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Estimating the Revenue-Raising Capacities of the States and Territories and the Implications for the Equitable Distribution of GST Revenue

Authors


  • The author is a part-time adviser to the NSW Treasury. However, the views expressed in this paper are the author’s and not necessarily those of the NSW Treasury. Thanks are also due to Ross Christ and Jonathon Pincus and to two referees for comments on an earlier draft of the paper.

Peter Abelson, School of Economics, The University of Sydney, Sydney, NSW 2006, Australia. Email: peter.abelson@sydney.edu.au

Abstract

The Commonwealth Grants Commission’s recommended allocation of some $45 billion of GST (VAT) revenue annually to the states and territories is heavily influenced by its estimate of their revenue-raising capacity, which it argues is primarily a function of the value of a jurisdiction’s tax bases. This paper argues that a jurisdiction’s revenue-raising capacity is primarily a function of the real household disposable income of residents after allowances for major cost-of-living differences, such as housing and journey-to-work costs, and tax exportation (the ability to tax non-resident income). Using this measure of revenue-raising capacity, we find that the CGC methodology significantly underestimates the real revenue capacity of the Australian Capital Territory (ACT) and Victoria and significantly overestimates the capacity of Queensland and Western Australia. The paper provides numerical estimates of the differences. The paper concludes that the principles on which the CGC determines the distribution of billions of dollars of funds are flawed and should be reformed.

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