In 2014, I was part of an unusual campaign – to call for increases in state taxes. The SACOSS “Without Taxes, Vital Services Disappear” campaign was a response to the social service sector constantly being told that there was no money to fund the various services and policies to address poverty and disadvantage. This was true in that budgets were in deficit, so the state government was already spending more money than it was getting in through taxes, grants and other income.

Ten years on, the situation has changed. The last state budget brought in an operating surplus for 2023-24 and forecast surpluses across the forward estimates. In this sense, there is money to expand expenditure on addressing poverty and disadvantage, so the issue would seem to be political priority rather than needing to raise taxes and revenue. However, the tax questions remain crucial because, despite the budget surpluses, state debt is increasing and the interest payments on that debt are undermining the state budget.

Opportunity Cost

As SACOSS noted in its analysis of the last state budget, the South Australian government will spend more on interest payments on debt than it will on the Department of Human Services – the department responsible for supporting the most disadvantaged South Australians. The graph below shows the increase interest payments, both in absolute terms and as a proportion of state expenditure.

The interest payments are growing because of a combination of higher interest rates, and increasing state debt driven by infrastructure spending. Conventional economics would suggest that going in to debt to fund infrastructure is not a problem, and the government argues that the debt is not a problem as the debt-revenue ratio is under control. However, this has always struck me as an apples and oranges comparison. It says little about the capacity to repay the debt or the impact of the debt on the government.

The more important ratio is the cost of debt servicing to total revenue. The red line in the graph above shows that this is increasing as interest rates account for more of the state budget. This inevitably has an opportunity cost as that money is not available to be spent on government services.

This is why the level of debt and deficit matters – not because it shows mismanagement or over-spending, or a need for austerity, but because it constrains the operations of government and their ability to support citizens.

And underlying this is a concern about equality. As I have noted previously, governments have a choice in financing their activity as they can tax or to borrow from those with surplus cash. Taxation represents a flow from those with resources to the common good, whereas borrowing creates a flow from the common treasury to those with capital resources to loan money.

This is not to say that there should never be state debt, but simply to recognise that it comes at a cost – an opportunity cost and a cost to equality. But in light of the rapidly increasing impact on the state budget, there is a fair argument now that we need to raise more state revenue.

Tax Reform Opportunity?

Unfortunately, the record for tax reform in South Australia, at least in terms of increasing taxes or introducing new taxes, is not promising.

The last time there was a broad public review of SA state taxes was in 2015, when the then Labor government released a discussion paper canvassing a range of reform options. The highest profile reform, a proposal to replace conveyance duties with a broad-based property tax – including on owner-occupied housing, was met with a media outcry about a “tax on the family home” (which ignored the fact that conveyance duties are also a tax on the family home). The proposal was ruled out in a matter of days – even before the formal consultation process closed.

Overall, despite the Treasurer publicly welcoming the SACOSS submission (which proposed raising revenue), the 2015 review resulted in the abolition of a range of taxes and decreases in other taxes totalling some $670m in lost revenue over four years to 2018-19 – all in the name of improving the business environment.

Outside of the 2015 review, the record is no more encouraging:

• The “car park tax” (Transport Development Levy) announced in late 2013 was defeated in parliament the next year after opposition from the Property Council and others
• The “bank tax” levy on the 5 major banks announced in the 2018-19 budget was withdrawn when the government did not have the numbers to pass the legislation in the Upper House;
• Land tax aggregation changes announced in the 2019 budget began as a revenue raiser which would close a tax avoidance loophole, but ended up being amended to lower tax rates and cost tax revenue.
• The Liberal government’s electric vehicle tax, which was announced in the 2020 budget saw implementation delayed until 2027 just months later, and was then subsequently repealed by the Labor government.

Of course, over the years there have been changes to rates and thresholds of existing taxes, but these are generally in the direction of tax “relief” rather than revenue raising.

There are two notable exceptions where new revenue-raising taxes have been introduced over the last 20 years. There was the 2017 introduction of the Foreign Ownership Surcharge – a 7% extra stamp duty for foreign owners purchasing real estate, and the point of consumption wagering tax introduced in the 2016-17 state budget. The former had been explicitly rejected in the government’s response to the State Tax Review a year earlier, while the later was flagged but not immediately implemented.

These two examples are telling – not so much because they show that new revenue measures are possible, but because they show the importance of the politics. By definition, the Foreign Ownership Surcharge had no resident vested interests opposed (because they were overseas), while the point-of-consumption wagering tax came at a time when the sports betting industry’s peak body and political lobby was in disarray (and the big companies did not want to risk their own brands in defending registration in tax havens).

Not exactly repeatable examples as a basis for a campaign strategy or a hope of reform.

A similar story could probably be told at the federal level from the experience of mining super-profits taxes, Labor’s 2019 mild capital gains and negative gearing reforms, and more generally in relation to the Henry Tax Review – comprehensive and steeped in Treasury’s market logic and legitimacy, but still largely gathering dust.

Conclusion

The reality is that it is always much easier to oppose a new tax than to pass one. A new or increased tax creates a vested interest in opposition, and they can always find or invent a deserving case study for whom the tax is unfair, or tell us how the tax will cripple the economy. By contrast, the vested interests who will benefit from the tax (the general public who will benefit from government revenue and spending) are too amorphous or too far removed from the specific proposal too mobilise in support.

I think the point of the story above is not to abandon all hope of tax reform and of raising sufficient revenue to fund vital services, but rather to see it as a political exercise rather than a policy one. It will require a long-term shift in public thinking and a mobilisation of political power, not simply a well-researched policy or a polite proposal. It will require political resources to oppose the vested interests, and an appropriate vehicle to drive the change.

In that sense, tax reform is both a part of a bigger project of social democratic renewal and dependent on that project.