1. Revenue assessments May 2011 1

2.  Examine three revenue scenarios ◦ A policy change that increases revenue ◦ A policy change that increases revenue and activity ◦ A policy change that shifts activity between States  Explain the direction and size of GST changes under each scenario  Draw together some insights into revenue assessments 2

3.  An Equal Per Capita (EPC) assessment is the average assessment  It means the category has no impact on the distribution of the GST  Implications of an EPC assessment” ◦ States can raise the same per capita revenue ◦ Any difference between actual and average revenue is deemed to be due to State policy 3

4.  A State’s revenue capacity is measured using its share of the revenue base  Our revenue assessments adjust a State’s GST if its revenue capacity differs from its population share ◦ The GST is adjusted down if revenue capacity exceeds population share ◦ The GST is adjusted up if revenue capacity falls short of population share 4

5.  The full impact of the policy change  A policy change will have an impact on: ◦ The revenue a State raises ◦ The GST it receives 5

6.  The policy change will have an immediate impact on the revenue a State raises  The policy change will have a delayed impact on the GST States receive  We need to compare the two impacts at the same time ◦ A dollar in 2007-08 is not the same as a dollar in 2011-12 6

7.  Our analysis uses ◦ The revenue impact in the assessment period ◦ The GST impacts arising in the assessment period  This approach removes the lag. It implies the GST impact is immediate 7

8.  Initially we will assume all States tax at the national average rates of tax  This means the revenue collected following a policy change will be the same for every State  We will relax this assumption later 8

9.  We will provide results for all revenue categories  But, we will use Payroll tax as the example ◦ Revenue collected was $16.8b in 2009-10 ◦ The revenue base is taxable payrolls of large employers ◦ It is the aggregate value of payrolls for individual employer that exceed a $0.7 million threshold 9

10.  What is the effect of a policy change that increases revenue but does not affect activity? ◦ An increase in tax rate with no elasticity effects  We’ve assumed the policy change: ◦ Increases a State’s revenue by $100m ◦ Does not affect its or other States’ revenue base  Does it matter which State makes the policy change? 10

11. 11  What if NSW made the policy change?  The GST impacts are small  NSW keeps most of the benefit of its policy change, but not all

12.  We assess NSW to have above average payroll capacity ◦ Its revenue share exceeds its population share ◦ We assess NSW to be able to raise more than its population share of the additional $100m, so it requires less GST  We adjust its GST down in each year ◦ NSW revenue capacity exceeds population share:  3.0 per cent (2007-08), 2.1 per cent (2008-09) and 1.8 per cent (2009-10) respectively  Average for the 3 years = 2.3 per cent (-$2.3m) 12

13. 13  What if WA made the policy change?  The GST impacts are the same ◦ States’ revenue bases have not changed  It doesn’t matter which State makes the change

14.  What if Qld made the policy change? ◦ State revenue: $100.0m ◦ GST revenue: $2.3m ◦ Total income:$102.3m  We assess Qld to have below average payroll capacity ◦ We assess Qld to be able to raise less than its population share of the additional $100m, so it requires more GST 14

15.  What is the effect of a policy change that increases a State’s revenue and revenue base? ◦ Cutting red tape ◦ Improving compliance effort  We’ve assumed the policy change: ◦ Increases a State’s revenue base by $2b, which increases its revenue by $100m  Does it matter which State makes the policy change? 15

16. 16  What if NSW made the policy change?  The GST impacts are big ◦ The policy has changed States’ assessed capacities  NSW loses most of the benefit of its policy change

17.  We increased its already above average payroll capacity  Its increased capacity is applied to all payroll revenue ◦ Both the initial $16.8b and the $0.1b increase  Note the total impact suggests: ◦ the GST adjusts to leave States with their population share of the increased revenue 17

18. 18  What if WA made the policy change?  The GST impacts are different The total impacts are the same  The same revenue base change has a different per capita impact for different States

19.  We assumed States tax at national rates ◦ The impact on the revenue raised is obtained by applying national tax rates to revenue bases  The GST impact is at national rates ◦ The GST impact is obtained by applying national tax rates to revenue bases ◦ The two effects offset one another – leaving States with their population share 19

20.  What is the effect of a policy change that shifts activity from one State to another? ◦ Convincing a company to relocate  We’ve assumed the policy change: ◦ Increases one State’s revenue base by $2b, increasing its revenue by $100m ◦ Decreases another State’s revenue base by $2b, decreasing its revenue by $100m  Does it matter which State makes the policy change? 20

21. 21  Part of WA’s revenue base shifting to NSW  The GST impacts completely offset the revenue impacts ◦ Because total revenue and total revenue base are unchanged

22.  Policy changes that: ◦ Only affect State revenues tend to have small GST impacts (scenario 1) ◦ Affect State revenue bases tend to have big GST impacts (scenario 2) ◦ Shift revenue bases between States tend to have smaller/no impacts on total income (scenario 3) 22

23.  The revenue raised by States will change  The revenue raised will be less for low taxing States ◦ They will keep less of the benefit of their policy change  The revenue raised will be more for high taxing States ◦ They will keep more of the benefit of their policy change 23

24.  Scenario 1 – increase NSW revenue by $100m  Increase in State revenue (NSW above ave taxes)  Increase in GST impact 24

25.  Scenario 2 – increase NSW revenue base by $2b  Increase in State revenue (NSW above ave taxes)  Increase in GST impact 25