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Unformatted text preview: level of public
services are higher than in other States.
Revenue disabilities arise from inter-State differences in per capita taxable capacities. Essentially a State’s taxable
capacity is determined by its level and distribution of income and by its resource endowments. The higher are average
incomes, the greater will be the State’s capacity to raise revenue from taxes on payrolls, financial transactions, property,
gambling, motor vehicle ownership and operation, and insurance. Thus States with lower per capita incomes will almost
certainly have lower taxable capacities (although the Commonwealth Grants Commission does not calculate taxable
capacities in this way).
A disadvantaged State is likely to face a combination of relatively high per capita costs for the provision of a given level
of public services and a relatively low ability to raise the tax revenue necessary to finance these services. The function of
the Commonwealth Grants Commission (CGC) is to recommend the process by which such horizontal fiscal imbalance
can be corrected.
The terms of reference of the CGC’s most recent report on general grant relativities were as follows:
The Commission’s assessment should:
a) b) be based on the application of the principle that the respective general revenue grants and hospital funding grants to which
the States are entitled should enable each State to provide the average standard of State-type public services assuming it
does so at an average level of operational efficiency and makes the average effort to raise revenue from its own sources;
take account of:
i) differences in the capacities of the States to raise revenues; and
ii) differences in the amounts required to be spent by the States in providing an average standard of government
services. (Commonwealth Grants Commission, 1999:2) 135 Commission on Fiscal Imbalance The Commission interprets its terms of reference in the following way:
To enable a claimant State to function at a standard not appreciably below that of other States without having to levy
taxation and other charges of greater severity than those in other States, its revenue needs to be supplemented
a) its lower capacity to raise taxes and other revenues; and
b) its need to incur higher costs in order to provide comparable government services.
It is important to note that the CGC operates on the principle of equalisation of fiscal capacity. States are to be put into
the position of having the ability to provide average levels of public services while imposing taxes of only average
severity. There is no requirement for any individual State actually to provide average levels of public service while
imposing average tax burdens. Such a system would be one of fiscal performance equalisation and would imply that
Federal grants became tied grants, with the Commonwealth Government determining how those grants were to be
spent. Performance equalisation would imply that the claimed major advantage of federal systems – the ability to cater
for inter-State differences in tastes and preferences - would be lost. Capacity equalisation means that States can choose
whether to adopt high spending/high taxing policies or low spending/low taxing policies.
There are essentially two sets of calculations in the CGC model – cost disabilities and tax...
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