One of the aims from the tax and benefit system is to reallocate the distribution of income. As a federal policy, the redistribution meant to address national inequality. Nevertheless, it would also affect the inequality between and within States and Territories, as well as the dynamics of their economies. This is because the situation in the States and Territories will determine both tax capacity and income transfer needed in the Budget. In light of the Federal Budget release, we will discuss how it may directly affect and be affected by the State and Territories movement of income.
Undoubtedly, there are different levels of income and wealth across States and Territories in Australia. According to the Survey of Income and Housing 2013-14, the Australian Capital Territory has the highest mean private income in Australia. This is followed by Western Australia, the Northern Territory and New South Wales, while Tasmania has the lowest private income (Figure 1). The Australian Capital Territory income has been stagnant since 2007-08 while Western Australia has considerably increased. However, the inequality in Western Australia increases relatively fast and becomes higher than in New South Wales, which has previously had the highest inequality rates in the country.
Figure 1. Movement in the average private income across States and Territories
One of the hot discussions in The 2016 Council of Australian Governments (COAG) Meetings was the proposal of allowing each State and Territory to levy some income tax to fund the services they provide. The plan was rejected by the COAG with Victoria, South Australia and Tasmania immediately opposed to the idea. Instead, the Premiers and Chief Ministers would consider a different proposal of income tax revenue sharing from the Federal Government. Although the idea seems to be short lived, it has highlighted the issue of different tax capacities in different states. Western Australia has the highest mean weekly tax paid by individuals in 2013-14 followed by New South Wales, Australian Capital Territory and Northern Territory, respectively. The 2000s commodity boom played a role in Western Australia’s tax performance as the price rose in 2009-10. This means the demand for Western Australia mining product also increased. Figure 2 shows how the average income tax on individuals in Western Australia has jumped from fifth in 2003-04 to second in 2009-10.
Figure 2. Movement in the average income tax on individuals across States and Territories
Having the highest average weekly tax does not mean Western Australia has the highest contribution on an individual’s income tax among States and Territories. Due to the number of population, New South Wales contributes to almost 34% of the overall tax on individual income. This is followed by Victoria and Queensland at around 23% and 20%, respectively. Western Australia is fourth, contributing around 14% of the overall tax on individuals’ income. The total income tax on individuals is estimated to be around 3.3 billion dollars weekly or around 171 billion dollars in the 2013-14 financial year.
More than half of the amount is transferred as social benefits such as age pensions, disability and carer payments, family support payments and unemployment and study payments. For New South Wales, Victoria and Queensland, the proportions their individual’s income tax contribution among the States and Territories and the proportions of the social payments transferred are very similar. Comparably, Western Australia is an example where the proportion of their contribution is higher that the proportion of its benefits being transferred, contributing 14% of the income tax on individuals among States and Territories and receives 8.3% of benefit. On the other hand, South Australia and Tasmania have higher proportions of benefits received among regions compared to the tax paid from individuals’ income. The contribution of South Australia on income tax on individuals is around 5% while receiving 8%of the social benefit. Tasmania contributes around 1.5% of the income tax on individuals while receiving 3% of the social benefit. Given that the amount of overall social benefit is more than half the income tax on individuals, Tasmania is the only state where the amount of the income tax is lower than the social benefit received by individuals from the Federal Government.
With the commodities booms started to wind-up, it is expected that the conditions for 2016-2017 financial year will be different. One of the changes is the increase of unemployment rates in Western Australia since 2013 (Figure 3). On the other hand, the unemployment in Tasmania is starting to ease, albeit still higher than Western Australia. This will be immediately reflected in the demand for social benefits especially the Newstart allowance. Our model shows that the need for Newstart allowance in Western Australia will increase from only 1.5% of population according to 2013-14 Survey of Income and Housing to around 2.3% of population, while the need from Tasmania is likely to be dropped from 3.7% to around 3%. The need of SA is estimated to be about the same at 3% while other states have a slight increase. Nevertheless, the highest increase could come from the two territories combined. Our estimate show that in 2016 more than 2.5% of the Australian Capital Territory and Northern Territory populations need the Newstart allowance, much bigger than the one indicated by 2013-14 Survey of Income and Housing at just below 1%.
Figure 3. Movement in unemployment rate across States and Territories
There could also be changes in the contribution to individuals’ income tax. The new Budget release changed the tax bracket but the impact of these changes is very small. Overall it is estimated to lower the income by around 10 million dollar in a financial year or 0.005% of the total income tax on individuals. Queensland has the highest impact at only 0.009% while the lowest is in SA at 0.002%. The impacts of changing economic conditions to the composition of individuals’ income tax contributions for the States and Territories are also surprisingly low. Nevertheless, added with the decrease of the demand for social benefit, we can expect Tasmania to have a smaller gap between the individuals’ income tax and social benefit need.
Summing up, this article shows how the Federal Budget could directly affect the income inequality among States and Territories. In reverse, the changes in economic conditions will also directly affect the Budget. Individuals’ income tax and social benefit payments are two of these channels where the impact is direct. One of the recent economic changes is the end of the commodities boom that may affect certain states (Western Australia) more than others. Surprisingly, the impact to their ability to contribute to the individuals’ income tax does not seem to be affected greatly, though there is a considerable increase in the social benefit need. Nevertheless, the two Territories where public services activities dominate the economy seem to be affected the most. Not in terms of the income tax they are contributing, but in the need for social benefit. This is likely to be the result of how the commodity income determines the capability of the public sector, especially in the Federal Budget.