The NSW government has urged the federal government to dump a $23 billion tax discount arguing the measure would undermine the budget base at a time when demand for health, housing and infrastructure spending was growing.
The NSW Treasurer Daniel Mookhey, said the proposed discount would deliver a significant hit to public revenue with limited economic benefit on offer as governments fight population growth, cost pressures and the long tail of inflation.
He urged Canberra to reconsider the policy and redirect funding toward frontline services and productivity enhancing investments.
The nationally applicable discount would cut Commonwealth tax receipts by an estimated $23 billion over the forward estimates.
NSW argues the loss would ultimately wash through to the states in the form of lower GST distributions and weaker Commonwealth capacity to fund shared programs.
NSW modelling showed the measure would skew benefits toward higher income earners while constraining government ability to meet demand for hospitals, schools and transport.
He added that the state was already wearing higher costs associated with ageing infrastructure, increased wages and rising service use.
The intervention sharpens a growing debate between the states and the Commonwealth over the balance between tax relief and fiscal sustainability.
While Canberra has framed the discount as necessary to ease household pressures state treasurers have warned that broad based tax cuts risk fuelling demand without addressing supply constraints.
Economists are divided on its effect on the economy at a macro level.
Some argue targeted tax relief can support consumption in periods of weak growth, while others claim that untargeted measures add little to productivity and complicate the task of the Reserve Bank if demand picks up faster than supply.
The NSW Government also expressed equity concerns. According to Treasury analysis, a disproportionate share of the benefit from this policy would accrue to higher income households and therefore the impact would be constrained on those most affected by cost of living pressures.
The state has urged the federal government to put more emphasis on policies that directly reduce household expenses such as reforms to housing supply and energy cost relief.
This comes ahead of the budget update that the Commonwealth is set to prepare in the coming days.
Also, the revenue projections of the budget are sensitive to the current prices of commodities in the international market.
Therefore, the budget will define the parameters of the fiscal system for years to come in relation to spending on the National Disability Insurance Scheme and the commitment to climate transition.
Other states have stopped short of supporting NSW in its stance but have voiced concern for the long term viability of revenue.
Several treasurers have pointed to the importance of a dialogue on taxation reform and the viability of income taxes as the headline funding source.
There has been no commitment from the federal government regarding the impact of reforms citing budget settings as beyond their point of decision.
Top ministers have stated that the commitment to providing certainty for taxpayers has not changed despite the pressure on state budgets.
In relation to NSW, it is as much about intergovernmental relations as it is about dollar amounts.
The NSW government is seeking greater consultation on national taxation arrangements which impact on state budgets.
The debate is likely to escalate as it approaches the next Council of Federal Financial Relations meeting where treasurers will demand an indication of what the taxation plans mean for their GST payments.
