Wednesday, September 7, 2011

A Taxing Misdirection

I've decided I'm not going to blog about the detail of the budget.

There are a few reasons for that.  First of all, I have a job and a life, and starting this blog at 9:45pm means that I don't have the energy or the time to read every page of the budget papers and provide a detailed, informative summary.

In any event, there will be plenty other pieces that cover that same ground, and I don't see any point in reinventing the wheel.

On that, I commend Ross Gittens piece to you.  The Herald had this helpful piece on the winners and losers. No doubt all the major papers will have extensive coverage on the budget tomorrow (Wednesday) if that is what you're after.

What I do want to blog about, however, if this extract from the budget speech delivered by Mike Baird:

What a load of crap.

Before I explain why, some background.

We all remember the massive controversy over the mining tax and its various incarnations.

In the end, the Federal Government signed an agreement with the biggest mining companies.  Part of that agreement was that the government would reduce the amount of mining tax payable to the Federal Government by the value of the royalties payable to the state governments.

On that - in researching this piece, I found a number of articles that suggest that under the mining tax the royalties will be deductible, whilst other articles suggested that the royalties will be refunded.

As anyone who has worked with tax goes, the difference is crucial. Something that is deductible reduces your "taxable income" - so a reduction in your taxable income of $10 might mean a net tax saving of maybe $4.

Something that is refunded, or (to use the word the income tax legislation uses, offset) against a tax reduces the tax payable by the full $10.

For present purposes, I'll rely on Mike Baird's statement in his speech that the Commonwealth has agreed to "reimburse" mining companies for any increase in royalties ie that royalties will be refunded in full by the Commonwealth.

There was a fuss earlier in the year when Western Australia's Liberal government increased the royalty rate on iron ore in the knowledge that the companies affected would have the loss offset by the Federal Government.
How the news was reported by

Unsurprisingly, the Federal Government has responded by threatening to slash WA's share of the GST revenues:

From this WAToday article
As a sidenote, it is difficult to comprehend how the Federal government did not see this issue coming, especially from the states with Liberal governments.

Coming back to NSW, this new increase in royalties will apply only to those companies that are liable for the mining tax .

The NSW Liberal government has decided to increase the royalty rate on (it would seem) all minerals presently subject to the royalty regime. The justification for this increase is (apparently) the carbon tax.

Mike Baird said the following:

It may well be the case that the carbon tax will cost the NSW state budget. If NSW Treasury modelling says so then I wouldn't dare disagree.

The problem that appears to have been lost in the fuss surrounding the budget is that this loss has NOTHING to do with the mining tax.

The NSW budget will increase the royalties that it charges the companies that are "subject to the Commonwealth’s proposed Mining Resources Rent Tax."

I don't know whether any of these companies will actually have to pay the carbon tax directly, although all will pay additional power costs due to power prices rising.  This is as most, if not all, power companies with coal powered plants will incur the carbon tax.  Those of you that follow these things will know that the carbon tax (in its present form) will apply only to those companies that produce 25,000 tonnes of CO2 from any one facility.

I'm not on top of precisely how many coal mines actually produce that much CO2.  It should be noted that the tax will only be payable on a mine that produces 25,000 tonnes of CO2 getting the coal out of the ground - not on a mine that produces enough coal that, when burned, will produce 25,000 CO2.

The hysteria on various websites means that it is difficult to find any figures I feel comfortable quoting.

The point is, however, this.  The companies that pay the mining tax will be the ones subject to the additional royalties. Baird confuses the issue by calling it an "offset increase" but it is simply a tax increase.

This is being done because the NSW government is "prepared to use all means within our power to recover the costs to the state of the Gillard Government’s carbon tax."

These changes will have no net effect on the bottom line of the mining companies.  There is no connection to whether these companies will be subject to the carbon tax or not. It doesn't really matter whether they are or aren't though, because there will be no net effect on their bottom line.

The net effect is that the NSW government will pull in more royalties and the Federal government will pull in less from the mining tax. The ostensible purpose is to cover the additional cost from the carbon tax.

Moreover, judging by what Swan said about Western Australia, it seems likely that NSW will suffer a retaliatory decrease in the amount of GST returned, meaning that it is likely that NSW will pull in less GST and other states will receive more.

Net effect?  Probably minimal. 

Despite that, the most frustrating part of the whole fiasco is this.  The NSW government (like every government) grapples every year with changes to income and expenditure.  Some things go up, some things go down, some things stay the same.  If it looks like things aren't going to balance, programs are cut or taxes are raised.

At the end of the process, hopefully the budget stays more or less in balance and we get through another year.

I've blogged previously about the (in my view) disgraceful pokie tax cut.  It was announced today that new police and nurses are going to be hired, and will of course need to be paid for.  There are a number of infrastructure promises for which O'Farrell has needed to start finding dollars.

These promises all have a negative impact on the budget, and will all need to be paid for somehow.

In the same way, it appears that the Carbon Tax is going to hurt the budget's bottom line.  But why is it THIS new expenditure that is being linked to this increase in the mining royalties?

It's simple. Partisan politics.  O'Farrell is a Liberal, and the Federal government is Labor.  He's taking a shot at Gillard, knowing that Federal Labor's unpopularity and the anger at the Carbon Tax means that he won't upset too many people who would ever actually vote for him anyway.

The fact is that the Carbon Tax has nothing whatsoever to do with these royalties, and the Coalition's attempts to link the two in this speech are nothing more than misdirection.

The budget has (quite properly, I'm prepared to accept) allowed for a negative impact from the Carbon Tax.  The budget has allowed for an increase in royalties, a change the government is entitled to make.

But to link the two in the way that Baird has done in the above quotes is deceptive - nothing more, nothing less. There can be no doubt that he did so knowing that we would see statements like the below in the papers on Wednesday;

He did so knowing that the issue is probably too complicated to canvass in a newspaper's coverage of the budget, and consequently most people's understanding of the changes would start and end with the above quote.

Moreover, he did so knowing the the mining tax and the carbon tax are still to progress through the Federal parliament.  Given present circumstances, who know what kind of tax we may end up with, or whether the taxes will even make it through both houses?

Baird's speech deceptive, it is misleading, and people should be told about that.  But I'm not holding my breath.

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