Turnbull’s plan to allow states to access income tax a “flawed concept”, according to experts

The federal government is considering a radical overhaul of the taxation system by allowing states to access income tax revenue in order to cover the ballooning cost of health and education.

Prime Minister Malcolm Turnbull confirmed this morning he is open to the idea of the states receiving a slice of income tax.

Speaking to the media, the PM said it’s essential for the states to have enough funding in order to deliver essential services.

“You have so much overlapping of funding [in the tax system],” Turnbull said.

“It is much better if we have clearly marked out lines of responsibility and we allow the states to raise income tax to meet that. The way it would work … we would withdraw from a certain amount of income tax that would be available to the states and we would agree that that would be the maximum they would levy for a period.

“In future, on the longer term, a state should be free to lower that amount or indeed raise it and then they are accountable to their own voters.”

Turnbull likened the radical tax proposal to the recent Senate voting reforms, arguing that altering the taxation system in this way would put more power into the hands of voters.

“Ideally, in a federation, the citizens of New South Wales should decide how much revenue the government of NSW raises to meet and deliver the services that the citizens of NSW want and demand,” Turnbull said.

Experts say Turnbull’s plan is a “flawed concept”

The president of The Tax Institute, Arthur Athanasiou, slammed the government’s most recent proposal, saying it would increase red tape.

“The Tax Institute considers any proposal to allow states and territories to impose and collect income taxes as a retrograde and flawed concept,” Athanasiou said in a statement.

“The Tax Institute has continually urged state and federal government to consider shifting away from income tax and inefficient state taxes for the bulk of revenue collections. It would further add to substantial compliance costs, red tape, and likely increase the overall taxation burden on already stressed taxpayers.”

We are heading towards 8 tax systems, 8 education systems, 8 health policies: Think of the inefficiency & red tape. Appalling policy #auspol

— Stephen Koukoulas (@TheKouk) March 30, 2016

James Solomons, head of accounting for Xero, told SmartCompany Australia could end up like the United States if small businesses have to report to both state and federal governments for tax purposes.

“Imagine if an individual had to lodge two tax returns – one in New South Wales and one federally,” Solomons says.

“From that perspective, a lot of it’s going to come down to how this is administered. And many small businesses have employees in more than one state … you start to open up this can of worms.”

Income tax accounts for more than 60% of the federal government’s revenue.

Income tax comprises of tax taken from an individual’s earnings, a business’s income and profits made from the sale of property and other assets.