The threat of the Federal Treasurer to punish the states of New South Wales and Western Australia for increasing royalties on their minerals has not gone down well.
The current version of the federal mining tax has just passed the House of Representatives. Should it pass the Senate we may see a major confrontation in the High Court.
The form of the legislation reflects the negotiations between the Federal government and the big three foreign miners just before the 2010 election. It replaced the super profits tax proposed during the last months of the Rudd government.
During these negotiations Mr Swan and Ms Gillard had agreed – apparently inadvertently – that the foreign miners 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.
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.
It is true that any minerals and petroleum reserved to the Crown under a land grant remain 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, say, Western Australia or New South Wales.
In other words, the minerals are held for the benefit of the people of , say, Western Australia – as determined by the Parliament of Western Australia. The same is true of every other state.
Our federation – our Federal Commonwealth under the Crown – is in difficulties. Successive federal governments have taken an increasing proportion of the taxation revenues of the nation. The centralist interpretation of the constitution by the High Court, the agenda of federal governments of both parties and the failure of too many state governments to defend state rights has led to a federation which is seriously imbalanced .
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.
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 it 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.