The Australian Federal Government has broken its constitutional bounds and is actively coveting the States responsibilities. The recent election campaign put the states on notice that the Liberal Government was going to take over education while the Labor health policy took health funding and administration from the States.

The basis for a Federation is that the power resides in the States with the small area of common interest being ceded to a Federal Government. These are normally nothing more than defence, international trade, inter-state trade, border control and immigration. In the 21st Century, the Australian Federal Government has crashed through these limited responsibilities.

The Federal Government has done this through taxing for the states and consequently controlling their funding. Coupled with that has been the meekness of the States and the inherent structural flaw in the Westminster in its inability to combat entropy of power to the centre.

Dissolve The States

The anti-federalist meme has sufficiently implanted itself into the polity that most major parties openly talk about removing the states as regional government and having all state responsibilities transferred to Canberra. The Democrats and Greens both have this as a stated policy goal on their websites.

John Howard in an interview in 2003 mentioned that if Australia was done again, then it wouldn't include the states. Currently all state governments are Labor, rather than his Liberal government, it may have been politics talking but Howard's education policy in the 2004 election allowed Parent and Teacher Organizations to bypass the States and appeal directly to Canberra for funding.

The Labor Party was no better, their health policy having won the acceptance of the states for the federal government's take over of that responsibility ;

Federal Labor has won endorsement from all state and territory governments for the takeover, which is likely to be seen as a trial run for a total takeover of health by the Commonwealth.

This notion has gone beyond the political parties and been accepted by the general population. A post-election letter to the editor in the Sydney Morning Herald contained these words;

The best reform both major parties could now work towards is the abolition of state governments. The efficiencies generated could massively improve all the hospitals, schools, water supply and public transport infrastructure where the current state administrations have long proved themselves spectacular failures.

William S Lloyd, Denistone, October 10.

The Federal Government has effectively coveted and controlled the States and their funding sufficiently for this "dissolve the states" meme to have been planted firmly in the population.

Taxatious Government

Previous to the John Curtin government in World War II, the States used to have income tax rolls and raise their revenue as they need through that. Part of the battle between the federal Lyons government and NSW Lang government was over the income tax rolls which Lang had hidden from the federal government.

With World War II the Curtin government created legislation that gave the federal government the first bite of the income tax pie. The constitutionality of this legislation was challenged by South Australia and Western Australia, but the High Court upheld Curtin's grab. This meant the federal government could become the primary recipient of income tax, making it politically impossible for the states to tax income.

This led to the federal government taxing for the states, an abominable thought in government. A government is only supposed to tax to maintain itself, it is not supposed to tax so much that it hands out the extra tax to the six states and two territories. This is completely anti-federalist.

GST

The Howard Government changed the system from government grants to the States from the federal governments income tax gathering to the GST. This is a nation wide 10% levy on all goods and services. The 2003 federal budget actually bragged how the Liberal Government had brought in more tax money that ever for the States. Once again, a government is only supposed to tax for "just" what it needs and no more. After that, it becomes theft from the individuals.

One of the main issues with the federal government granting money or collecting money for the states is the number of strings that it comes attached with. The Federal Government through its control of the purse and the flow of revenue can quietly manipulate where the money is to go to, punishing the states and programs that disagree with it.

The collecting of revenue for the states also helps in making them see superfluous and insignificant. If the federal government is "propping" them up by handing them tax money, then they can be construed as a drain on the federal government, rather than the federal government making naked power grabs for the states responsibilies.

Under Australia's current anti-federalist system, the federal government is open in its power plays for the states responsibilities with the obvious (and stated goal) being to centre all legislative power in the federal government. If this was part of a Swiss like Canton system it may be acceptable, but it is more like the English system where there is one big massive honking federal government in London and nothing else as a barrier to the overt centrism of the British system.

The Weakness of the Westminster System

The Westminster system is a political hack, it is a patch to a monarchical system that centres absolute power in the monarch. To get around this political reality of British heritage, the British politicians of the 1700's began to route power around the monarch through an Executive embedded in the Legislative arm of government.

While this was an improvement over the absolute power of a monarch dominated parliamentary system, it left a lot to be desired in the very necessary separation of powers (that even Joh Bjelke-Peterson failed to understand). The Washington system which was developed in the late part of the 18thC contained a far better understanding and constitutionally mandated separation of powers, placing the Executive outside of the legislative and under the revue of the legislative.

