Welcome to Wednesday - a day where state premiers and territory chief ministers awoke with sore heads.

While this week's Council of Australian Governments (COAG) is not known for boisterous parties, but the mooted proposal for their jurisdictions to set independent levels of income tax will have some licking their lips while others cry into their morning coffee.

As always, there are a number of strategies at play here.

The states are still hurting from former Prime Minister Tony Abbott’s $80 billion revenue cut across the forward estimates, and are desperate for new taxes to plug that gap.

The new PM isn’t making any moves to rectify this. Rather, the Commonwealth has increased focus on how to push more fiscal responsibility to the states. A big part of this is to shift the rapidly increasing cost of healthcare.

Interestingly, if the US and its user-pays system has taught us anything, it is that Medicare is unsustainable without significant government intervention.

 

Image: news.com.au

 

The basis of the strategy is to introduce a regime where the Federal coffers return a couple of cents in the dollar across all income tax brackets that would allow the states to fill the gap with their own income tax… or not.

Why not? Well, the underlying aim is to push the states to introduce further competitive advantages in order to attract investment and, perhaps, population.

However, the key question is whether the states that require the most government assistance (Tasmania and Northern Territory) can afford to cut their tax rates at all.

Meanwhile, economic powerhouses such as New South Wales and Victoria can offer all the goodies and continue to attract the lions’ share of revenue.

Regardless, this new style of Federalism has only one real outcome. This is a top-down manoeuvre designed to transfer as much responsibility for state funding away from Canberra.

Forget economies of scale and universal service… in the new paradigm it might be everyone for themselves.