Gavin R. Putland,  BE PhD

Saturday, April 02, 2016 (Comment)

Would a State retail sales tax require a referendum?

Now that the Prime Minister's proposal to allow the States to set their own income-tax rates has bitten the dust, an alternative offered by Gregory Melleuish (and republished at MB) has, by default, become more interesting:

Give states power over sales tax.

As the High Court defines sales tax as excise, the wording of Section 90 [of the Constitution] could be changed so that sales tax is explicitly excluded from the definition of excise. This would require a referendum...

Such a referendum would have no chance of being passed unless it simultaneously took away the Federal power to impose a sales tax or GST. But that's beside the point because, if the aim is to let each State set the sales tax rate within its borders and receive the revenue therefrom, no referendum is needed.

Section 90 of the Constitution forbids the States to impose excise taxes. In the last relevant High Court case, namely Ha v. NSW (1997), the majority held that an excise is "an inland tax on a step in production, manufacture, sale or distribution of goods". If paying the workers is such a "step", that definition would sink payroll tax. (The same definition, by the way, would also scuttle the existing State stamp duties on new cars and sales of livestock.) The three dissenting judges preferred a narrower definition of excises. In their view the purpose of s.90 was to "prevent impairment by the States of the common external tariff," so that "A State tax which fell selectively upon goods manufactured or produced in that State would be an excise duty..." They added: "Whether a tax which falls upon locally produced goods discriminates against those goods in favour of imported goods is a question of substance, not form." In substance, domestic payroll tax on labour embodied in goods manifestly discriminates against locally produced goods because it is not levied on the corresponding labour embodied in equivalent imported goods.

Does it matter that payroll tax affects services as well as goods? Not under the majority definition, because the GST also affects services, and nobody is suggesting that the States could have imposed the GST; that's why the Commonwealth imposed it and handed over the revenue. Under the minority definition, the question is whether a law forbidding discrimination against local goods can be circumvented by discriminating against local services as well. One should hope not.

If State payroll taxes were struck down, the Commonwealth could of course impose its own payroll tax and distribute the revenue to the States. But that would be political madness, because it would waste the best-ever opportunity to eradicate the hated payroll taxes (think of the kudos!), and because it would worsen vertical fiscal imbalance, so that the States could more easily blame Canberra for underfunded services.

Let me therefore offer an alternative solution that gets rid of payroll tax and reduces or eliminates vertical fiscal imbalance. One advantage of a retail sales tax over a VAT is that the absence of input credits makes it easy to have different rates (on a uniform base) in different States. (In this context the "States" will be taken to include the Territories.) So, suppose that, instead of payroll tax and GST, we have a retail tax for which the tax rate in each State is set annually by the Federal Parliament at the "request and consent" of the State Parliament, and suppose that the revenue so raised in each State is refunded to the State on the condition that the State refrains from imposing certain other taxes (e.g. income tax).

Does this arrangement amount to a State excise tax in violation of s.90 of the Constitution? No, because it's imposed under Federal legislation. Does the variation in the rate amount to discrimination between the States in violation of s.51(ii) and s.99? No. The Commonwealth invites each State to pass a "request and consent" act. The States respond as they see fit and the Commonwealth meekly accepts their responses. Where's the discrimination?

In the unlikely event that "discrimination" is an issue, there's another way to legitimize the same arrangement. According to the "minority" definition of an excise, the States can impose their own retail taxes, in which case they can refer the collection power to the Commonwealth under s.51(xxxvii), and the Federal Parliament can authorize the collection by the ATO on the condition that the referring States accept a uniform base and refrain from imposing certain other taxes.

The enabling Federal and State legislation could cover both constitutional options, so that different High Court judges could approve the arrangement for different reasons. As long as a majority of judges agree that the arrangement is constitutional, it doesn't matter if they disagree on the reasons!

For optimal affordability of housing, a retail tax should treat real estate as follows:

(1) To loosen up the supply chain, all property sales (some of which are presently subject to GST) should be exempt.

(2) To encourage construction, buildings should be exempt, leaving only sites subject to tax.

(3) To maximize the incentive to build commercial accommodation and seek tenants, commercial landlords (who presently collect GST on rents received for sites and buildings) should pay retail tax on the imputed rental values of their sites alone, regardless of whether the sites are developed or let to tenants; and any contractual provisions requiring tenants to pay the tax (or increments in the tax) should be void.

(4) To maximize the incentive to build rental housing and seek tenants, residential landlords (who are input-taxed under the present GST) should be treated as in point (3).

Regardless of how it treated real estate, a retail tax with the States setting their own rates, replacing payroll tax and GST, would reduce vertical fiscal imbalance. The retail tax would improve international competitiveness because, unlike payroll tax, it would not act as a reverse tariff. It would create jobs because, unlike payroll tax, it would exempt exports and capital formation and would not drive a tax wedge between employers and employees. It would reduce compliance costs by eliminating payroll tax, GST input credits, and GST collection by non-retail businesses. And it would not require compensation for low-income households, because payroll taxes and sales taxes have similar effects on prices when shifted downstream, whereas payroll tax is more regressive when shifted upstream: a sales tax, when shifted upstream, is a tax on all the factors of production in the jurisdiction in which production occurs, whereas a payroll tax, when shifted upstream, is a tax on labour within the taxing jurisdiction.

[Note: Most of the above argument, among others, was previously published in On Line Opinion on 16 December 2009.]

Creative Commons License         Return to Contents
comments powered by Disqus