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Revenue assessments

May 2011

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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

Overview

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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

An EPC assessment

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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

About revenue assessments

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The full impact of the policy change

A policy change will have an impact on:

◦ The revenue a State raises

◦ The GST it receives

In our analysis we consider ...

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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

Lags are a problem

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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

We removed the effect of lags

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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

We removed the effect of differences in tax rates

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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

The calculations

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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?

Scenario 1

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Scenario 1 results 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

Change to: NSW Vic Qld WA SA Tas ACT NT Total

$m $m $m $m $m $m $m $m $m

State revenue 100.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 100.0

GST revenue - 2.3 - 0.5 2.3 - 1.7 1.4 0.7 0.0 0.2 0.0

Total revenue 97.7 - 0.5 2.3 - 1.7 1.4 0.7 0.0 0.2 100.0

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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)

Why does NSW lose some of the benefit?

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Scenario 1 results 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

Change to: NSW Vic Qld WA SA Tas ACT NT Total

$m $m $m $m $m $m $m $m $m

State revenue 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0 100.0

GST revenue - 2.3 - 0.5 2.3 - 1.7 1.4 0.7 0.0 0.2 0.0

Total revenue - 2.3 - 0.5 2.3 98.3 1.4 0.7 0.0 0.2 100.0

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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

Can the GST impacts reinforce the revenue change?

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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?

Scenario 2

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Scenario 2 results 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

Change to: NSW Vic Qld WA SA Tas ACT NT Total

$m $m $m $m $m $m $m $m $m

State revenue 100.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 100.0

GST revenue - 67.4 24.8 20.1 10.2 7.4 2.3 1.6 1.0 0.0

Total revenue 32.6 24.8 20.1 10.2 7.4 2.3 1.6 1.0 100.0

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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

Why does NSW lose most of the benefit?

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Scenario 2 results What if WA made the policy change?

The GST impacts are differentThe total impacts are the same

The same revenue base change has a different per capita impact for different States

Change to: NSW Vic Qld WA SA Tas ACT NT Total

$m $m $m $m $m $m $m $m $m

State revenue 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0 100.0

GST revenue 32.6 24.8 20.1 - 89.8 7.4 2.3 1.6 1.0 0.0

Total revenue 32.6 24.8 20.1 10.2 7.4 2.3 1.6 1.0 100.0

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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

Why do States end up with a population share of the increase?

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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?

Scenario 3

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Scenario 3 results 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

Change to: NSW Vic Qld WA SA Tas ACT NT Total

$m $m $m $m $m $m $m $m $m

State revenue 100.0 0.0 0.0 - 100.0 0.0 0.0 0.0 0.0 0.0

GST revenue - 100.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0 0.0

Total revenue 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

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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)

Summary

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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

Relaxing the assumption that States tax at national rates

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Scenario 1 – increase NSW revenue by $100m

Increase in State revenue (NSW above ave taxes)

Increase in GST impact

Impact of relaxing assumption

Scenario 1 NATIONAL RATES OF TAXChange to: NSW Vic Qld WA SA Tas ACT NT Total

$m $m $m $m $m $m $m $m $mState revenue 100.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 100.0GST revenue - 2.3 - 0.5 2.3 - 1.7 1.4 0.7 0.0 0.2 0.0Total revenue 97.7 - 0.5 2.3 - 1.7 1.4 0.7 0.0 0.2 100.0

Scenario 1 STATE RATES OF TAXChange to: NSW Vic Qld WA SA Tas ACT NT Total

$m $m $m $m $m $m $m $m $mState revenue 107.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 107.9GST revenue - 2.5 - 0.6 2.4 - 1.8 1.5 0.7 0.0 0.2 0.0Total revenue 105.4 - 0.6 2.4 - 1.8 1.5 0.7 0.0 0.2 107.9

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Scenario 2 – increase NSW revenue base by $2b

Increase in State revenue (NSW above ave taxes)

Increase in GST impact

Impact of relaxing assumption

Scenario 2 NATIONAL RATES OF TAXChange to: NSW Vic Qld WA SA Tas ACT NT Total

$m $m $m $m $m $m $m $m $mState revenue 100.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 100.0GST revenue - 67.4 24.8 20.1 10.2 7.4 2.3 1.6 1.0 0.0Total revenue 32.6 24.8 20.1 10.2 7.4 2.3 1.6 1.0 100.0

Scenario 2 STATE RATES OF TAXChange to: NSW Vic Qld WA SA Tas ACT NT Total

$m $m $m $m $m $m $m $m $mState revenue 107.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 107.9GST revenue - 72.7 26.7 21.7 11.0 8.0 2.5 1.7 1.1 0.0Total revenue 35.2 26.7 21.7 11.0 8.0 2.5 1.7 1.1 107.9