State and territory leaders have rejected a push toward "competitive federalism" by Prime Minister Malcolm Turnbull that would have allowed states to levy their own portion of the nation's income tax take.
The decision is a major loss for the government, coming just two days after Mr Turnbull announced the proposal, pitching it as "the most fundamental reform to the federation in generations" and "the only way that we can genuinely reform our federation". The plan was also spruiked by several government frontbenchers including Treasurer Scott Morrison.
"There was not a consensus among the states and territories to support further consideration of the proposal that would enable states to levy income tax on their own behalf," Mr Turnbull announced on Friday after the Council of Australian Governments meeting in Canberra.
He acknowledged the proposal was dead and it would not be resurrected by the Commonwealth. "There isn't anything like a consensus," he said. "That proposal is not there, it's withdrawn, it's not acceptable to COAG."
Instead, leaders agreed to consider a revenue sharing proposal that would give states direct access to the growing income tax pool, rather than forcing them to routinely ask Canberra for more money on top of tied grants.
Under such a model, the states would be given a percentage of income tax levied by the Commonwealth, to be used as they see fit.
There was little detail about the new proposition on Friday, and it remains some way from being implemented, but it would mean a reduction in what the Prime Minister described as the Commonwealth's "very complicated, expensive-to-administer" grants tied to particular projects and uses.
"This would not result in states getting more money immediately," Mr Turnbull said. "It means they would have greater freedom to determine how they spend that money."
Mr Turnbull insisted the result was still "an important step" in reforming the federation that would give the states greater financial autonomy. He turned the decision back on state and territory leaders, emphasising that tight budget conditions meant improvements to infrastructure and services would have to be made using the available revenue.
"We have to live within our means, that much is clear," he said. "There will be no raising of income tax. The states will not be levying an income tax and the Commonwealth will not be increasing income tax."
Leaders also agreed to a Commonwealth proposal for "Healthcare Homes", a new model of primary healthcare in which chronically ill patients would be encouraged to appoint a GP to take responsibility for their co-ordinated care. The aim was to reduce the number of unnecessary hospital visits made by patients with chronic illnesses such as diabetes.
The Commonwealth will also provide an extra $2.9 billion in hospital funding from July 1, 2017 to June 30, 2020.
State and territory leaders welcomed that commitment, although Victorian Premier Daniel Andrews said it did not make up for billions of dollars he said had been withdrawn from the health budget under the former Abbott government.
"Hundreds of millions of dollars of extra funding for Victorian hospitals does not replace billions of dollars that have been taken away from Victorian hospitals," Mr Andrews said.
Northern Territory Chief Minister Adam Giles, an early sceptic of the state income tax levy idea, said it would have been better if the proposal "came out in a different format, in a different way".
The plan was reported in national newspapers on Wednesday and then confirmed, in detail, by the Prime Minister at an interview with journalists outside the Penrith Panthers rugby league club in west Sydney.
Mr Turnbull said his original "full-blooded" tax sharing proposal was made in the spirit of bold reform, but conceded there was "no appetite" for it in the end. "It's my job to lead reform, to push the envelope," he said.
The rapid cremation of the plan means the Prime Minister's other major proposal of the week – the federal government pulling out of funding public schools – is also effectively off the table, because it was dependent on the states levying their own income tax.
The can of education funding was kicked further down the road, meaning tensions remain between the federal government and the states. New South Wales Premier Mike Baird suggested the Commonwealth had left the door open for funding the full "Gonski" arrangements beyond January 1, 2018.
Mr Turnbull said the government was "not wedded to … the full Gonski, whatever what means", and that promises made by the former Gillard Labor government were "never credibly funded".
