Must try harder
The most important single point in the Queensland Commission of Audit report (not a new one) is that Queensland is attempting to deliver the same services as the other states with a lower “tax effort”. To see what this means, let’s look at payroll tax which is both the biggest and (at least in principle, and with the exception of land tax) the least distorting tax available to state governments. The states were given the right to collect payroll tax back in the 1970s, in the hope that it would provide them with a tax base growing in line with the economy, and free them from dependence on the Commonwealth. It was never going to be enough, but the states made things worse by competing to provide exemptions, higher thresholds and so on, with the result that the tax collects less, and distorts more than it should. Unsurprisingly, Queensland has been the leader in this field. We have a payroll tax threshold of $1.0 million, about twice the level prevailing in other states, and a rate of 4.75 which is the lowest of any state. The LNP has promised a further increase in the threshold to $1.6 million.
The tax currently raises a bit under $4 billion, so raising the rate to 5 per cent would yield around $200 million a year. No one likes paying more tax, and a payroll tax is a tax on jobs, so raising the rate isn’t a step that should be taken lightly. Still, it seems clear that any job losses from a higher tax rate would be far less than those now under way. There are currently about 20 000 Queensland firms liable for payroll tax, and the average bill would increase by $10 000 a year. Perhaps some firms might respond by laying off an employee or not filling a vacancy, but surely most would not (and hardly any would lay off more than one. Cutting the threshold to $800 000, still much more generous than other states, would also raise $200 million a year.
If Newman took his hyperbolic rhetoric about a debt crisis seriously, the least he could do is ask his own supporters in medium-sized and big business to share some of the burden of fixing the problem, while still getting a better deal than anywhere else in Australia. Disregarding this rhetoric, we ought to have a serious discussion of whether the benefits of payroll tax concessions are sufficient to justify the lower standard of health, education, police services and so on now being imposed upon us.
fn1. The theory of tax incidence shows that, in equilibrium, a payroll tax is the same as a consumption tax, since both fall, in the end, on labour income. I’ve never been sure how much weight I should place on this result.