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Revenue assessments May 2011

Revenue assessments May 2011. Overview. Examine three revenue scenarios A policy change that increases revenue A policy change that increases revenue and activity A policy change that shifts activity between States Explain the direction and size of GST changes under each scenario

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Revenue assessments May 2011

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  1. Revenue assessments May 2011

  2. Overview • Examine three revenue scenarios • A policy change that increases revenue • A policy change that increases revenue and activity • A policy change that shifts activity between States • Explain the direction and size of GST changes under each scenario • Draw together some insights into revenue assessments

  3. An EPC assessment • An Equal Per Capita (EPC) assessment is the average assessment • It means the category has no impact on the distribution of the GST • Implications of an EPC assessment” • States can raise the same per capita revenue • Any difference between actual and average revenue is deemed to be due to State policy

  4. About revenue assessments • A State’s revenue capacity is measured using its share of the revenue base • Our revenue assessments adjust a State’s GST if its revenue capacity differs from its population share • The GST is adjusted down if revenue capacity exceeds population share • The GST is adjusted up if revenue capacity falls short of population share

  5. In our analysis we consider ... • The full impact of the policy change • A policy change will have an impact on: • The revenue a State raises • The GST it receives

  6. Lags are a problem • The policy change will have an immediate impact on the revenue a State raises • The policy change will have a delayed impact on the GST States receive • We need to compare the two impacts at the same time • A dollar in 2007-08 is not the same as a dollar in 2011-12

  7. We removed the effect of lags • Our analysis uses • The revenue impact in the assessment period • The GST impacts arising in the assessment period • This approach removes the lag. It implies the GST impact is immediate

  8. We removed the effect of differences in tax rates • Initially we will assume all States tax at the national average rates of tax • This means the revenue collected following a policy change will be the same for every State • We will relax this assumption later

  9. The calculations • We will provide results for all revenue categories • But, we will use Payroll tax as the example • Revenue collected was $16.8b in 2009-10 • The revenue base is taxable payrolls of large employers • It is the aggregate value of payrolls for individual employer that exceed a $0.7 million threshold

  10. Scenario 1 • What is the effect of a policy change that increases revenue but does not affect activity? • An increase in tax rate with no elasticity effects • We’ve assumed the policy change: • Increases a State’s revenue by $100m • Does not affect its or other States’ revenue base • Does it matter which State makes the policy change?

  11. Scenario 1 results • What if NSW made the policy change? • The GST impacts are small • NSW keeps most of the benefit of its policy change, but not all

  12. Why does NSW lose some of the benefit? • We assess NSW to have above average payroll capacity • Its revenue share exceeds its population share • We assess NSW to be able to raise more than its population share of the additional $100m, so it requires less GST • We adjust its GST down in each year • NSW revenue capacity exceeds population share: • 3.0 per cent (2007-08), 2.1 per cent (2008-09) and 1.8 per cent (2009-10) respectively • Average for the 3 years = 2.3 per cent (-$2.3m)

  13. Scenario 1 results • What if WA made the policy change? • The GST impacts are the same • States’ revenue bases have not changed • It doesn’t matter which State makes the change

  14. Can the GST impacts reinforce the revenue change? • What if Qld made the policy change? • State revenue: $100.0m • GST revenue: $2.3m • Total income: $102.3m • We assess Qld to have below average payroll capacity • We assess Qld to be able to raise less than its population share of the additional $100m, so it requires more GST

  15. Scenario 2 • What is the effect of a policy change that increases a State’s revenue and revenue base? • Cutting red tape • Improving compliance effort • We’ve assumed the policy change: • Increases a State’s revenue base by $2b, which increases its revenue by $100m • Does it matter which State makes the policy change?

  16. Scenario 2 results • What if NSW made the policy change? • The GST impacts are big • The policy has changed States’ assessed capacities • NSW loses most of the benefit of its policy change

  17. Why does NSW lose most of the benefit? • We increased its already above average payroll capacity • Its increased capacity is applied to all payroll revenue • Both the initial $16.8b and the $0.1b increase • Note the total impact suggests: • the GST adjusts to leave States with their population share of the increased revenue

  18. Scenario 2 results • What if WA made the policy change? • The GST impacts are differentThe total impacts are the same • The same revenue base change has a different per capita impact for different States

  19. Why do States end up with a population share of the increase? • We assumed States tax at national rates • The impact on the revenue raised is obtained by applying national tax rates to revenue bases • The GST impact is at national rates • The GST impact is obtained by applying national tax rates to revenue bases • The two effects offset one another – leaving States with their population share

  20. Scenario 3 • What is the effect of a policy change that shifts activity from one State to another? • Convincing a company to relocate • We’ve assumed the policy change: • Increases one State’s revenue base by $2b, increasing its revenue by $100m • Decreases another State’s revenue base by $2b, decreasing its revenue by $100m • Does it matter which State makes the policy change?

  21. Scenario 3 results • Part of WA’s revenue base shifting to NSW • The GST impacts completely offset the revenue impacts • Because total revenue and total revenue base are unchanged

  22. Summary • Policy changes that: • Only affect State revenues tend to have small GST impacts (scenario 1) • Affect State revenue bases tend to have big GST impacts (scenario 2) • Shift revenue bases between States tend to have smaller/no impacts on total income (scenario 3)

  23. Relaxing the assumption that States tax at national rates • The revenue raised by States will change • The revenue raised will be less for low taxing States • They will keep less of the benefit of their policy change • The revenue raised will be more for high taxing States • They will keep more of the benefit of their policy change

  24. Impact of relaxing assumption • Scenario 1 – increase NSW revenue by $100m • Increase in State revenue (NSW above ave taxes) • Increase in GST impact

  25. Impact of relaxing assumption • Scenario 2 – increase NSW revenue base by $2b • Increase in State revenue (NSW above ave taxes) • Increase in GST impact

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