Speech to a forum on State Taxation. Assessing the New South Wales Tax Task Force, Proceedings of a Public Forum held at the Hilton Hotel, Sydney, on 14 December, 1988, Conference Series No. 9, Australian Tax Research Foundation, Sydney, 1989, pp. 47-50.
I would like to go over a number of points from a Labor Council perspective concerning the New South Wales Tax Task Force Report. I would like to look at it in the context of a number of other reports that have been commissioned by the New South Wales government, to make some criticisms with respect to one of those reports (the Curran Report), and to make a number of comments concerning particular recommendations that are advanced in the Collins Report.
Let me say at once that I think it is extremely valuable that for the first time in recent memory, if not for all time, the taxation situation in New South Wales has been systematically reviewed. To be fair minded, I think also that some credit must go to the New South Wales government for the way it has reacted to this Report. It did not do so by simply referring to what the newspaper headlines seized upon, namely the question of the Income Tax Surcharge and the Consumption Tax. The government and the Premier did say that the Report opened up a number of major areas for reform and the government, though it was disappointed with and disagreed with some of the recommendations, was concerned to see the various recommendations seriously considered and many of them implemented. I think that kind of maturity in the public debate has been an interesting outcome of this Report, which was commissioned by the previous government and concluded its deliberation under the current New South Wales government.
It is interesting to reflect, in looking at this Report and the general question of public sector efficiency and the taxation levies that are imposed in New South Wales, on some ideas that have been advanced over the years. One of the things that I looked at in preparing my notes was F.A. Bland’s pioneering study on Budget Control in New South Wales. In that book, published in 1931, he made a number of interesting observations and I would like to quote one of those at length:
We have seen that the preparation of the estimate is largely the work of the permanent officials who incorporate in their plans for spending and raising money, the policy which has been determined by the various ministerial chiefs and approved by Cabinet. The government will usually take its party into its confidence and get its approval before it incorporates its proposals in its financial plan. This, in effect, removed to a secret meeting the determination which should be made by Parliament. But even if this were not done, it is highly improbable that any of the rank and file of Parliament, whether of government or of opposition party, will have the same intimate knowledge of the requirements of the department as the permanent officials and ministers have. We cannot expect Parliament, therefore, to be in a position to offer much useful criticism of the details of expenditures or to know whether the departments are economically administered. It ought to be aware of the tendencies in principle and these ought to be debated. Unfortunately, the major questions tend to be obscured by the actual working of the party system, for if it is sure of its majority, the government pays little heed to any criticism. Members speak with the knowledge that the government will use its numbers to force its proposals through the House. How can such debate be realistic in those circumstances?
In answer to that question, Bland in his book argued for the need to extend Parliament’s practice of standing committees and also recommended that Parliament should create a Bureau of Administration to which it could look for independent advice upon all problems or organisation and finance. The argument put forward was not only that Parliament’s raising and voting of money should be done intelligently, but it would have added command agencies that might ensure that value was obtained for what was spent.
It seems to me that the prosaic intentions outlined in that advice would remain valuable today. I think no one can accuse the government of acting with undue haste in responding to those particular proposals advanced in Bland’s work in 1931. Only in the mid-1970s would we see the Public Accounts Committee established in this State with proper resources, while only this year (1988) have we seen the kind of comprehensive review of the tax system of New South Wales that was so eloquently argued for more than half a century ago.
Having made those initial comments, let me make some observations concerning this report in its context. I think it should be seen in terms of how the government is likely to react in the context of the Curran Commission Report that was brought down in the middle of this year and the State Development Strategy Report that will be tabled in the Parliament no doubt in 1989.
