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.

Power politics dominates the international scene and the US as the most powerful nation on the planet plays power politics hard. Power politics is also how the vertical power balance in a federal system is conducted. For instance in the US California tends to be very independent of the US national government. This is due to a mix of size, economic power and ability to raise revenue to support independent policy. So much so that Californian policy ends up influencing federal policies.

Australia has a far more centralised federal system which despite NSW's dominance of GDP at 33% has not translated into independent policy and political power since WWII. The main imbalance is tax, but a nationalist high court has helped as has a national government selective in its fights.

Three recent incidents are indicative of the power politics balance in Australia. The national emergency over Indigenous issues was between the National government and the Northern Territory. This is despite the Aboriginal people being well represented electorally wise in the NT as 25% of the population. The failure is the representatives in this system. In NSW, Qld and Western Australia the indigenous people are a much smaller percentage, under 2%.

The national government muscled in on the Northern Territory and not the other states because it could. NSW, Qld and Western Australia are big enough to tell the national government to bugger off, in polite words, but they can resist the take overs unless they agree to them. The federalist response for the Northern Territory should have been; thank you for your concern, it is a territory matter which the assembly will handle.

The next incident was the funding of a Tasmanian Hospital which centralising intensive care operations between two local hospitals. Would this happen in NSW or Victoria? Not without precedents being set in smaller states that have less ability to resist the national government and its dollars.

The third one is the Queensland Premier demanding results and explanations from the federal handling of the Haneef issue. There are electoral politics in play here, however, Queensland is powerful enough that it can go toe to toe with the national government and make administrative demands.

Power in politics comes from the ability to (or not) raise tax revenue and then redistribute it. Often in a democracy this is basis for electoral success as well. It is hard to see the funding of the Tasmanian hospital in any other light. Currently the national government does approximately 80-85% of all taxation in Australia.

The dirty little secret in Australian federalism is that the national government has income tax by agreement from the states. If the states truly wanted to assert themselves they would cancel that agreement, leave the national government with the GST and then raise the taxes to support their own government through income tax.

A basic component of republican government is that a government raises enough tax to support itself and nothing more. The states are dependent for 50% of their budgets on the national government redistributing GST and tied grants.

This is the vertical tax imbalance. However this can be rectified by the states re-asserting their sovereignty over their constitutional right to tax income.