A report on federal financial relations has recommended sweeping reform including increasing the GST and getting rid of “inefficient and misaligned taxes” including stamp duty.

The draft report of the NSW Review of Federal Relations says stamp duty should be replaced by a broad-based land tax; insurance taxes including the NSW emergency services levy should be abolished and road-user charges should pay for roads and transport infrastructure.

The NSW government last August commissioned a review of the State’s revenue system in relation to federal funding and the state tax system and tasked an independent Review Panel headed by David Thodey to deliver a roadmap to more sustainable funding and financial autonomy for the state.

Releasing the report on Wednesday, Mr Thodey said federation had served the nation but was in need of calibration.

He said since the review was commissioned there had been two catastrophic events – bushfires and a global pandemic – that made it clear a business-as-usual approach by governments was no longer an option.

“The economy and state finances cannot recover by relying on the set of complex, misaligned and unpredictable system of funding that we have today,” he said.

“Without reform, governments face a significant decline in their tax revenues and an era of higher debt, challenging their ability to fund the essential services and infrastructure their citizens expect and deserve. Failure to reform will create a legacy of undesirable choices for future governments.”

Call to phase out unfair, damaging taxes

The report makes 15 recommendations including phasing out “unfair and damaging taxes” harmonising payroll tax, broadening and increasing land tax and modernising road use.

The states should agree to lift the GST rate or expand the base, the panel said, with some of the revenue gained transferred to lower income households.

“State governments, in consultation with the Commonwealth, should assess and agree options for lifting the GST rate and/or expanding the base over the medium to longer-term to offset base erosion and move away from more harmful taxes,” the report recommends.

It also calls for stamp duty on property transfers to be ditched and replace with land tax.

“As a more equitable and efficient approach to taxation, the NSW Government should replace transfer duty with a broad-based land tax,” the panel says.

The report says the Board of Treasurers and state transport departments should design a national scheme to charge road users for electric vehicles to make up for lost fuel excise.

“Once distance-based charging for electric vehicles has been successfully implemented, the NSW Government should work with the Board of Treasurers to replace vehicle registration, licence fees, stamp duties on motor vehicles and motor vehicle insurance with a distance-based charging scheme that better reflects the social costs of road use, including wear-and-tear, pollution and congestion,” the report says.

“Revenue should be hypothecated to expenditure on roads and other transport infrastructure.”

Treasurer Dominic Perrottet has welcomed the report but says it doesn’t reflect the views of the government and that no decisions will be made until the final report is released later this year.

Fans and critics

The Committee for Sydney has welcomed the draft report, saying the 15 recommendation offer a road to recovery and economic growth.

The committee supported broadening the GST base, CEO Gabriel Metcalf said.

“We should use the GST as the workhorse tax, so that we can do away with more damaging taxes like payroll tax and niche consumption taxes,” he said.

He said introducing of a road pricing system and congestion cordon for the Sydney CBD were solid ideas.

“As transport electrifies, income from fuel excise will dissipate, meaning the general tax base will have to subsidise the maintenance of roads more,” he said.

“A road pricing scheme offers a smart option to continue to raise revenue while also managing congestion.”

But the Property Councils said the report had missed an opportunity for real reform by ruling out an enhanced GST as way to remove stamp duty.

Chief Executive Ken Morrison said the council agreed that the abolition of stamp duty needed to be “front and centre” of any attempt to reform the tax system.

“However, the proposed remedy of replacing stamp duty with a broad-based land tax is potentially problematic and needs much more careful consideration,” he said.

“There is a compelling case for the GST to do much more of the heavy lifting in providing state and territory governments with the revenue they require.”

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