The renewed push for state income taxes

July 22, 2017

Federal government hospital spending rose by 80% in the decade to 2014, from $23 billion to $42 billion. This has led to a renewed push by conservatives for a new state income tax to fund health costs.

The right-wing Centre for Independent Studies has just published a piece by David Gadiel and Jeremy Sammut in the Australian Financial Review titled “Fiscally fixing health and Medicare means state income taxes”. It argues that a “rational” health policy would allow states to charge for hospital services.

Gadiel and Sammut warn there is no such thing as a free lunch and conclude the same applies when it comes to health policy. They claim that a “free” health system is not sustainable.

In 2011, the Julia Gillard government introduced the “National Partnership” funding formula, by which the states were reimbursed by the Commonwealth for services in public hospitals at an average cost across the country. This took some of the burden from the states, but Gadiel and Sammut are still concerned that “the unfulfillable promise of ‘free’, universal public hospital care has imposed increasingly onerous burdens on over-stretched state finances”.

Their solution is to remove the concept of a free hospital system available to anyone who needs it and substitute a “rational” health policy, under which, states would control demand by imposing hospital co-payments modelled on Centrelink’s energy co-payment policy. The other part of this policy is for the states to fund their hospitals themselves via a state income tax.

State Premiers have already rejected reintroducing the state income tax system that existed before it was taken over by the Commonwealth to fund World War II, but Prime Minister Malcolm Turnbull remains keen on the idea. He wants to relieve the federal government of some of its responsibilities.

The US has a long history of state income taxes. Forty-three states levy individual income taxes: 41 tax wage and salary income while two states — New Hampshire and Tennessee — tax dividend and interest income exclusively. Seven states levy no income tax at all. 

In some US states a large number of brackets are clustered within a narrow income band. Missouri taxpayers reach the state’s tenth and highest bracket at US$9072 in annual income. In other states, the top marginal rate kicks in at US$500,000 (New Jersey) or even US$1 million (California, when one includes the state’s “millionaire’s tax” surcharge).

Some states use a price index to keep tax brackets, exemptions and deductions for inflation constant. Many others do not. Some states tie their standard deductions and personal exemptions to the federal tax code, while others set their own or offer none at all.

The US system of state income taxation varies across the states, with some being high tax states while others are income tax havens. The burden on workers is thus arbitrarily dependent on location.

But these state taxes fund the entire spread of state expenditure and are not a precedent for funding one particular service, such as health. 

If states in Australia were given new tax-raising powers, their political power relative to that of the federal government would rise significantly.

The state level of government is a luxury for such a small population and remains of dubious value. Too often the federal government passes laws and regulations that it then requires the states to enforce, but fails to ensure they actually do. Food safety and food advertising are examples of this. 

It is inconceivable that public welfare could be advanced by the state tax for health proposal. It would be one more rung in the infinitely extendable history of capitalism’s appropriation of the commons, one more baleful result of neoliberal contempt for society in favour of the myth of market benevolence.

[Gabriel Donleavy is Professor of Accounting and Deputy Head of the University of New England Business School and a member of the Socialist Alliance.]

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