With respect to the State Development Strategy Report, the government has engaged a consultant, Booz Allen and Hamilton, to survey business, industry and unions with respect to appropriate industry policies and appropriate strategies that this government can pursue in order to assist entrepreneurial practices in industry. This is likely to focus on tax incentives and different incentives for particular industries, the view of business concerning such questions, the competitiveness of New South Wales industry, what the New South Wales government can do to enhance the business environment, and overall NSW tax policies. Obviously, the State Development Report, that will be released early next year, will have a significant influence on the public debate and what this government is likely to do with respect to this particular Report, the Collins Report.
The Labor Council has been critical of the Curran Report. We believe that that Report would have been a much more substantial document if it had had the Collins Report recommendations, commentary, and argument before the Curran Commission of Audit. Unfortunately the Collins Report was to be subsequent to the Curran Commission Report and no doubt the terms of reference of both Reports constrained each of them in reviewing in detail some areas. Nonetheless, we believe that the Curran Commission Report made a number of recommendations impinging on taxation questions which, in our view, are naive. For example, the focus of the Report, not surprisingly given its terms of reference, is on the implication of the high levels of New South Wales public indebtedness, including overseas debts. Despite the relative high tax burdens allegedly faced by New South Wales residents, the use of the word “high” in this context needs to be questioned. The Report claims that New South Wales residents pay more tax per person than residents of the other five states on aggregate. As the Grant Commission itself shows, and this is confirmed by the Australian Bureau of statistics findings, for all the years since 1981/82, New South Wales States taxes, fees and fines per head were lower than in Victoriea. In addition, the 1987/88 State Budget Paper No. 2 notes that New South Wales State expenditure (as a percentage of GSP), State Borrowings (as a percentage of GSP), State Debt (as a percentage of GSP) and State Public Sector Employment (as a percentage of the labour force) were lower than in any other Australian State, a fact to which the Audit Commission fails to draw attention.
This is not to say that that particular Report is a worthless document. The Labor Council commissioned a criticism of the Report, and I would agree with the findings of Peter Groenewegen of the University of Sydney who observed that:
The Report’s emphasis on efficiency, cost effectiveness, improvements in management and work practices, investment decision making and accountability can be applauded. However, in many cases, it dealt with the subject in the most general terms and gives few realistic examples of the practices in specific authorities that it wishes to see eliminated and why. Reasons for the existence of such practices are never really investigated and generally explained in terms of featherbedding or inadequate management. This substantially lowers its value as a reform document. Likewise, its pleas for cost effectiveness and efficiency, are rather naively based on appeals to the beneficial consequences of more competition, commercialisation and introduction of the profit motive which, when introduced into State business undertakings, will allegedly achieve the desirable aims. Its arguments tend to gloss over the many difficulties inherent in such a reform programme.
The Report’s emphasis on the need to provide better information can be more easily endorsed. This includes its suggestions on the introduction of accrual accounting, the need for more regular reporting by State business enterprises and its introduction of new information such as the State balance sheet it has prepared. Likewise, its plea to bring subsidies into the open needs to be supported, because all of these together enhance the ability for informed criticism of aspects of public sector activities.
Having made those comments with respect to the Curran Commission, I move on to the particular recommendations and my preliminary views and those of the Labor Council concerning the Collins Report. It seems to me, having read a number of them, that some of the recommendations of the Report must have struck the government and the Premier with a mild sense of horror. This reminds me of the story in Yes Prime Minister about Jim Hacker who, when asked to take a “courageous decision” winced and did not take the decision that was being proposed. But as I already have outlined, I think it is encouraging to have observed the kind of public reaction that this government has made concerning this particular Report. One set of criteria for judging the Report is summed up in the final paragraph of the Chairman’s Introduction:
I believe that the Task Force has produced a blueprint for comprehensive reform of the taxation system of New South Wales. Our terms of reference constrained us, perfectly correctly, to consider reform in a revenue-neutral framework. This constraint removes the luxury (one might almost say the “cop-out”) of being able to propose cuts in expenditure rather than facing up to the real task of tax reform. The revenue-neutrality requirement concentrates the tax reformer’s mind wonderfully and, in my view, no tax review committee should be freed from its shackles.
