Garnaut Fitzgerald Review of Commonwealth-State Funding

CHAPTER 7: Other Federations
Three main tax bases determine the level of vertical fiscal imbalance between Federal
and State Governments:
• income
• sales of goods and services
• natural resources.
Income taxes
In Australia, the States have constitutional access to the income tax base (including
taxes applied on personal and corporate income). However the Commonwealth has
effectively blocked the States from accessing income tax since World War II – except for
a politically unacceptable offer to the States to add income tax surcharges made by the
Fraser Government.
In Germany, the Basic Law specifies financial relations between the Federation and the
States, which are known as Länder. The Basic Law prescribes tax legislation and, in the
case of income and corporate profits tax, how much tax revenue will be distributed
between tiers of Government. The Federation and the Länder mostly share income and
corporation tax revenues. This reduces the need to use grants for equalisation purposes
(Table 7.2).
TABLE 7.2: Distribution of public incomes across Government levels, Germany (%)
WAGES AND INCOME TAX CORPORATION TAX VAT
Federation 42.5 50 52.2
Länder 42.5 50 45.7
Communes 15 0 2.1
Source: Kienemund 2000
The United States Constitution and Canadian Tax Collection agreements effectively
serve the same purpose, but allow interstate variations in tax rates by providing for
shared Federal–State access to income tax bases. The States generally apply their own
taxes over Federal income taxes. In the United States, both tiers of government tax
personal income, although Federal income taxes limit the amount States can collect. To
minimise administration efforts and costs, States in the United States that choose to tax
income tend to piggyback on Federal tax structures and returns.
The Canadian Provinces, excluding Quebec and Ontario, set their personal and
corporate income tax rates as a proportion of that charged by the Federal Government.
The Provinces piggyback their income taxes onto the Federal Government’s income tax
to minimise administration costs (as in the United States), and the Federal Government
centrally collects these taxes, returning their shares of revenue to the Provinces.
FINAL REPORT [91]