The British system contains London, and more recently the Scottish parliament, but below that national government is the local councils. Britain has no notion of federalism as it pertains to colonies, states or provinces allowing a small subset of their powers and responsibilities to be maintained by a federal government. The Westminster system was created in this environment.

By contrast the Washington system was created with the reality that the power lay with the States, and ratifying the confederation of the then colonies in the United States was not an easy manner. Many smaller and southern states opposed such a union as they saw their power and authority being subject to the potential tyranny of a federal government.

Even with the grafting of a popularly elected Senate on the Westminster system by the "Bearded Men" in 1901, the Australian Wash-minster system is more Westminster than Washington and contains all the problems of no separation of power between the Executive and Legislative. This leads to an increased rate of entropy and pressure placed on the conventions by the ongoing stress placed on the systems by governments seeking absolute power.

The Westminster is not strong enough a system to stop this rot and consequently the States it seems will eventually be consumed by the federal desire for the states responsibilities.

Not only does Australia have a damaging vertical tax imbalance, apparently there is some crazy formula directing the redistribution of state wealth through Commonwealth Grants.

NSW Transport Minister John Watkins complained;

This is really fantasy land stuff and it's about time the Grants Commission came into the real world and started to deliver to the needs of Australian citizens, wherever they live, and not penalise Sydneysiders because of the particular needs we've got here.

That is truly bizarre considering Sydney is Australia's premier city and when you consider the concerns of Sydneysiders wanting to improve transport infrastructure.

Why would the big states like NSW and Victoria put up with the federal government supplying fifty percent of their budgets through GST and Commonwealth Grants? Simple. Ministers like Watkins can get up there and blame the lack of an efficient transport system on the federal government rather than the state government neglecting infrastructure through poor policy and planning.

If the NSW and Victorian state governments had any ticker they would reject the federal government's ability to either raise income tax or GST in their states and take responsibility for policy/planning and the raising of revenue to support those policies/plans.

But that would take political courage.

The NSW, Victorian and Federal government's have been in government long enough that they are more interested in remaining in power than good government.

Western Australia is claiming that they are being ripped off by the federal government collecting taxes for them and then redistributing it with a loss of four billion to Western Australians. Australia's other big exporting state, New South Wales, has found itself in a similar position. The vertical tax imbalance is the most insidious form of anti-federalism and must be stopped if Australia is to have a federalist political system.

We had the absurd situation last month where the NSW government ran an ad campaign against the federal government in order to secure more GST funding. That is just bizarre.

A government entity is supposed to have complete autonomy over its tax collection, tax distribution and the policies those tax funds support. This is not the case in Australia, and has not been since WWII when federal income tax was implemented as an emergency response.

That emergency is over sixty years old. The exception became permanent.

The current form of anti-federalism that is being practised was started by John Gorton who believed that the federal government was for making policy and the states were points of disbursement to implement those policies.

When the parties at the federal level talk of abolishing the states, they mean that there will be a unitary policy regime in Canberra - and councils will become the local means, funded federally, to implement those policies.

This gives little to no chance for local based politics, or local responses to local challenges.

In our current economy the states serve as sufficient differentiators to economic challenges. Western Australia and NSW are our two biggest exporters, but their economies are radically different.

Western Australia is commodity based and exports raw materials out of the country at a prodigious, and currently highly profitable rate. NSW is a service economy, exporting services and consuming at a prodigious rate in return.

The commodity and service based economies require different local responses to infrastructure, industrial relations, capital investment, education policy and even town planning.

Canberra does not understand these subtleties, being isolated from local needs, whereas Sydney and Perth are much, much closer to the local pressures and challenges.

Queensland is another powerful state that has adopted a differing economic model to both Western Australia and NSW. It uses the development-state model which is popular with nations such as Japan, China and South Korea.

Queensland faces different policy pressures and growth pressures to WA and NSW that are best met locally. A good example is Queensland subsidising petrol at the pump. They have to do so, by buying back the subsidy from the federal government. Which is absurd and a good example of how unitary federal policy in Canberra is an imposition and unable to react to local circumstances and needs.

Western Australian Treasurer, Eric Ripper, hoped that the federal government would invest Western Australia's missing four billion in WA's infrastructure. The Bwahahaha's from Canberra can be heard all way across the Nullarbor in Perth.

