History of tax sharing arrangements
The Commonwealth's tax sharing arrangements with local government
Introduction of general revenue assistance
General revenue assistance was introduced in 1974-75 in recognition of the fact that new demands were being placed on local governing bodies in areas such as health and welfare services. Under the Grants Commission Act 1973 regional bodies were established to represent and act on behalf of local governing bodies.
The aim was for these bodies to apply for a grant to ensure that the local governing bodies represented could function at a standard not appreciably lower than the standard provided by other regional or local governing bodies. Despite the existence of the regional bodies, the Commonwealth Grants Commission (CGC) provided the grants direct to local government bodies. Not all local governing bodies received funding, as it was an application based program.
Tax sharing system
In 1976 the Commonwealth introduced the Local Government (Personal Income Tax Sharing) Act 1976. This Act changed the manner in which local governing bodies received money from the Commonwealth.
With the introduction of the Act all local governing bodes were entitled to a fixed portion of Commonwealth personal income taxation revenue. This percentage was originally 1.52%; it then rose to 1.75% in 1979-80, and then increased to 2% in 1980-81. These untied grants were commonly known as PIT's (personal income transfers) and moved in line with Commonwealth tax collections. This was a true tax sharing agreement reflecting changes in national economic activity. Under this arrangement local government would share the benefit in times of economic buoyancy and absorb some of the burden when the economy slowed.
General revenue funding
In 1985-86 the Commonwealth ceased the tax sharing arrangement with the states, territories and local government. For that year general revenue funding to local government was capped and only allowed to increase at a real rate of 2% for that year.
Since the ending of the tax-sharing agreement the value of general purpose assistance grants to local government has continued to fall.
General Purpose Payments
In 1986 the Commonwealth accepted the overall finding arising from the National Inquiry into Local Government Finance. The inquiry recommended that the Commonwealth should maintain some form of general purpose payments (GPPs) for local government.
The Commonwealth introduced the Local Government Financial Assistance Act 1986. Increases in funding to local government were linked to increases in GPPs provided to the states.
Incorporation of tied local roads grants
In 1991-92 previously tied Commonwealth local road grants became untied and were paid to local governing bodies as an identified local road grants (ILRGs). It was agreed that these funds would remain separately identified and would continue to be distributed on the same principles that had applied to the allocation of such road funds. From 1991-92 to 1993-94 GPPs were maintained in real terms.
Financial Assistance Grants (FAGs) now have two components, GPPs and ILRGs.
Introduction of a specific escalation factor
In 1994-95 the states agreed to have their FAGs indexed via an escalation factor, that took into account changes in population and inflation, this in turn was reflected in FAGs to local government. The Commonwealth Treasurer at each federal budget determines the escalation factor.
The determined escalation factor is based on the estimated change of the population and inflation. This is then adjusted for the difference in the estimate and the outcome of the actual factor in the previous year.
Commencement of the New Tax System
In 2000-01, the state and territories began to receive the full proceeds from the Goods and Services (GST). This change removed the link between growth in assistance to the states and territories and the growth in the assistance to local government. The Local Government Financial Assistance Act 1995 was amended to include details on how the escalation factor was to be calculated.
Review of the Financial Assistance Act by the Commonwealth Grants Commission
In 2001, the Commonwealth Grants Commission reviewed the Act on request from the Treasurer and recommended restructuring the payment of FAGs. This would see the whole pool split into three categories:
- a per capital pool
- a local roads pool
- a relative need pool
The Australian government is yet to respond to the recommendations.
Cost shifting inquiry
On 30 May 2002, the House of Representatives Standing Committee on Economics and Finance resolved to inquire into local government and cost shifting as referred by the Hon. Wilson Tuckey MP, Minister for Regional Services, Territories and Local Government. The terms of reference did not however, include investigating the current tax sharing arrangements.
The Fair Share Report tabled in Federal Parliament in November 2003, made several recommendations regarding local government financing including:
- SPPs be paid to states and territories with a view to isolating funds for direct payment to local government
- a direct financial relationship between the Commonwealth and local government
- a national methodology for local government bodies to evaluate their infrastructure needs and requirements and a set of principles to reduce cost shifting and unfunded mandates and to ensure that Australian and state and territory responsibilities administered by local government are adequately funded, with the ultimate aim of developing an intergovernmental agreement
A response to the report is expected by July 2005.
