Western Australia would keep half of all future mining royalty increases under changes put forward by the body responsible for GST distribution in a move which could bring substantial relief to the state's financial bottom line.
The prospect of GST relief for WA is raised in a position paper by the Commonwealth Grants Commission [CGC] into the system of horizontal fiscal equalisation, by which GST is shared among states, ahead of its 2020 Methodology Review.
Treasurer Ben Wyatt welcomed the CGC's interim position to quarantine half of future revenue increases as recognition the way it had been assessing WA's iron ore royalties was unfair.
WA currently only receives 34 cents for every dollar of GST revenue it raises, with the rest redistributed to other states.
Successive governments have largely blamed this for the state's economic problems, with debt forecast to reach $43.8 billion by 2020 and the budget not predicted to return to surplus until 2020-2021.
The commission position paper acknowledged that a mining-based state with a relatively small population which increased its tax rates would only be left with a small share of the revenue change. Most would be given to other states.
This is what currently happens in WA, which only gets to keep about 10 per cent of its iron ore royalties.
The commission stated a preferred position going forward where states would retain at least 50 per cent of any future revenue increases, such as a hike to iron ore royalties.
"For the 2020 review, the commission considers that its methods should ensure each state retains, after equalisation, at least half of the own-source revenue effects of the discretionary policy changes that it makes," the position paper said.
"This will ensure that for any discretionary rate change, no more than half of the changed revenue will be affected by the equalisation process, thereby removing the potential for cases to arise where the equalisation effects outweigh the effects of discretionary policy change."
Mr Wyatt said this was still not the commission's final decision on changes to its methodology but he expected it to decide on something close to this in its 2020 review.
"Finally, we have the CGC recognising that the way that it's being dealing with our iron ore royalties by reducing our GST to such woeful levels doesn't reflect the reality of a government that makes the decision to exploit that mineral base," Mr Wyatt said.
But if the CGC did eventually enact this change it would then require a state government to raise royalty rates, which Mr Wyatt said "had it controversies as well", with strong opposition from the mining sector highly likely.
Mr Wyatt said the position paper was an acknowledgment by the commission that the way it had approached iron ore royalties in the past was not right and had "penalised Western Australia unfairly".
"That is why it's a significant concession from the CGC," he said.
"It doesn't yet mean we're going to be getting a better fiscal return, but it does at least highlight, importantly to all the other states in the nation, that some of them have got a free ride from all the hard work of Western Australia."
Royalty share should not be linked to rate: CCI
The Chamber of Commerce and Industry (CCI) said the CGC had recognised the GST formula was broken, but had made the wrong recommendation to fix it.
CCI chief economist Rick Newnham said the current proposal would encourage state governments to increase mining royalties.
"What the CGC has acknowledged is that there is a problem with the way they assess mining royalties, which is a really positive first step for WA," he said.
"However, this just creates an incentive for states to put up their royalty rates so they can get a greater share of revenue.
"What the Chamber of Commerce recommends to the Grants Commission and the Productivity Commission is they should allow states to keep more of mining royalties regardless of what the rate is.
"States should be rewarded for developing their own economies and as a result should get to keep more of the revenue they generate."
The Productivity Commission is reviewing the system of horizontal fiscal equalisation, and Prime Minister Malcolm Turnbull has promised to eventually set a GST floor under which WA's share of the tax could not fall.
Opposition Leader Bill Shorten has also promised to give WA substantial infrastructure funding to relieve GST pressure.
