Vertical Fiscal Imbalance - The Radical
Reform Options", in Walsh C (Ed.), Issues in State Taxation, Centre for
Research on Federal Financial Relations - Australian National University,
Canberra, (1990).

WALSH, C., "Federalism Australian - Style: Towards Some New Perspectives",
in Brennan, G., Grewal, B., and Groenewegen, P. (Ed.), Taxation and Fiscal
Federalism, Australian National University Press, Sydney, (1988).

Notes:

[1] Mathews R, Federal Balance and Economic Stability, Centre for Research on
Federal Financial Relations - Australian National University, Canberra,
(1978), at 2; Maxwell A, Federal Grants in Canada, Australia, and the
United States, Centre for Research on Federal Financial Relations -
Australian National University, Canberra, (1974), at 63.

[2] Commonwealth Grants Commission, Report on General Revenue Grant
Relativities 1993 - Volume I: Main Report, Australian Government Publishing
Services, Canberra, (1993), at 5; Maxwell A, Federal Grants in Canada,
Australia, and the United States, Id at 63; Mathews R, Federal Balance and
Economic Stability, Id at 3.

[3] Section 90 of the Commonwealth Constitution. See High Court decisions in
Matthews v Chicory Marketing Board (1938) 60 CLR 263; Parton v Milk Board
(Vic) (1949) 80 CLR 229; Dennis Hotels v Victoria (1960) 104 CLR 529; H C
Sleigh Ltd v SA (1977) 136 CLR 529; Evda Nominees Pty Ltd v Victoria (1984)
154 CLR 311; Capital Duplicators Pty Ltd v ACT (1992) 177 CLR 248.

[4] Walsh C, "State Taxation and Vertical Fiscal Imbalance - The Radical
Reform Options", in Walsh C (Ed.), Issues in State Taxation, Centre for
Research on Federal Financial Relations - Australian National University,
Canberra, (1990), at 56.

[5] Income Tax Act 1942 (Cth); New section 221 inserted in the Income Tax
Assessment Act 1936 (Cth) by section 31 of the Income Tax Act 1942 (Cth);
State Grants (Income Tax Reimbursement) Act 1942 (Cth); Income Tax (War
Arrangements) Act 1942 (Cth).

[6] A High Court challenge to this legislation failed in South Australia v
The Commonwealth-First Uniform Tax Case (1942) 65 CLR 373. In 1946 the
Commonwealth informed the States that it intended to continue uniform
income tax indefinitely. The validity of the continuing scheme was upheld
by the High Court in Victoria v The Commonwealth-Second Uniform Tax Case
(1957) 99 CLR 575.

[7] While financial responsibilities have basically stayed the same, State
expenditure as a percentage of total public sector expenditure has
decreased from 87% to 46% whilst at the same time Commonwealth expenditure
has increased from 13% of total expenditure to 54%. Report of Court, R.,
MLA Premier of Western Australia, Rebuilding the Federation, WA Government
Printer, WA, February (1994) at 8.

[8] Mathews R, Federal Balance and Economic Stability, Centre for Research on
Federal Financial Relations - Australian National University, Canberra,
(1978), at 3.

[9] Supra n. 7 at 10.

[10] Mathews R, Changing the Tax Mix: Federalism Aspects, Centre for Research
on Federal Financial Relations - Australian National University, Canberra,
(1985), at 18.

[11] Moore D, Developments in Commonwealth - State Financial Relations,
Centre for Research on Federal Financial Relations - Australian National
University, Canberra, (1986), at 2.

[12] Mathews R, A Fractured Federation? Australia in the 1980s Allen & Unwin,
Sydney, (1981), at 48.

[13] The CGC is a Commonwealth statutory body established under the
Commonwealth Grants Commission Act 1973.

[14] Commonwealth Grants Commission, Report on General Revenue Grant
Relativities - 1994 Update, Australian Government Printing Service,
Canberra (1994), at 425.

[15] Ibid.

[16] The standard budget for the 1993 Review of Relativities included 14
categories of taxation, 2 categories of property income and 3 categories of
contributions from trading enterprises. Id at 131.

[17] Id at 47.

[18] This may be termed the "Australian average effective rate of tax." Id at
50.

[19] The revenue base is "the measure of the transactions, activities or
assets considered to be indicative of the relative capacity of the State to
raise a particular type of revenue." Id at 423.

[20] Id at 50.

[21] The final per-capita relativities used to determine the distribution of
`the pool' are derived by averaging the preceding five years' relativities.
Id at 350-351.

