State Finances in the 21st century

The IGA granted the States access to an efficient growth tax in the form of the GST, which was to be administered by the Commonwealth. Given this context we would expect the States to gradually reduce their reliance on existing own-source taxes given both the electoral benefits of cutting taxes combined with widespread recognition that many of the remaining State taxes were administratively complex and economically inefficient (Smith 2007; Freebairn 2002). Yet an analysis of State taxation over the period clearly defies such predictions.

Table 2: Key trends in state taxation 2000–06




Increase $

Increase %

Annual Increase %

Gambling Machine Tax






Payroll tax


13 087




Property tax


13 784




Total State Rev

32 679

44 235

11 556



(Source: ABS 2007 — Cat. 5220)

State taxation increased by over 35 per cent in nominal terms (or $11.55 billion) over the period between mid-2000 and mid-2006. Of even greater significance is the specific composition of this increase and the fact that it was largely driven by the rapid growth in State property taxes on the back of a booming property market (particularly between 2000 and 2003). Over this period, revenues from land taxes and conveyancing charges on real-estate transactions increased by 28 per cent per annum. Even averaging this growth over the six years for which data is available, the housing boom contributed over 55 per cent of total State revenue growth, with payroll and gambling taxes accounting for most of the remainder. The problem for State public finances is that this property-tax windfall was the dividend of unsustainable housing boom, a reality borne out by the fact that such revenues have declined in real terms since 2003–04 as real-estate prices have stabilised and the volume of property transactions has fallen (Productivity Commission 2004).[2]

Narrowly based taxes are inevitably inefficient and volatile. Periods of exceptional revenue growth, such as the States experienced during the early years of the decade, are a boon for public finances just so long as they are not committed to recurrent expenditure, and herein lies the budget challenge confronting the States. State governments were able to achieve modest cash surpluses (and retire State debt) at the height of the property boom. However, many States are now struggling to maintain a cash surplus as the growth in own-source revenues slows.

According to the latest Commonwealth Budget Papers (2008b), aggregate net State debt for the total non-financial public sector (which combines general government and public non-financial corporations) will increase from 1.1 per cent of GDP in 2005–06 to 5.7 per cent in 2009–10. These financial pressures will be compounded by the fact that total Commonwealth funding to the States (both GST revenue and Special Purpose Payments) will grow at a pedestrian 5.5 per cent over the forward estimates contained in the federal budget papers, significantly slower than in 8.2 per cent experienced in recent years (Commonwealth of Australia 2008b). When combined with unprecedented challenges in relation to health, education and infrastructure funding, it is not surprising that State Treasurers are once again trying to devise politically palatable ways of expanding their tax base and increasing revenue.[3] In summary, the IGA increased total funding available to the States (budget capacity); however, this increase in funding has largely failed to keep pace with rising expenditure pressures. As a result, State governments have been forced to increase their reliance on their own-source taxation in addition to their growing transfers from the Commonwealth under the IGA. Regrettably, the tax base on which the States are becoming more reliant is even narrower and less efficient than that available prior to the introduction of the ANTS reforms (Freebairn 2002; Commonwealth of Australia 2008a).

[2] While the national housing market experienced a temporary revival in 2007, preliminary data for the first quarter of 2008 suggests that higher interest rates are starting to bite. While prices of established dwellings remain steady, the fact that sales volumes have fallen by up to 30 per cent in some States does not bode well for property-tax revenue (ABS 2008).

[3] The NSW Government’s controversial proposal to privatise $21 billion-worth of electricity assets has always been closely linked to the need to invest a $110 billion in infrastructure of the next decade (Ferguson 2007).