ERA pushes major economic reforms

The Economic Regulation Authority has called for an end to the Royalties for Regions program and the abolishment of domestic gas reservation and the Keystart housing scheme, while also pushing for major payroll tax, land tax and stamp duty reforms.

The recommendations are contained in a draft report on the ERA's inquiry into microeconomic reform opportunities, requested by former Treasurer Troy Buswell.

Speaking at the launch of the draft report in Perth this morning, ERA chairman Lyndon Rowe said the combination of soft revenue growth and record demand for government services meant there was a strong need to pursue difficult reforms that would create both winners and losers.

In the area of tax reform, the ERA has recommended broadening the base and lowering the rate of payroll tax, land tax, and transfer duty.

This would address the efficiency costs which arise from individuals and businesses taking advantage of concessions and exemptions which allow them to avoid or minimise the amount of tax they pay, such as companies engaging employees as independent contractors to reduce payroll tax liabilities.

The efficiency costs created by the three taxes have been estimated to be in the order of $1 billion per annum.

In an alternative scenario pitched by the ERA, the state could increase reliance on the more efficient taxes by raising the land tax rate and removing payroll tax concessions while abolishing stamp duty on residential property.

Both scenarios are revenue-neutral but are likely to spark controversy.

Mr Rowe said the reforms had the potential to provide a significant boost to the state's budget but conceded they would a difficult sell.

"The best way to make payroll tax more efficient is to broaden the base as much as possible and to lower the rate as much as possible," Mr Rowe told Business News.

"If you got rid of all exemptions, and there'd be some pain in there because that includes charities, then you could drop the rate to just under 2 per cent.

"We'll get some submissions on that and I suspect in the final report we'll probably come back with an exemption but it's more likely to be (about) $100,000 and that will have an impact on that rate."

The government has previously flagged that it would only be likely to implement state tax reforms if it could secure changes to federal taxes, which fell beyond the ERA's terms of reference.

Another area of focus was the need to ensure effective decision making in infrastructure spending and project delivery.

The ERA has called for the abolishment of the Royalties for Regions scheme, which it says is creating inefficient outcomes and placing the state budget under avoidable and unnecessary pressure.

It has meanwhile identified Western Power, Synergy, Water Corporation and Fremantle Port as assets that would be better placed in the hands of the private sector.

However the ERA defied calls from several industry groups for the creation of a state infrastructure body, arguing that infrastructure decisions were ultimately political and that an independent body still had the potential to attract vested interests.

A number of potential reforms pitched by the ERA are focused on removing barriers to competition.

The ERA recommends full deregulation of retail trading hours, with Christmas Day, Good Friday and ANZAC Day the only days considered for exemptions, as well as the removal of restrictions on the number of taxis that can operate, which it estimates would save about $80 million per annum in lower fares and reduced waiting times.

It wants to see an end to the Keystart home loan scheme, arguing that the scheme distorts the market and poses an unreasonable level of risk to government finances. 

Master Builders Association WA executive director Michael McLean questioned the ERA’s call to abolish Keystart, which he said had helped a number of young people enter the housing market.

“We’re a bit curious as to why the ERA would come to that conclusion,” he told Business News.

However he said he was keen to closely examine the ERA’s proposed tax reforms, and said it was incumbent on industry leaders to challenge their views on "sacred cows" to reduce the costs of doing business.

The ERA also weighs into the debate on the state's domestic gas reservation policy, saying it could find no evidence to support claims of an ongoing shortage of supply in the domestic gas market and the policy was increasing reliance on subsidised gas prices and reducing incentives for investors.

Chamber of Commerce and Industry WA chief economist John Nicolaou said CCI broadly supported the ERA's proposals.

“These productivity improvements will deliver higher rates of economic growth and wealth creation for WA in the long run," he said in a statement.

"The draft report provides a blueprint to boost the state’s productivity and will also add to the state government’s efforts in addressing structural challenges to the budget.” 

Other topics considered in the wide-ranging inquiry include potato marketing, congestion charges and electricity pricing.

However reforms in health, education, industrial relations and liquor licensing were excluded from the inquiry because they were considered too large in scope.

The draft report will be open to public comment until May 9, with the final report due to be handed to Treasurer Mike Nahan at the end of June.