January 29

The federal balance must be maintained

We have on several occasions back to April 2010 expressed our concern about federal government proposals to tax minerals found within the territory of the states. (See links below) 

This issue is crucial to any consideration of federal-state relations within the Australian constitutional system. ACM is committed to the defence of that system.

The Commonwealth is already flush with revenue. It controls vast taxation streams, so many that Australia has become the most fiscally centralised federation within the OECD.

The taxation by the federal government of mineral and petroleum resources belonging to the states will only make that bad situation worse.

Our Federal Commonwealth will be even more unbalanced. This, of course, was never the intention of our Founding Fathers. The people have never approved such a deviation from the fundamental original intention of our Constitution.


…federal taxation proposals…

The first version of the tax, the Super Profits Tax, was a crucial element in the overthrow of the former Prime Minister Kevin Rudd and his replacement by his deputy Julia Gillard.

Its successor tax, the minerals rent resource tax (MRRT) was designed in rushed secret negotiations between the Prime Minister, Treasurer and three foreign miners.  They came to an agreement just before the 2010 Federal Election.

But after the election a dispute arose between the government and the three foreign miners as to whether the agreement provided that any increases in state royalties should be allowable as deductions.

The government now seems to accept that the agreement provides that any such increases should be allowable. It is believed that the federal government will attempt to ensure the states do not increase their royalties.  

In addition the government proposes to extend the offshore Petroleum Resource Rent Tax (PRRT) to petroleum and gas found within the territory of the states.

…ownership of the minerals…

[Continued below]

The basis for the super profits tax is the claim that the minerals belong to the people of Australia, and are therefore taxable by the Commonwealth.

But a perusal of a typical land grant indicates that where the minerals are reserved to the Crown, this is what lawyers refer to as the Crown in the right of the relevant state and not the Crown in the right of the Commonwealth.

In other word,s it is the State government – and not the Federal government – which is entitled to the royalties.

To the mineral rich states then, these taxation proposals are being seen as an attempt by the federal government to commandeer their resources.

…reopen the Seas and Submerged Lands case?


The suspicion that other state owned resources might one day be taxed will be reinforced by the proposed extension of the Petroleum Resource Rent Tax (PRRT) to onshore oil and gas, clearly the property of the States. Indeed, this  extension may well encourage the States to try to reopen the 1975 High Court ruling that offshore oil and gas are not theirs.

That decision was based on nineteenth century British legislation, which British and Australian legislation repealed in 1986.  The jurisdiction of the states now extends beyond the old three mile limit; perhaps the offshore resources are now theirs.

…national standards…

As a result, the federation genie is out of the bottle, challenging the current centralist fashion. The view that the federal government knows best is nevertheless widespread in political and media circles.

This assumes no centralist approach could ever be wrong. This is not something limited to the Australian intelligentsia. French education ministers were once want to boast that at say, 3:00 pm every child in the nation aged ten was studying Latin.

This centralism has gone a step further with the formation of the European Union, with its trade distorting standards.  The story that Brussels had decreed the degree to which a banana might curve, if not true, illustrates the widespread perception of excessive EU interference in the market.

There is a simplistic attraction in the declaration of national standards. This must have some limits. While wheelie bins look much the same, is there any advantage in declaring a national Australian wheelie bin standard? (For all I know such a standard may well exist or be on the drawing board.).

But national standards in everything would be a mistake – the politicians and bureaucrats are not omniscient, they cannot foresee all of the problems.If different states have different policies, there can be a competition among them to see what is best. This can be effective, doing what is impossible outside of a federation. We would still have that detested tax, death duties, were it not for the initiative of the Queensland Bjelke-Petersen government in abolishing them.

Why then should mineral royalties be the same across Australia, and be collected by the Commonwealth?

…centralised taxation… 

At Federation it was assumed that the States would continue to rely on taxes they raised and to face the electors and account to them how they had spent their money.

Our Founders were well aware of the fundamental point made by the American Founders, that:

"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." (The Federalist Papers)

The principle that the States have their own income and answer to the electorate as to how they spend it is fundamental.

But successive federal governments have gone too far in commandeering the taxation revenues of the nation.

…original intention thwarted…

But over the years, with High Court interpretations and political machinations we have reached the stage where the original intention of the Founding Fathers has been thwarted. The result is that to day, our Federal  Commonwealth of Australia is the most fiscally centralised of the OECD federations. 

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

While the benefit to Australia from being a federation is estimated to be 10 per cent of the GDP, this could be raised significantly by further decentralising our taxation system, thus raising average incomes by $4,188 per annum. (The 2007 Twomey-Withers Report to the Council For the Australian Federation.)

The result is that the States are over dependent on the Commonwealth; technically we live in a federation poisoned by "vertical fiscal imbalance".

Just as healthy adults who are welfare dependent tend to lead dysfunctional lives, this imbalance has tended to reduce the quality of State governments, making them dysfunctional and reducing them to mere service providers and not true governments.

The Commonwealth government last  year has already tried to take  30% of the GST, a Federal tax which John Howard valiantly tried to give the States to make up income they had lost thanks to a centralising High Court.  Alone among the States, the Western Australian government has vetoed this. 

The proposed federal taxes  will only exacerbate this situation and make the States even more dysfunctional.

The proposal in the Henry Review was that the Commonwealth take over State royalties. Fearful of the fight a direct seizure would provoke, the federal government is trying to cap them and impose a tax on the surplus.

The decision how the people are to benefit from mining is a matter for the States, not Canberra. That is after all what the Constitution, approved by the Australian people, intends.

…other ACM briefings on the minerals tax…

Federalism and the election

Super Profits Tax: Not in a Federation

Super Profits Tax: Massive International Law Claims Likely

Super Profits Tax: A Nationalisation Without Compensation?          

Super Profits Tax: Who Owns The Minerals? 

Super Profits Tax: Canberra or the States?

Banana Republic

Treasury head raises eyebrows

Super profits tax: Constitutional challenges likely

The Constitution and the Henry Tax Review  



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