STATE and territory governments could be given the power to effectively set income taxes in Australia, creating new competition between the states, under a proposal from the Abbott Government's Commission of Audit.
The audit report, released on Thursday, has recommended the Commonwealth give state governments' access to personal income tax revenues.
As part of much wider reforms to state-federal relations, the proposal would see the Federal Government lower income tax rates "to allow room for the states to levy their own income tax surcharge".
Such a move, if the Abbott Government supports it and gets state governments on board, would effectively mean different states could charge different income tax levels to attract new workers.
It would, the report proposed, see the Commonwealth reducing income taxes by 10% from 32.5% to 22.5%, with that extra 10% given as a tax "surcharge"
"It would also be possible to extend the income tax sharing arrangement by allowing the states to periodically adjust the surcharge rate (either up or down by several percentage points)," the report reads.
The report also recommended changes to both the rate and base of the goods and services tax, but Treasurer Joe Hockey again ruled out any changes to the GST in the Abbott Government's first term.
Examining specific national agreements between the Commonwealth and states, the commission recommended abolishing the $14 billion worth of National Partnership Agreements with tied funding.
Other funding grants to the states marked for abolition include housing affordability ($1.3 billion), school education specific payments ($13.2 billion) and skills and workforce payments ($1.4 billion).
The entire $14 billion National Partnership Agreements agenda would be cut, if the government acted on the recommendation, and would help facilitate a proposed abolition of COAG in future years.
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