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Decisions of the High Court

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The Engineers’ Case 1920

A dispute between a national union, the Amalgamated Society of Engineers and an engineering and saw-milling factory owned by the Western Australian Government was referred to the High Court. The Commonwealth sought to legislate for the union because it believed that under Section 51(xxxv) of the Constitution, it had the power to make laws for State-based businesses when the dispute extended beyond State boundaries.

The High Court agreed giving a much broader interpretation to Commonwealth industrial powers in the Constitution by ruling that Commonwealth industrial law could apply to Western Australian State agencies, and by implication, to other States. It brushed aside any belief that interpretation of the Commonwealth’s powers should be limited by concern for the rights of the States, since the Commonwealth Constitution does not say anything about what those rights are.

The decisions and the principles laid down in The Engineers’ Case have permitted Commonwealth laws to intrude into areas that would otherwise have been subject to State control. It has become a major precedent case for similar decisions expanding Commonwealth power at the expense of the States.

Uniform Tax Case 1942

Prior to 1942 income tax was payable to the Commonwealth and State Governments.  In 1942, the Commonwealth Government passed a law assuming exclusive control over income taxes. The scheme had two essential features:

  1. The use of Commonwealth taxing power to impose an income tax at a rate equal to the previous total of State and Commonwealth income taxes combined. 

  2. The second was the use of the grants power contained in Section 96 of the Constitution.  Each State was to be granted an amount of money approximately equal to that which it would have raised through the imposition of its own income tax, but on the condition that the State itself imposed no such tax.

The States challenged the Commonwealth and lost. The court upheld a Commonwealth legislative scheme that had the practical effect of excluding the States entirely from the field of income tax.  It was the greatest blow to the States’ economic independence since Federation, creating the situation of vertical fiscal imbalance, whereby the States are financially dependent upon the Commonwealth to carry out their constitutional responsibilities.

Vertical Fiscal Imbalance

The Australian States suffer from what is termed ‘vertical fiscal imbalance’ because they do not have access to sufficient tax revenues necessary to carry out their constitutional responsibilities.  However, the Commonwealth has the capacity to raise revenue that exceeds its requirements.  It passes on some of these funds to the States by way of grants.  Western Australia relies on commonwealth funding for about 50 per cent of its revenue.

Vertical fiscal imbalance is more extreme in Australia than in any equivalent federation.  It exists because the States have been excluded from access to the two main sources of tax revenue: sales taxes and income taxes.

Section 90 of the Commonwealth Constitution prohibits the States from imposing ‘duties of custom and of excise’.  This has been interpreted by the High Court denying States the right to levy general sales taxes at all.  The consequence has been to cut the States off from what is on other federations, such as the United States and Canada, a major source of State revenue.

Income tax is another story.  There is no constitutional prohibition preventing the States from levying income taxes.  Indeed, for many years they did.  However, in 1942 the Commonwealth passed its ‘uniform tax’ legislation as a wartime measure that allowed it to collect income taxes before the States.  The States challenged the law in the High Court but lost when it upheld the Commonwealth legislative scheme that had the practical effect of excluding the States entirely from the field of income tax.

The scheme had two main features.  First, the Commonwealth used its taxing power to impose an income tax that equalled the previous combined State and Commonwealth income taxes.  Secondly, the Commonwealth’s use of its grants power, under Section 96 of the Constitution, meant that it could grant to the States amounts approximately equal to what they would have raised through their own income taxes, on the condition that they forgo imposing such taxes.

The Commonwealth has enjoyed full control over all income tax revenue ever since.

GST

 The most significant development in federal finance since then has been the passage of the Commonwealth Government’s GST legislation in 1999.  This legislation imposes a new and much more comprehensive sales tax across Australia.  The Commonwealth has agreed that all the revenue from the GST will go to the States, replacing a long-standing set of annual grants that had been subject to varying Commonwealth budgetary influences a source of inter-governmental disagreement.  The essential facts of vertical fiscal imbalance remain untouched, with the States being enormously dependent on Commonwealth funds, including those coming from the good and services tax.

The Fallout for Western Australia

Grants from the Commonwealth make up about half of the State’s total revenue from all sources. Grants may be:

  • general revenue grants, to be spent as the States decide, or
  • special purpose or tied grants, grants with conditions attached.

Under section 96 the Commonwealth may make grants to the States in any manner it sees fit.  It may attach almost any conditions it likes to these grants even in areas for which it has no constitutional responsibility. Key areas of funding include health, housing, urban development, education and roads. 

Thus, tied grants enable the Commonwealth to specify what the States must do with the funds, and in many instances, involve matching arrangements requiring States to contribute. This has greatly reduced the freedom States have to choose how they spend funds within their budgets.

Under Section 51 of the Commonwealth Constitution, responsibilities given to the Commonwealth at Federation related to:

  • Defence and external affairs;

  • Navigation, quarantine and meteorological services;

  • Immigration, citizenship, matrimonial status; International and interstate trade and commerce;

  • Currency, non-State banking and insurance;

  • Conciliation and arbitration for interstate industrial disputes;

  • Postal and telecommunications services, conditional powers with respect to railways;

  • Invalid and old age pensions;

  • The regulation of commerce and industry;

  • Natural resources, including land;

  • Local Government;

  • Education, housing and health;

  • The environment; and Industrial relations.

The Commonwealth Constitution does not list any powers of the States, but at Federation the States were considered to have sole responsibility for everything not specified in the Commonwealth Constitution.  This included:

  • Law and order;

  • The regulation of commerce and industry;

  • Transport services;

  • Natural resources, including land;

  • Essential services such as water supply, sewerage, drainage, electricity and gas;

  • Local government;

  • Education, housing and health;

  • The environment;

  • Industrial relations.