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State tax competition could lead to a race to the bottom

Helen Hodgson writes in The Conversation (31.3.16) about the federal government’s proposal that the states could directly raise income taxes from their residents, with the Commonwealth scaling back its taxation responsibilities. The author warns that this could prompt an unhealthy ‘tax rate competition’ between states.

‘Australia’s federal government initiated two major reform processes after the last election: a tax reform process and reform of the Federation. Prime Minister Malcolm Turnbull’s plan to hand income taxing powers to the states sits at the intersection of the two.

‘Under the Constitution, the states already have the right to levy income taxes. They effectively conceded this power to the Commonwealth after the Uniform Tax Cases, in wartime 1942 and affirmed in 1957. Both held that the Commonwealth use of the grants power was valid.

‘The Turnbull proposal is based around the Federal Government cutting income tax rates, then allowing the states to raise income tax directly from residents of that state.’

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