WAxit: is a financial secession possible?

Western Australia has never really been sure about being part of Australia. They were the last colony to hold a referendum asking the people if they would like to join the new federation. All of the other colonies held referendums in 1899, while WA waited until after the Constitution had been passed by the British Parliament, had received the Royal Assent from the Queen and even waited until after the first Governor-General had already been chosen. The WA referendum was held on 31 July 1900. The Yes vote was 44,800, while the No vote was 19,691. There was an overwhelming majority wanting to join the federation.

However, that sentiment didn’t last long. After the great depression, a movement began in Western Australia for them to leave the federation. They even had a name. The new country would be called Westralia. In 1933 a referendum was held in Western Australia, asking the people if they would like to secede. The result was a large Yes majority. But when the delegation from Western Australia went to the British Parliament to ask them to overturn the Act to Constitute the Commonwealth of Australia, they were rejected. The Brits did not have the power to grant Western Australian secession. In fact, it is widely accepted that there is no mechanism in our Constitution that allows any State to opt out of the country.

Recently some constitutional experts have stated that this might be possible by firstly holding a referendum to change the Constitution to allow any State to get out of the federation. This would mean adding a section that creates a pathway to leave. But in order for this to happen, the Parliament would have to enact the enabling legislation and a majority of people in a majority of States would have to vote Yes at the referendum.

Would a change like this be likely to succeed? It could fall over at the first hurdle, with the Parliament refusing to pass enabling legislation.

Instead of full secession, this time the Liberal Party in Western Australia is pushing for a financial secession. They believe that they are being ripped off by the federal government with the GST. It has been suggested by the WA Libs that the States should raise all personal income and company tax and pay the Commonwealth for the services it provides.

Now that sounds familiar.

This type of fiscal relationship was basically the intention of the people who wrote the Constitution. The delegates at the Constitutional Conventions were from the colonies. They wanted to keep the powers of their new created States mostly intact and handover to the new federal Government only the functions that should be shared. Such as a military, uniform rail gauges and a federally run post office. Tax was seen as a State issue.

Before Federation

The six Australian colonies operated as separate economies right up until federation. Most of the taxes levied were indirect customs and excise duties, with income only being taxed in some colonies in the final years before 1901. In the decade before federation there was a split in the colonies outlook upon taxation, with some adopting a more free-trade approach and others remaining staunchly protectionist. The battle between the free-traders and the protectionists shaped some parts of our Constitution and it played out within the first decade of our Parliament. The first Federal Government led by Edmund Barton was the Protectionist Party (who had to rely on Labour to pass legislation) and the first Opposition was led by George Reid from the Free Traders.

At Federation

Quick and Garran described taxation in 1901 in the Commentaries on the Constitution of the Commonwealth of Australia:

Taxation may be now defined as any exaction of money or revenue, by the authority of a State, from its subjects or citizens and others within its jurisdiction, for the purpose of defraying the cost of government, promoting the common welfare, and defending it against aggression from without.

Taxation power was provided to the Federal parliament through Section 51ii of the Constitution:

51 Legislative powers of the Parliament
The Parliament shall, subject to this Constitution, have power to make laws for the peace, order, and good government of the Commonwealth with respect to:
(ii)  taxation; but so as not to discriminate between States or parts of States;

The States also retained taxation power, but it was more limited than before Federation.

After Federation

At Federation or soon after, each of the States levied income tax from their populations, while the Federal Government obtained income from customs and import duties. It wasn’t until 1916 that the Federal Government introduced income tax in order to raise revenue to fund Australia’s involvement in WWI. In 1923 all States except WA came to an agreement that joint income tax returns would record both State and Federal taxes and the States would collect the tax and then hand the Federal Government their portion. The system was complex and the amount of tax paid by people in each State was different.

As a war time measure in 1942, the Federal Government suspended all agreements with the States for the imposition and collection of income tax and took over the role. In return for this revenue power the Federal Government agreed to give some of the proceeds back to the States which is in the form of funding grants as outlined in Section 96 of the Constitution:

Section 96 Financial assistance to States 
During a period of ten years after the establishment of the Commonwealth and thereafter until the Parliament otherwise provides, the Parliament may grant financial assistance to any State on such terms and conditions as the Parliament thinks fit. 

Thus the agreement made in 1942 meant that if a State did collect their own income tax, they would forfeit their federal funding grants. And as stipulated in section 96, the funding grants are given to the States with terms and conditions, meaning they have to be spent in the way the Federal Government specifies. The system has remained this way since and has been validated by the High Court. The current income taxation structure, where the Federal Government collects all income tax and doles some of it out to the States, has now been in place for 75 years.

The challenge facing states like Western Australia is that they do not have enough funding to provide the services and policies they would like. It was reported last week that the WAs debt will rise to $43.8 billion by 2020. In the State budget it was announced that big business will see an increase in their payroll tax and gold miners will be charged higher royalties. The budget savings will include axing the Royalties for Regions (RFR) program, along with 3,000 public sector redundancies.

Early last year Prime Minister Malcolm Turnbull stated that the States had to raise their own taxes:

They have got to be prepared I believe to go to their citizens and say, for example, ‘We want to — we need to raise money, more money to spend on our schools and our hospitals. And, we are going to increase this state tax, or that state tax’.

At one stage the Prime Minister even suggested a policy of splitting of income tax to address the problem. This would have meant that States could fund their schools and hospitals with their share of income tax. This seems to be what the WA Liberal party would now like to do. But how hard would that be?

Is a fiscal secession possible?

Since Federation we have seen more power granted to the Federal Government from the States. These suggested taxation changes would seek to reverse this. The States would be given back the power to collect additional revenue for themselves which won’t be tied up with the terms and conditions of Federal funding grants.

But could one State do it alone? Can they get out of the federal tax system? One of the features of the GST system is that every State has to agree to any changes. Would the smaller States say okay, let’s give up some of that revenue we get from Western Australia.

What do you think? Is WAxit a dummy spit, or something that is achievable?


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