How the GST actually gets shared out, and why it keeps causing fights

Every few years, a fight breaks out between the states over goods and services tax revenue, and every few years most Australians watch it without quite understanding what is actually being argued about. This week’s Productivity Commission report on Western Australia’s GST deal is the latest round. Understanding the mechanism underneath it is worth ten minutes of your time, because the same argument will resurface long after this particular report is forgotten.

The Commonwealth collects all GST revenue nationally, but the states deliver most of the services that money funds: hospitals, schools, police, public transport. Since the tax began in 2000, all GST revenue has been distributed back to the states and territories under an agreement between the Commonwealth and the states. The formula answers one question, even if the maths behind it is complex. Should every state get GST in proportion to its population, or should it be shared some other way?

Australia chose another way. The principle is called horizontal fiscal equalisation, and it means every state should be able to deliver a similar standard of services and infrastructure to its residents, regardless of how wealthy or poor that state’s own economy happens to be. A state with fewer taxable resources or higher costs of delivering services, whether that is remoteness, an ageing population or a larger share of residents needing specific support, gets a larger GST share than its population alone would suggest.

That calculation falls to the Commonwealth Grants Commission, an independent body most Australians have never heard of that decides how tens of billions of dollars get divided every year. It is meant to be a technical exercise, insulated from which party governs where. In practice it involves genuine judgement calls, how much extra it costs to deliver services in remote areas, how to weigh a state’s exposure to natural disasters, how to treat pandemic era spending. Those are defensible, expert judgements, but they are judgements, and billions of dollars ride on where the commission lands.

For most of the system’s history, the formula delivered something close to consensus, even as individual states grumbled. Then Western Australia’s mining boom broke it. The state’s revenue raising capacity, driven overwhelmingly by iron ore royalties, a state tax that has nothing to do with GST, grew so large that under the standard formula its GST share fell close to zero. Western Australia argued this was unsustainable, since it was still delivering services and still part of the federation.

In 2018 the Morrison government changed the rules. Western Australia was guaranteed a GST relativity that could never fall below whichever of New South Wales or Victoria was fiscally stronger in a given year, the so called standard state, with a legislated floor underneath that as well. Two separate funding streams paid for this. The Commonwealth topped up the actual GST pool with extra money, worth $1.1 billion in 2026-27. On top of that, a temporary no worse off guarantee paid the other states separate compensation, entirely outside the GST pool, so none of them lost out during the transition. That guarantee cost $5.5 billion in 2026-27 alone, for a combined $6.6 billion in a single year, on the commission’s own figures. The no worse off guarantee was legislated to expire in 2026-27. States have since agreed to extend it to 2029-30, and New South Wales wants it made permanent, which tells you something about how transitional arrangements tend to behave once a state comes to depend on one.

That last detail still matters for understanding the fight. Western Australia’s extra share is not simply taken from what New South Wales or Victoria would otherwise receive. It is funded by additional Commonwealth spending on top of the existing pool. That does not make it free. The federal budget is finite, and $6.6 billion spent maintaining this arrangement in one year is $6.6 billion not available for anything else the Commonwealth funds, from hospitals to disaster relief. Not being taken directly from you is not the same as costing you nothing.

Western Australia’s mining wealth has not gone away, and the state has come to depend on the current arrangement for its own budget position. Any change creates a clear, loud loser in Western Australia and quiet, barely noticed winners everywhere else. That asymmetry makes reform politically difficult, even when the numbers say a different system would be fairer overall.

Victoria heads into a state election on 28 November 2026, and state budgets will be argued over constantly in that campaign. In 2026-27 Victoria is estimated to receive $27.9 billion in GST, the largest amount of any state, ahead of New South Wales on $26.1 billion despite New South Wales having more people. Victoria can raise only around $32 per person from mining royalties, well below the national average, which is a large part of why it depends so heavily on the equalisation system in the first place. Whatever a Victorian government promises on health funding or transport this campaign, a meaningful share of the money behind that promise was decided in Canberra, by a formula almost no voter has ever been asked to understand.

The next round in this particular fight comes with the Productivity Commission’s final report, due by 31 December 2026. Public hearings run through September, and submissions remain open until 30 September 2026 for anyone who wants their view formally on the record, not just state treasuries and mining companies. Whichever way it lands, you now have the tools to follow the argument on its merits rather than on whichever premier shouts loudest.

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Sue Barrett is the founder of Democracy Watch AU and Before You Vote - a free civic education resource for every Australian who wants to cut through the spin. Before You Vote publishes every Tuesday and Friday. If this was useful, share with it to five people.