Jay Weatherill backs 15pc GST in return for 17.5pc of income tax

The federal government would keep all the money from an increase in the rate of the GST in return for the states being given a guaranteed share of income tax revenue, under a proposal by South Australia designed to turn the tax reform debate on its head.

Seeking to break the current political impasse, South Australian Labor Premier Jay Weatherill has told a business lunch in Adelaide on Thursday that the revenue from the GST does not grow at a rate fast enough to enable the states to keep covering the spiralling cost of health.

If the GST were increased to 15 per cent help cover the health funding gap, it "would provide the states with too much revenue in the short term and too little revenue in the long term to meet growing service delivery costs".

In a proposal he will put to the meeting of the Prime Minister and Premiers in a Canberra in a fortnight, Mr Weatherill will recommend the GST rate be increased from 10 per cent to 15 per cent but that the Commonwealth keeps all the extra revenue, which would be about $34 billion a year. The states would still receive the revenue from the current 10 per cent GST.

The Commonwealth would use its GST revenue to compensate low and middle-income earners for the impact of the increased GST, and to fund its own tax reform plans such as cutting personal and company income taxes to boost productivity.

In return, the states would be given a fixed share - 17.5 per cent - of all the income tax the Commonwealth collects. Mr Weatherill argued that income tax grows at a faster rate than the GST and would enable the states to keep funding heath.

The Commonwealth would retain control of setting the income tax rate, including reducing it to target bracket creep, and collecting it.

In addition, all fixed payments now given to the states in the form of tied grants would be abolished. These would include Specific Purpose Payments and National Partnership Payments.

The states would be free to spend their share of income tax revenue as they saw fit. Mr Weatherill said this would double as Federation reform given it would reduce duplication and bureaucracy involved in current funding agreements and reporting requirements.

Before making the speech, Mr Weatherill ran his proposals past fellow state leaders as well as federal Treasurer Scott Morrison and Prime Minister Malcolm Turnbull.

He said the proposals would give the states access to a more reliable funding source to meet rising health demands and "it gives the Commonwealth the freedom it's seeking to provide near-term tax relief".

"It means an end to debate about expanding the GST base to health and education, a topic that would otherwise make national agreement difficult to reach," he said.

"It gives the Commonwealth more skin in the game when it comes to the management of the GST.

"Most important of all, it amounts to genuine Federation reforms - giving the states more fiscal autonomy to pursue productivity growth through policy innovation."

Mr Weatherill also supports extending the GST to financial services and giving that extra revenue of about $4 billion a year to the states in return for them abolishing stamp duty in insurance premiums.

He said he was proposing the upheaval "to end the logjam" over tax reform, the need for which was "urgent and staring us in the face".

His GST plans are in defiance of the position of federal Labor and the Victorian and Queensland Labor governments. Mr Weatherill implies his fellow leaders should rethink their views.

"If current arrangements continue, governments across the country simply will not draw in sufficient revenue to fund the services they're expected to provide, which will paralyse productivity reform," he said.

"In these circumstances, the elected leaders of this nation can do one of two things. They can avoid political flak, protect existing arrangements by resisting change and, so, sit back paralysed as the situation reaches crisis point.

"Or they can move away from entrenched positions, consider the long-term national outlook and work towards a practical solution. As Malcolm Turnbull said on the day he became Prime Minister in September, we need a new style of leadership – one that respects people's intelligence, explains complex issues, sets out a course of action and argues the case for it."