Special Report - Rising rates and a broader base mark Labor’s take on tax

A look back at the Gallop Government’s performance on taxation may provide a clue as to what the state can expect for an upcoming tax review, as Joe Poprzeczny reports.

Between 200 and 300CE, when the Roman Empire was still a superpower, albeit in decline, its citizens complained of two types of bandits – those who were mobile and those who were stationary.

Mobile bandits were those that robbed citizens as they travelled on the empire’s highways and byways. Stationary bandits, better known as imperial taxmen, sat in offices and demanded from citizens what they saw as belonging to Caesar.

People still complain about the taxman today. Everyone barring a few minority fringe groups accepts the need for taxes but that still leaves plenty to complain about, such as tax rates and equity.

So how does the the state’s Labor Government’s taxman rate?

The key figure in the Government’s 2005-06 budget papers is Treasury’s forecast revenue – the total tax base or tax take – of $14.2 billion.

The GST will provide about $3.8 billion, or 27 per cent, of this total while federal grants will provide a further $2.7 billion, or 19 per cent.

Mining royalties will contribute $1.7 billion (12 per cent), dividend from government business $708 million (5 per cent), the sale of various goods and services $943 million (7 per cent), and other charges $426 million (3 per cent).

The remaining $4 billion will come from state taxes, and the main target will be the business sector. Stamp duty hits business and private households alike, with each paying about half the total take of $1.7 billion.

This is also the story in relation to taxes on financial transactions, which will raise about $1.7 billion, and $959 million raised from motor vehicle and insurance taxes.

It is a different story in relation to payroll tax, however. In exchange for employing hundreds of thousands of Western Australians, businesses will be charged $1.2 billion by the ‘stationary bandits’ at 197 St Georges Terrace.

The only state tax not impinging on business is gambling, but this will reap a mere $129 million in 2005-06.

Whichever way one looks at it, WA business carries an inordinate proportion of the state’s tax load, so it’s little wonder business is at the forefront of lobbying for lower tax rates.

To appreciate businesses’ stand in relation to the present government it’s helpful to go back to January 2001 when Labor leader Geoff Gallop and then premier Richard Court debated their respective party manifestos.

During their televised encounter, Dr Gallop said he wouldn’t increase taxes, something business was delighted to hear since the Court and Colin Barnett-led Liberals had been big spenders, especially during their second term from 1997 to 2001.

What’s happened since?

The first Labor budget (2001-02), delivered by Treasurer Eric Ripper, contained nine major tax measures, including grossing up the value of taxable fringe benefits in the payroll tax base, extending that base to include employee-like contractors, and increasing the top payroll rate to 6 per cent. All up this was to reap another $360 million from business over Labor’s first term.

Business also encountered a revised land tax scale, which boosted the rate to 2.3 per cent on an unimproved value between $2 million and $5 million, and to 2.5 per cent on unimproved land valued above $5 million, raising a further $92 million over four years.

The controversial premium property tax on owners of land offering river and ocean views was dropped following a western and coastal suburbs tax revolt during the 2001 federal election.

And there was a handful of minor changes that cost Treasury $43 million, while others boosted revenue by $64 million, meaning a net gain of about $20 million over four years.

A review of business taxes was announced, resulting in the scrapping of taxes on items including cheques, leases and life insurance. plus simplification of taxing on other financial activities.

The review’s changes were crafted to be revenue neutral, meaning Treasury couldn’t be a loser. Abolition of these minor taxes resulted in broader stamp and payroll taxes.

Clearly, Labor got off to a bad start in relation to its January 2001 undertaking not to increase taxes.

But there was more to come.

The second Ripper budget (2002-03) had five major taxing measures crafted to raise a further $458 million at the end of 2005-06.

Stamp duty on motor vehicle licences except heavy vehicles was increased to raise $163 million over four years, stamp duty on vehicle compulsory third party policies changed to raise $105 million over four years, and conveyance duty rates across various property values were increased to raise a further $250 million.

A change to stamp duties on heavy vehicle registration cost Treasury nearly $17 million and a plan to extend the payroll tax base to include employee-contractors was dropped meaning a loss to Treasury of $24 million over four years.

Mr Ripper’s third budget (2003-04) contained two major taxing measures – a boost to stamp duty by 15 per cent across the rate scale, and an increase in these duties on general insurance from 8 to 10 per cent.

These were crafted to raise $700 million over four years.

These two measures were to raise $162 million in 2003-04, $171 million in 2004-05, $180 million in 2005-06 and $188.5 million in 2006-07.

The fourth budget (2004-05), the Labor Government’s final first-term budget, had five major taxing measures and was followed in October with four pre-election sweeteners. The budgetary measures meant Treasury forsook $133 million over that financial year.

For business, the major October pre-election measure was a cut to payroll tax from 6 to 5.5 per cent, which cost Treasury nearly $465 million.

Others included lowering stamp duty from 6 to 5.4 per cent, raising first home owners’ exemption to $250,000, and raising the exemption threshold on land tax to $100,000.

“Over its first term the Gallop Government increased the tax effort for each of its major taxes – payroll, stamp duty, motor vehicle, land and on insurance,” former Treasury officer and now Chamber of Commerce and Industry senior economist, John Nicolaou, said.

“Not only were rates increased, but the base of each tax was broadened.

“Both changes, in conjunction with a growing economy, meant revenue were boosted by some 40 per cent.”

He said another crucial factor was the boosting of spending, particularly in the second half of Labor’s first term.

“The reason they believed they needed the extra tax revenues after their second year in power was simply because of their lack of control over expenditure,” Mr Nicolaou said. “If the Government had controlled expenses to the extent it had forecast in 2001-02 it could have abolished payroll tax entirely.”

Although the Government forecast in 2001 for expenses in 2004-05 to be $11.3 billion, this figure came in at $13.2 billion, nearly $2 billion off target.

“Had that not occurred the Government wouldn’t have needed its tax increases and there would have been an opportunity for significant tax cuts, making WA a more competitive state economy in relation to other states,” Mr Nicolaou said.

“Total general government expenses grew by 10.1 per cent to $13.2 billion in 2004-05 due mainly to pre-election initiatives.”

Tax competitiveness is something the Government claims to be concerned about because its taxing can be gauged against other states.

And, finally, the 2005-06 budget lacked relief for businesses paying payroll tax despite a third successive surplus. Perhaps because of this, Mr Ripper announced another review of taxes.

But unlike the 2001 review this would consider all taxes, not only those affecting the business sector, so it has the potential to offer real tax cuts.

Moreover, the coming review won’t be constrained by having to be revenue neutral.

Harsh experience showed that Dr Gallop’s January 2001 undertaking not to increase taxes was chimera.

Only time will tell if his forthcoming tax review will be a worthwhile exercise.

Click here to view the State Revenue pie chart.

TAX SNAPSHOT

Budget revenue expectations for the 2005-06 financial year

• Total revenue will reach $14.2b, $1b more than forecast last May.
• GST will be 27 per cent of revenue – $3.8b.
• Direct Canberra grants will be $2.7b.
• State taxes will be nearly $4b.
• Payroll tax component will be $1.2b.
• State taxes on financial transactions to exceed $1.7b.
• Insurance and motor vehicle taxes will reap nearly $1b.
• Land tax expected to raise $320 million.
• Gambling taxes will only bring in $129 million.
• Public corporations will earn $710 million.
• Minerals royalties to earn $1.71b.