A federalist system of government is unique in the sense that it has multiple governments (central/federal and then that of states or provinces), each with their own legislative jurisdictions. Through increasing cross border commerce, greater connectivity and overall more opportunities to do business than seen before, a framework for national harmonisation is important in regulatory matters that span different states (or other sub national jurisdictions).
In Australia, the Council of Australian Governments (COAG) is the body that brings together the state and territory heads, along with national leaders. Its aim is to ‘manage matters of national significance or matters that need co-ordinated action by all Australian governments’ 1. In the United States (US), the National Governors Association (NGA) represent a collective, bipartisan unit to develop best practices, national policy solutions and also support the principles of federalism. The NGA is different in terms of its structure and engagement with the Federal Government in comparison to COAG, but it still represents a forum where state leaders can discuss ideas, along with a number of committees that are made up of multiple Governors that can then advocate their position to the Federal Government. These organisations are important in decreasing the regulatory burden between states, yet also in upholding the independence of sub national jurisdictions.
Harmonisation of economic regulations is pertinent to increasing commerce opportunities. However we have all seen the consequences of extreme economic harmonisation in the Eurozone (single currency) where the traditional economic levers available to countries were removed and lumping strong performing jurisdictions (in this case, Germany) with economically weaker countries (such as Greece or Italy) which means that growth is slowed, the economy stagnates and overall satisfaction with the system is lost. Maintaining jurisdictional independence is paramount when engaging with national harmonisation.
The Commissioners of state and territory revenue offices committed to harmonisation of key areas of payroll tax in 2007, which was one of 27 projects launched under the Australian National Partnership to Deliver a National Seamless Economy. As payroll tax is up to the states to decide at what rate and what threshold it starts, a number of key areas have seen regulations harmonised in order to make it easier to pay workers in a different state, consequently freeing up resources such as time and money, through giving businesses a greater understanding of compliance, reporting, exemption and other requirements. While it is important in bringing different regulations up to date with each other, it’s also important to allow individual states to decide upon what rate and what threshold payroll tax should be charged at, in order to allow enough independence to respond to local economic concerns.
Regarding payroll tax, Australia has some way to go to achieve harmonisation. According to a Board of Taxation Working Group in 2017, there remain inconsistencies with the laws and administrative practices between states, likely increasing the cost of compliance and consequently lessening the economic benefit to states. Dependent upon company size, the differences in the payroll tax are quite pronounced. The threshold in Victoria is $650,000 of annual wage payments to employees, while the Australian Capital Territory (ACT) has an annual threshold of $2,000,000, with the rates varying between 4.5-5.5% 2.
As exampled by studies undertaken in the US, higher taxes, or even an increased regulatory burden during a slowing economy will mean that businesses are less likely to invest than when the economic cycle is at a strong point, and decreasing the regulatory burden will free up capital, and in turn this should help stimulate the economy. Harmonisation should be carried out around what presents the best practice for that particular policy area, and it takes time for states to agree to what that is. From this perspective, regulations should not solely be rolled back as they are viewed as inhibitive, but rather when there is a general view of the direction that will be taken and the benefits that it will have to all the states involved.
While taking into account the lessons from the Eurozone, there is still a place for economic harmonisation. Within Australia, we also need to be aware of the ‘race to the bottom’ effect, where jurisdictions would compete with lower taxes in order to get more employment in their area because this means less government revenue and consequently less funding available for infrastructure or other spending in that jurisdiction. The right balance would need to be found between the impact of a lower tax base, and the benefits that increased employment would bring, while being aware that increased employment opportunities may put an increased strain on state resources. We still need a continuation of the important work that states have undertaken in trying to find key areas that can be harmonised, while taking account of the nuances between different political and economic circumstances within the state, without eroding the central tenets of federalism.
FPL Advisory is a team of specialists resolving risks and creating opportunities with respect to government. We work with public sector and corporate clients to execute strategies for owning and managing change.
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