The world according to GRP — Wednesday, March 05, 2008:
The fiscal equalization myth
[Letter submitted to THE AGE (Melbourne), March 5, 2008.]Contrary to the parochial prattle of Victorian Treasurer John Lenders, the carve-up of GST revenue between the States does NOT constrain their ability to build infrastructure.
The benefit of an infrastructure project (net of user charges such as fares and tolls) is location-specific and therefore is reflected as an uplift in land values in the serviced locations. Hence the cost/benefit ratio of the project is simply the cost/uplift ratio, which is the fraction of the uplift that must be recovered through the State tax system in order to pay for the project.
If the tax system claws back x% of every uplift in land value, any project with a cost/benefit ratio of x% is self-funding, while any project with a lower cost/benefit ratio is better than self-funding, yielding surplus revenue that can be used for other purposes (perhaps including projects with slightly worse cost/benefit ratios).
The untaxed portion of the uplift is a net windfall for the land owners -- who therefore should enthusiastically support the tax because it would finance projects that would not otherwise proceed, yielding windfalls that the owners would not otherwise get.
The idea that the GST carve-up must be subject to "fiscal equalization", to compensate for differences in infrastructure needs and revenue-raising abilities, ignores the self-funding quality of infrastructure.
If "fiscal equalization" is to continue, and if the equalization formula is to continue rewarding "tax effort", then the only such effort worth rewarding is the taxation of uplifts in land values. Other State taxes -- payroll tax, gambling taxes, etc. -- shouldn't count.
Copyright © Gavin R. Putland except as otherwise attributed. Posted at The world according to GRP under the title The fiscal equalization myth. You may republish this item verbatim on your website or blog provided that you include this notice (with hyperlinks).
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