Western Australia, NSW and Queensland can take back their autonomy on tax collection, and consequently policy, by refusing to agree to allow the federal government to tax income in their states.

They could allow the federal government to continueto collect GST, but institute their own income tax system that is more equitable, and takes less from taxpayers.

This would not be hard. The federal government's income tax policy has been creep, creep and more bracket creep; along with tax them early and tax them hard as Australians cop high tax rates starting at 21K.

For federalism to continue to work the vertical tax imbalance is going to have to be solved. A federalist system is more politically stable and locally responsive than a unitary one. It is an important component of the Australian political structure.

It is imperative that the states become autonomous in the leveraging of tax.

I am not a fan of the GST. I consider it an anti-federalist tax. I would accept it if it was funding the federal government, but since it is redistributed to the states, and not one for one, it breaks the principle of a government only raising the revenue it needs to support itself and nothing more.

Guy Barnett has a speech in the Senate Hansard on Commonwealth Grants Commission Report on state revenue sharing relativities. The language from the government is that the GST is a windfall - suggesting it comes at no cost, and Barnett, as Costello has, suggests that the states should cut their payroll taxes amongst others due to the GST windfall.

I would argue the opposite. Payroll tax, business taxes etc are some of the few means of taxation the states have direct control over. I am not suprised that they guard them jealously, considering as last time they challenged the federal government (NSW did) on excise taxes the High Court came down on the states declaring that an excise was anything short of a sales tax, and consequently the feds had authority over any excise. It should be noted that the dictionary definition of excise is a tax on local production. Which the High Court ignored.

The GST has also been an expansive federal tax, as Barnett notes:

In terms of the ongoing windfall gain, I want to make it clear that the GST windfall from 2003 to 2011 is humungous in size. In 2003-04 it was a $69.5 million windfall gain; in 2004-05, $106.1 million; in 2005-06, $102.2 million; in 2006-07, $109 million; in 2007-08, $117 million - as I have just indicated; in 2008-09, $131 million; in 2009-10, $140 million; increasing to a $152 million windfall gain in 2010-11. They are very significant numbers. So during that time the estimated GST windfall gain to the Tasmanian government is $927 million more than it would have received under the old tax system

Which sounds to me like Tasmanians are over-taxed by the federal government with GST. If sales tax was leveraged at the state level, the states would be able to move the percentage of sales tax up and down according to their needs and the local economy. With an anti-federalist national tax, there is no refinement, and instead is just a whopping great coarse tax which envelopes both the Western Australian and Northern Territory economies in with the NSW and Victorian ones.

Barnett speaks:

The state government payroll tax is a tax on jobs. This is a particularly iniquitous tax. Tasmania has been benefiting from that tax significantly. That revenue increase in the 2003-04 year to the 2006-07 year was 34.6 per cent. So they should use the GST windfall to start phasing out this anti-jobs tax, in my view. This report makes it clear that the rivers of gold are flowing deep and fast into Tasmania with GST dollars. It is up to the state government to use those dollars wisely.

Alternatively, the federal government could reduce the GST rate since it is obviously overtaxing and supplying the state governments with more funding than they need.

Rudd stated:

"What I'm signalling firmly, strongly today is it's time for the buck-passing to end and it's time for the real work, with sleeves rolled up, to begin," Mr Rudd said yesterday. "These are huge challenges for the nation," Mr Rudd said. "The time for buck passing has come and gone. I think the Australian people are tired, just sick and tired of all the excuses which their politicians have served up for so long as to why progress can't be realised in these critical areas of public policy need."

The only reason buck passing is possible is because the national government has delved so deeply into the states' revenue stream and responsibilities. We have a broken federal system which has been smashed through successive anti-federalist Governments and High Courts.

A government is only supposed to raise enough revenue from taxes to support itself and no more. This is not the case in Australia as the national government does 85% of all taxation in the country. Half of the state budgets are dependent on nationally raised taxation revenue such as the GST and Grants.

The quickest way to fix federalism in Australia is dump the GST and Grant system. States would become responsible for meeting their own budgetary needs. This would force them to revisit their agreement allowing the national government to tax income exclusively, curbing the national government's fiscal power by eroding their monopoly on income taxation.

Federalist systems are built upon the principle of their being unique levels of problems and solutions at differing levels of local government. Australia has too much government, but we have too much government at the national level. It is the national government which needs to be restricted and taken down several pegs.