Unequal fiscal burdens and interstate migration – by Robert Schwarz

Is it fair to have to move interstate because of the taxpayer burden of public health costs of the elderly in one’s state of residence?

Under the system of horizontal fiscal equalization (HFE), state governments are given equal capacity to provide public hospital services even if there are different numbers of elderly in one state rather than another and even if state tax bases are stronger in one state rather than another.

This is consistent with the principle of horizontal equity or ‘equal treatment of equals’. In other words equivalent young families with employed breadwinners (say a nurse and motor vehicle mechanic) need not face a higher payroll tax in one state rather than another merely because of the number of elderly or number of people in low paid jobs in that state compared with another.

At the recent Federal Relations and Tax Reform Workshop, Chris Murphy presented a paper, which confirmed the efficiency case for HFE but had as one of its assumptions that HFE was not necessary for horizontal equity in the presence of population mobility.  On this assumption horizontal equity would be equally and satisfactorily achieved by the young family shifting to a new state of residence motivated by avoiding fiscal disadvantage in doing so.

The efficiency case for HFE (i.e. to avoid fiscally induced migration when equals are treated unequally, which is inconsistent with the maximisation of national productivity) is based on the assumption of population mobility. Murphy finds that HFE as practised in Australia is beneficial from an efficiency point of view.

But the question I pose here is: Does the horizontal equity case for HFE really fall away completely if there is population mobility?

Well beyond the relatively slight modifications to HFE advanced in the Murphy paper for optimal efficiency1, it should be recognized that the view that population mobility dispenses with concerns about horizontal equity has very strong implications. It implies that uniformity of national tax rates across regions within a nation, or equal access to the Pharmaceutical Benefits Scheme say, is neither here nor there from an equity point of view – or indeed that literally any distribution of Commonwealth grants among the States is as good as any other – on the grounds that anybody can choose to move to a fiscally favoured jurisdiction and is therefore treated equitably.2

This view of equity and population mobility is I think difficult to accept and it would not command wide support. It surely is the case for example that the anti discrimination wording of S 51 (ii) of the Australian Constitution3 is motivated by considerations of equity and fairness, as well as economic efficiency, notwithstanding an expectation of interstate population movement.

Another line of thought is that people may have an attachment to a ‘home’ location – for instance as might arise from the presence of elderly parents – constraining their mobility. In this case relocation is costly. A changed distribution of fiscal benefits across States will lead to different outcomes for a person in Western Australia with elderly parents compared to an otherwise identical person in Tasmania with elderly parents.4

Transaction (moving) costs also seem to detract from the proposition that population mobility solves for horizontal equity if continual back and forth migration is required – in the absence of responsive continually recalibrated HFE there can be no stability in net fiscal benefits.

This discussion calls into question possible modifications to HFE as canvassed by Murphy,5 or worse ‘sort of’ HFE or ‘near enough is good enough’ changes to HFE if based on the assumption that population mobility deals adequately with issues of horizontal equity and fairness.

Biographical note: Robert Schwarz is currently part time adviser in the SA Department of Premier and Cabinet. He was formerly Assistant Under Treasurer Revenue and Economics in the SA Treasury. Robert has many years of experience in the fields of tax policy, intergovernmental financial relations and horizontal fiscal equalisation. In 2017 he was awarded the PSM for leadership and innovation in public finance in the State and national arena. He holds a Bachelor of Economics (Honours) from the University of Adelaide. The views expressed here are personal views and are not attributable to the organisations mentioned.

1 This can be discussed at another time.
2 One can always shift state and rely on S117 of the Australian Constitution. S117 provides that a resident of one state shall not be subject to disability or discrimination in any other state.
3 S 51 (ii) provides for a Commonwealth taxation power but so as not to discriminate among states or parts of states.
4 Consider also those with attachment to ‘country’ and elders both past and present. Of course considerations such as these temper the quantification of the efficiency case for HFE based on population mobility.
5 Such as drop equalization for ‘geographic circumstances’ e.g. high costs of urban public transport in large cities.

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