June 12

Commonwealth v WA – tax dispute

The proposed federal tax on the states’ mineral resources goes to the very heart of our federal constitutional arrangements.

…minerals tax…

The argument here is not against the taxation of mineral resources. That is a matter for parliament. The question is which parliament.That question can only be determined by constitutional and legal principles.  

 …federal minerals tax… 
The context of the present dispute between Western Australia and the Commonwealth is that in the negotiations between the Federal government and the big three foreign miners before the 2010 election, Mr Swan and Ms Gillard had  agreed they could write off increases in state royalties against the new federal tax.   

 Unlike the earlier version, the proposed tax only applies to coal and iron ore.

…who owns the minerals?…

An argument in this debate is that minerals (and petroleum resources) belong to the people of Australia and should therefore be subject to a federal tax.   Any minerals reserved to the Crown under a land grant remains vested in the Crown. 

But that is not, as lawyers say, the Crown in the right of the Commonwealth. It is the Crown in the right of Western Australia. 

In other words, the minerals are held for the benefit of the people of Western Australia – as determined by the Parliament of Western Australia. The same is true of every other state.

…taxation generally…

Our federation is in difficulties. Successive federal governments have taken an increasing proportion of the taxation revenues of the nation. A federal mining tax would be  another example of this trend.

As a result, Australia is the most fiscally centralised of all the OECD federations. 

The States and territories raise only 19 per cent of taxes but are responsible for 40 per cent of public spending.

..essential principle…

( Continued  below)

The essential fiscal principle of a federation was established long ago in the negotiations to form the United States of America. This is well stated in The Federalist Papers:

"In a federation, the individual States should possess an independent and uncontrollable authority to raise their own revenues for the supply of their own wants." This principle that the States must have their own income and answer to the electorate as to how they spend is fundamental to good government and the nation achieving its full potential.

The benefit to Australia from being a federation is estimated to be 10 per cent of the GDP according to the  2007 Twomey-Withers Report to the Council for the Australian Federation. They argued that this could be raised significantly by decentralising our taxation system.

 What is needed is a serious re-examination of the taxation system to ensure the states have their own defined taxation resources. The first step should be for the federal government to abandon its plans to tax minerals belonging to the states.

A corollary of this is that the Commonwealth should also restrain itself from moving into areas which really are the concern of the states and best dealt with at that level.    In the past we have been told by newspaper editors and politicians that the way to improve the quality of government is by longer fixed parliamentary terms and by handing over more powers to Canberra.These so-called solutions have failed. The answer was there all along. If we make the federation work as it was intended, we will all benefit.

It is time to make the Federation work by allowing – and requiring – the states to have their own income and enjoy a guaranteed and fair share of joint taxes.

[ A more detailed version of this paper was published  on Quadrant Online  


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