Joe Hockey calls on states to lift their game as he outlines his six tax reform priorities

State and territory governments must take more responsibility for balancing their budgets, according to federal Treasurer Joe Hockey.

Speaking at a tax reform forum hosted by PwC in Melbourne today, Hockey will also call on state governments to reconsider opposing reform to the goods and services tax, telling the forum many of the submissions the government has received to its tax white paper process are in favour of either increasing the rate of GST or broadening the base of the tax, or both.

Hockey will say the submissions also call on the states to hold up their end of the bargain and finally scrap inefficient duties and taxes that were slated for removal following the introduction of the GST.

“Before we go further down the track of reform of federal financial relations, there are still a number of states that have failed to abolish some taxes that were agreed to be abolished following the introduction of the GST,” Hockey will say.

While Hockey will again rule out changing the GST without the unanimous support of the states, his speech comes as state and territory leaders prepare for a summit with Prime Minister Tony Abbott next week. Hockey will say the summit is “a real opportunity for a constructive discussion about reforming our federation”.

“This must include the states taking responsibility for their own budgets in order to ensure they can afford their ever increasing expenditure – such as the costs of their public hospital systems as our population ages into the future,” Hockey will say.

But Hockey will acknowledge efforts by some of the states to reform their tax systems, including the current governments in South Australia and the Australian Capital Territory, and previous governments in SA and Victoria.

“Surely it is not beyond the capacity of us as a country to have a sensible, mature debate about long-term tax reform more generally,” Hockey will say.

Peter Strong, executive director of the Council of Small Business of Australia, welcomed the Treasurer’s comments this morning, telling SmartCompany reform to the GST should be the priority.

“And there are state taxes that need to disappear, we totally support that,” Strong says.

“This is a great opportunity for the states to get rid of other taxes.”

While Strong says tax reform is about governments raising more revenue, he says this reform process should also “challenge the imagination” of policymakers to see taxes as a way to “change behaviour and how the community functions.

“If there are certain behaviours we want to encourage, you can reward them.”

Here are Joe Hockey’s six tax reform priorities:

1. Tax reform must “promote a stronger economy building jobs, growth and opportunity”

“A good tax system raises the revenue needed to finance necessary government activities, whilst still boosting and promoting the economic growth and innovation that underpins a strong modern economy,” Hockey will say.

“A stronger economy provides our society with more jobs and higher incomes, as well as the opportunity and conditions for entrepreneurship and innovation.”

2. Tax reform “must be fit for purpose in the modern economy”

Hockey will argue Australia currently has “a tax system with 1950s rules that simply don’t fit with the modern, globalised economy”.

“Facebook is now the biggest media company in the world and doesn’t employ a journalist. Uber is the biggest taxi company in the world and doesn’t own one car. Airbnb is the largest hotel chain in the world and doesn’t own one hotel room,” Hockey will say.

“And Alibaba is the most diverse retailer in the world and doesn’t have one traditional shopfront.”

3. Tax reform “must encourage workforce participation and ensure families control their own money”

Taking aim at bracket creep, which means individual taxpayers move into higher tax brackets because of the effects of inflation on their wages, Hockey will argue there is a risk “our best and brightest [will] leave the country for what they see as better opportunities abroad”.

4. “You should not be taxed until you have earned the income”

Hockey’s fourth principle relates to the government’s changes to employee share schemes, which he said became a “mess” under the previous government.

“But while these changes will make a big difference, there is still more to be done and the government will continue to look at ways to make improvements,” Hockey will say.

5. Tax reform “must encourage innovation and opportunity, and reward for effort”

Hockey will tell the forum the government’s focus on small businesses and startups in this year’s budget is a “reasonable start” to getting the “right tax settings to encourage bright young Australians to commercialise their ideas”.

“We need to continue to make it easier for entrepreneurs to get new businesses up and running,” he will say.

“The next Cochlear, the next Google or the next Facebook might already be an idea in the mind of a bright young Australian.”

6. The ability of each level of government to raise revenue must align with what they spend

“Our current federal system clearly fails this objective,” Hockey will say.

“Because of the high concentration of revenue raising capacity at the federal level, vertical fiscal imbalance is higher in Australia than in other federations.”