Malcolm Turnbull’s Tax Plan: No More Small Target

One month ago in this space, we looked at the problems that Australian Prime Minister Malcolm Turnbull was encountering with what seemed to be a policy of remaining a small target ahead of elections scheduled for later this year. The initial honeymoon Turnbull had enjoyed after ousting the remarkably unpopular Tony Abbott was giving way to criticism that the prime minister was being too cautious on the economy, the one area where it was felt he had some latitude to be bold. Would Turnbull be bold in the run-up to the election, we asked?

Apparently yes, but it may have done more harm than good. Comprehensively ditching the small-target approach, Turnbull took on the fraught issue of public health funding, long the source of bickering between the Commonwealth and the states over who ought to be paying what.

The problem lies in the states’ limited options for raising revenue. The Australian states relinquished the ability to levy income taxes during the Second World War, leaving them reliant on money from the Commonwealth and revenue gambits such as poker machines, which have consequently (and controversially) become rather ubiquitous. The lack of revenue has left the states struggling to pay their share of health costs, and with stresses increasingly evident in the public hospital system, the issue proved a problem for Turnbull’s three immediate predecessors.

First, Labor Prime Minister Kevin Rudd threatened a full Commonwealth takeover of public hospitals, but settled for throwing more money at the problem, raising Canberra’s share of healthcare funding to 60 percent. His successor Julia Gillard initially agreed to make that increase permanent, but increasingly aware of the limitations of the Federal government’s own budget, lowered the share to 50 percent. That still have the Commonwealth spending money it did not possess, a problem Tony Abbott sought to address in his inaugural budget, to widespread public criticism.

Enter Malcolm Turnbull with a radical plan: End Commonwealth funding of the hospitals and instead restore to states the right to levy a share of the income tax. The idea is that state governments would then be able to pay for their own hospitals, and if they needed to raise more revenue, they could do so themselves, explaining to their own constituents why an income tax raise was necessary. Presumably then, the states would spend their money more wisely (spendthrift state governments have long been a bugbear of Canberra politicians).

The plan has its appeal, and it is not completely without precedent; former Labor Prime Minister Bob Hawke considered something similar. But it is controversial. For one thing, states where incomes are lower, like South Australia and Tasmania, would be at a clear disadvantage to the wealthier states like Western Australia. For another, despite Turnbull’s pledges, it would seem to portend a rise in income taxes. Given that the prime minister has also called for a reduction in the corporate income tax, Australian voters are unlikely to respond with warmth. Which makes it a rather risky plan to float just ahead of an election.

Still, kudos for the boldness. Fewer plaudits, however, go to the way in which the plan was announced. It was all very sudden, and there seemed to be little preparation, and shockingly it appears the Treasurer Scott Morrison was caught off-guard. Like earlier Turnbull proposals, such as raising the Goods and Services Tax, which was quickly withdrawn, there was more than a whiff of impulsiveness to it all.

Turnbull’s plan had other implications: He suggested that the government could also move ahead from funding public education, turning that over to the states with the tax reforms. The idea was widely panned, with critics pointing out that with states likely to be incentivized to compete on taxes, service levels would likely to take a hit. This after years of trying to raise and standardize the levels of schools across the nation.

At any rate, the plan is dead on arrival. Turnbull took it into today’s meeting of the Council of Australian Government (Canberra’s meeting with the states), where it was rejected, just two days after Turnbull first proposed it. So heading into the election the prime minister has left the Opposition with a juicy target, with nothing to show for it.

It is perhaps not quite what the prime minister had in mind.