Victoria would lose an extra 6¢ out of every dollar of GST revenue collected in the state, Queensland would lose 13¢ and NSW would lose 1¢ under fresh proposals to change how the Goods and Services Tax is carved up between the states.
They equate to a loss of $972 million for Victoria, $1.6 billion for Queensland and $110 million for NSW.
The calculations, in an appendix to the Productivity Commission's newly released draft report on GST distribution, assume that the changes are introduced immediately in order to lift Western Australia's share of its GST takings up from 34 per cent to 87 per cent. If, as the Commission proposes, they were applied later when Western Australia's share has recovered further, the impact would be less severe.
The estimates supplied to Treasurer Scott Morrison have Victoria's GST payout falling from 93¢ of every dollar collected to 87¢. Queensland's share would slide from $1.19 to $1.06, the NSW share from 88¢ to 87¢, South Australia's share from $1.44 to $1.32, Tasmania's share from $1.80 to $1.62, the ACT's share from $1.19 to $1.07, and the Northern Territory's share from $4.66 to $4.55.
The commission found Australia's system of dividing GST revenue is broken, "beyond comprehension by the public" and poorly understood by most within government.
Although it has broad support, it delivers "unfair equity", attempting to bring all states up to the financial strength of the strongest state, even if the GST revenue kept by that state needs to fall to unprecedented lows.
The report also pointed to a "first mover disadvantage" that applies to any state that attempts to introduce a new tax first. At the moment if NSW or Victoria attempted to switch from stamp duty to land tax each would lose more than $300 million in GST payments. If it attempted to introduce a road traffic congestion charge NSW would lose $670 million. Victoria would lose $6 million.
The commission rejected three proposed ideas to ease the burden on Western Australia. One is to hand out extra Commonwealth grants outside the GST process, as the Turnbull government has done. Another is to guarantee that no state's GST share would fall below 70 per cent of what it put in, and another is to allow each state to keep at least 50 per cent of an extra revenue it raised from mining, proposed by the Commonwealth Grants Commission.
Its calculations suggest Western Australia loses in GST adjustments as much as 88¢ of every dollar it raises in mining royalties.
It suggested that instead of aiming to bring the financial capacity of each state up to the financial capacity of the strongest, an updated formula attempt to merely bring it up to the financial capacity of the average or second strongest.
The commission said in normal times the new formula would make little difference to the GST distribution. Only at extreme times such as the present when West Australian's share has dived to extraordinary lows, would it soften the blow.
Mr Morrison welcomed the draft recommendations and said the way the GST revenue was carved up needed a proper fix, rather than more "band-aids and bolt-ons".
"The commission needs to do a lot more work, they have got to firm up what they believe the answer is, although they have given some good hints," he said. "They have also got to work out a transition plan so that we can get from A to B. It's not enough to know where B is, you have to work out how to get there and that is what I have tasked them to do between now and the final report."
The commission rejected a proposal put forward by government ministers and the Grants Commission to penalise states that banned coal seam gas mining by allowing those that permitted it to keep all of the extra royalties they earned.
"Mining revenue is a prime example of a source-based advantage; one a state benefits from by virtue of where its borders happen to be drawn," the commission said. "It should prima facie be included in the equalisation process."
Victoria's Acting Treasurer Gavin Jennings said the commission had poured cold water on the Coalition's plan to discipline states that protected their environments.
"Mr Morrison's thought bubble to punish states like Victoria and NSW who have acted to protect their farmers, their world-class produce and their environment, has been thrown into the bin where it belongs," he said.
NSW Treasurer Dominic Perrottet said it was encouraging to see the Productivity Commission acknowledge what NSW has said all along: that the GST system was in dire need of an overhaul.
"Ultimately the Productivity Commission has acknowledged we need real reform, not just to the GST system, but to the entire federal system when it comes to the taxes we pay, the services governments provide, and the way they are funded," he said. "My number one priority will be to continue to fight tooth and nail for the people of NSW to get the maximum value for the tax they pay."
The commission has called for submissions on its draft recommendations. It will present a final report to the Treasurer by January 31.
In The Age and Sydney Morning HeraldAnalysis: GST change a softening of the edges rather than a revolution
The Productivity Commission has found that the way the GST is divided up is broken, and much of it "beyond comprehension". But it has also found something more important: that the brokenness doesn't much matter.
Treasurer Scott Morrison asked it to examine the influence of the current system on "productivity, efficiency and economic growth".
In short, the commission found there was none, or none it could find.
"In practice, it is hard to tell whether Australia's system has helped or hindered productivity and growth," its report says.
In part that's because, despite all the angst about the carve-up of the GST, the carve-up is small in relation to the size of state governments.
There's less than $8 billion moved around each year, out of a total GST cake of $60.7 billion. The states themselves, with local governments, raise the best part of $200 billion. The Commonwealth raises almost $300 billion. It's worth arguing about, but it isn't enough drive behaviour.
Morrison asked whether the GST carve-up rules were impeding the movement of capital and labour across state borders. The commission found that people move interstate "for a range of reasons". GST distributions were "unlikely to play a significant role".
So unimportant did the commission find the GST formula that it flirted with the idea of scrapping it entirely and simply doling out the GST on the basis of population. It was a recommendation of Tony Abbott's 2014 Commission of Audit. The disadvantaged states – South Australia, Tasmania, the ACT and the Northern Territory – could apply for extra top-up funding directly from the Commonwealth. The commission rejected the idea only because it thought the top-up funding was "unlikely to be forthcoming".
Instead it has settled for for modifying the extremes of the system we've got. Instead of falling as low as 30 cents out of every dollar collected from Western Australians, Western Australia's GST payment would only fall to 87 cents.
The change would give poor states only the average financial capacity of the other states, or the capacity of the second-best, rather than the best.
The commission's idea isn't new. Up until 1981 it's how the Grants Commission divided the pie, redistributing merely enough to allow states to function "at a standard not appreciably below that of other states".
Morrison is keen. Whereas previous treasurers have treated the distribution of the GST as political Kryptonite, saying it was up to the states to agree on a change (knowing they won't) Morrison is prepared to get his hands dirty. He needs to consult the states on the change but he doesn't need them to agree. Although it wouldn't take effect until 2020, he is likely to get the ball rolling next year.
In The Age and Sydney Morning Herald