Let me go over a number of the recommendations. First of all concerning payroll tax. I am personally sympathetic to the proposal, including the suggestion that the net revenue gained from other recommendations of this Report should be devoted to a reduction in the tax scale.
Incidentally, the recommendation that the payroll tax threshold be indexed annually by an index of average changes in award rates of pay in New South Wales has positive implications for the New South Wales Department of Industrial Relations. It would be required to do some real research to produce such an index and that, I guess, is one of the unintended consequences of the Report’s recommendations which I wholeheartedly endorse. I also agree with the comments made in the Report about the concession that may be made concerning the marginal tax rate method and the need to sell that particular concept to the community. I also agree with the obiter dicta made in the Report questioning whether we provide too many advantages in a thoughtless way for what are sometimes called “small” businesses, and whether we should target particular business rather than indiscriminately providing a benefit to everyone under a certain employment size. On Land Tax, I believe that the recommendations here favour equity and should be of significant benefit to low and middle income earners, and, as outlined in the Report, the fact that Land Tax is levied on rental property but not on owner-occupied dwellings I think also discriminates against the disadvantaged.
I wonder, though, whether many of the recommendations made in that area are too brave for this government to contemplate. Nonetheless, I think the Report authors deserve credit for advancing proposals in that field.
On other taxes, the Labor Council is generally sympathetic with what has been put forward in the tobacco, petroleum product and liquor areas, despite arguments advanced by the last speaker on gambling taxes. I cannot understand why we do not have a casino (not that I would ever waste any money by walking into such a place!).
On motor taxes, I think there are very important implications with what has been put forward, particularly in view of the Curran Commission’s comments and recommendations on the State Rail Authority and its cost requirements. But I wonder whether the government agrees to the proposition put forward in the Report that the cost of road use, road damage and administration of motoring and roads should be met by motor vehicle taxes designed specifically to finance expenditures relating to motorists and roads, and that their revenue, together with specific allocations from the Commonwealth, cover the cost of road maintenance and the administration of roads and motoring. I think that is an appropriate recommendation.
With respect to the extension of the tax base, other speakers have clearly raised questions whether other States can be rallied to support the concept of an income tax surcharge. I think there is a test here of whether state governments are going to prefer the luxury of whingeing about allocations from the Commonwealth Grants Commission and what might come from Premiers’ conferences rather than assuming their real responsibility to raise the revenues that they spend. I think that the government should explore all avenues to removing the constitutional impediment to the implementation of a State Retail Sales Tax and if the New South Wales government is serious about this, it should attempt to achieve Commonwealth support for that proposition. With the tax changes that are due in 1989, this provides a golden opportunity to marry some income tax changes with changes in this particular area.
I think it is no secret that we are looking at a whole financial year of tax changes in 1989. Certainly the ACTU was arguing that the first bite of tax change should occur from the 1st July and that in the reduction of the top level of taxation, some 49c to a lower level, that should be staggered over the remainder of 1989/90. So 1989/90 is the financial year where significant tax changes will occur at the Commonwealth level and therefore there is that opportunity to pursue a number of proposals put forward in this Report. I think it is a test of how serious the state government is about these questions as to whether that will be attempted.
Let me say in conclusion that the Report can be fairly presented as raising and recommending improvements related to equity and efficiency. It is a valuable document. The test very much to the fore of everyone – Government, Opposition, Business and Unions – is how we deal with it.
As for the public debate that may follow, I am reminded of the aphorism which introduces F.A. Bland’s book on Budget Control, that I mentioned earlier, when he quotes from the Preface to the Book of Common Prayer: “There was never anything by the wit of man so well devised or so sure established, which in continuance of time hath not been corrupted.” I hope that cannot be said about the tax debate that will follow.
Mark Duffy, an economist and lawyer then working at the Labor Council of NSW, played a big role in helping me draft this paper.