[22] The principle giving effect to this policy is "Fiscal Equalisation".
Supra n. 14 at 1.

[23] A natural absolute advantage would be its resource endowment or the
concentration of particular class of industry.

[24] Supra n. 14 at 183.

[25] Ibid.

[26] The absolute level of needs is, however, important when the all of the
categories are aggregated.

[27] In particular, the effect of the CGC methodology will vary from case to
case.

[28] Commonwealth Grants Commission, Report on General Revenue Grant
Relativities: Volume 1 Main Report, Australian Government Printing Service,
Canberra (1988), at 44.

[29] For example a tax on sunny days in Tasmania.

[30] Commonwealth Grants Commission Report On Issues In Fiscal Equalisation:
Volume 1- Main Report, Australian Government Publishing Service, Canberra,
(1990).

[31] The most important of the PTEs excluded are Banks; Insurance Offices;
Metropolitan Water and Sewerage; and Electricity and Gas. Id at 75.

[32] Commonwealth Grants Commission 59th Report 1992, Australian Government
Publishing Service, Canberra, (1992), at 3.

[33] Supra n. 7 at 8.

[34] See discussion between Lane and Webster RG (the State Treasurer of
Victoria in 1975) in Lane WR, Financial Relationships and Section 96,
Centre for Research on Federal Financial Relations - Australian National
University, Canberra, (1975), at 68-69.

[35] Mathews R, The Mythology of Taxation, Centre for Research on Federal
Financial Relations - Australian National University, Canberra, (1984), at
12-13.

[36] Walsh, C., "Federalism Australian - Style: Towards Some New
Perspectives", in Brennan, G., Grewal, B., and Groenewegen, P. (Ed.),
Taxation and Fiscal Federalism, Australian National University Press,
Sydney, (1988), at 222; 225.

[37] Victoria v The Commonwealth-Second Uniform Tax Case (1957) 99 CLR 575.

[38] Supra n. 35.

[39] For example, tobacco and alcohol franchise fees, gambling taxation.

[40] Collins, D.J., "Competition and Harmonisation in State Taxation", in
Walsh C (Ed.), Issues in State Taxation, Centre for Research on Federal
Financial Relations - Australian National University, Canberra, (1990), at
21.

[41] See for example the discussion in the Report of Court, R., MLA, Supra n.
7 at 7-8.

[42] See the USA experience - Mathews, R., Comparative Systems of Fiscal
Federalism: Australia, Canada and the U.S.A., Centre for Research on
Federal Financial Relations, Australian National University, Canberra,
(1985), at 12-13; (Collins Report) Report of The NSW Tax Task Force 1988.
Review of the State Tax System: Tax Reform and NSW Economic Development,
Vol. 1, NSW Government Printer, Sydney; (Nieuwenhuysen Report) Committee of
Inquiry into Revenue Raising in Victoria, (1983). Report, (2 volumes),
Victoria Government Printer, Melbourne.

[43] That requires a referendum pursuant to s. 128 of the Commonwealth
Constitution.

[44] The repeal of s.90 would be unlikely, given the history of referendum's
in Australia: only 8 out of 42 have succeeded since federation.

[45] Under the Commonwealth tax sharing legislation which was introduced in
1978, the States are empowered to impose income-tax on top of the
Commonwealth's income tax at their own rates; the reasons for not doing so
are non-legal and stem from the fact that the Commonwealth has not created
`tax room'. Supra n. 28 at 144; see also Supra n. 4 at 57.

[46] Supra n. 7 at 69-71. See the Canadian experience as discussed in
Mathews, R., Comparative Systems of Fiscal Federalism: Australia, Canada
and the U.S.A., Centre for Research on Federal Financial Relations,
Australian National University, Canberra, (1985).

[47] Ibid.

[48] Supra n. 10 at 17-8.

[49] Calculated from the 1993-94 Budget Distribution adjusted for the 1994
Update Distribution. It should be noted that this figure is still
essentially arbitrary, as it depends on the size of `the pool' set by the
Commonwealth. Supra n. 14 at xii. Other sources have identified the
`reimbursement' component of the grants at around 80%. Supra n. 36 at 231.

[50] An agreement was reached in 1990 between the Federal ALP Government and
the State governments, with the States gaining a fixed percentage (6%) of
personal income tax. After a change in leadership at the Federal level this
agreement fell through.

[51] Supra n. 4 at 68.

[52] Ibid.