There’s no doubt that my home state of WA has bagged a pretty good deal when it comes to the goods and services tax. But the outcry over how it’s shared, here in the land West Australians like to label “the eastern states”, is … a bit over the top.

Before I’m dismissed as a sandgroping sympathiser for the mining state, it’s worth noting I don’t think the carve-up is right. Really, there’s much to be desired.

The goods and services tax is the 10 per cent tax you pay on most things you buy (which you probably don’t notice because it’s included in the price tag).

That money goes to the federal government. But because our state governments are responsible for providing things such as hospitals, schools and roads – and have given up a lot of their taxing powers to the federal government over time – the roughly $90 billion collected through the GST is meant to be dished back out to the states.

But it’s how this money is shared among our states that’s led to bickering.

WA premier Roger Cook has labelled the Productivity Commission’s criticism of the current arrangements as an attack by “east coast clowns”, while NSW Premier Chris Minns has bemoaned the fact that WA is now wealthy enough to bid on NSW rugby league games.

But how did we get here, and is the deal really the “worst public policy decision of the 21st century”, as some put it?

Since the GST was introduced in 2000, we’ve generally relied on “horizontal fiscal equalisation” to guide how we split the money. Basically, every state is meant to be able to provide services and infrastructure to its citizens – to the same standards as every other state.

A child growing up in remote Western Australia, for example, should have the same access to education and care as a kid growing up in the middle of Sydney.

The Commonwealth Grants Commission weighs up each state’s ability to provide services to the minimum standard with the money each state has (from state taxes) to do so.

That’s affected, for example, by how remotely a state’s citizens live (which costs states more and means they “deserve” more of the GST money).

It also considers how much money a state can raise itself – through things such as stamp duty and royalties – to meet those needs.

This all sounds pretty fair, right?

Well, the controversy started when, in the early 2000s, a mining boom in WA led to the state government raking in a lot of money from royalties as the iron ore price went from $30 a tonne in 2002-03 to more than double that in 2017-18.

But it wasn’t simply swimming in cash.

Rising royalties meant WA also got a much smaller slice of GST. Why? Because it was suddenly able to generate heaps on its own and didn’t “need” as much, according to the GST formula.

That upset WA: why should it get “punished” for doing well, ending up with less money from the federal government for the hard work it put in?

WA is labelled by some as a “nepo baby” endowed with resource-rich soil. But the state government has also made choices to mine this land.

There is an argument that the original GST distribution system – which the Productivity Commission recommends we return to – discourages state governments from making important reforms and investing in things such as ports and railways which can help the economy to flourish.

The commission’s response to this is that the system is “not intended to incentivise or disincentivise states from undertaking reforms”. That’s a nice sentiment, but I’m not convinced that intentions always equal intended outcomes.

A clear flaw in the system is that while mining royalties are considered, revenue from pokies are not because, seemingly, that’s too hard to estimate. That incentivises bad policy decisions. Victoria and NSW, for example, shy away from banning pokies – probably at least in part because they rake in a lot of revenue from them in a way that doesn’t affect their GST share.

You can see why WA – which has banned pokies with the exemption of one casino and misses out on a lot of the tax revenue – would be miffed.

The grants commission claims it’s not rewarding or punishing policy decisions, but it is shaping incentives, some of which are pretty harmful.

But back to the distribution itself. In 2018, the federal government shook up the way they distribute GST to the states.

The changes, in short, were designed to make sure WA didn’t lose too much of its GST.

No state could receive less than 75 per cent of its per-person share (what it would get if the amount was based purely on a state’s population size) of GST, even if it was raking in plenty of its own revenue. So while WA, under the old system, had a number as low as 30 per cent at one point during the mining boom, under the new system, it would automatically be bumped up to 75 per cent of its per-person entitlement, and other states would have to give up some of their GST to make up the difference.

The other new rule was that no state could have a lower number than the stronger one out of Victoria and NSW. Once again, other states would have to pay to make up the difference for any state which found itself better placed than that benchmark.

It makes sense why most states were annoyed by these changes.

The changes made some sense when WA’s royalty revenues started slipping while its GST share began dropping (thanks to the gradual, lagging way the grants commission accounts for things like changes in royalties).

But as WA’s mining royalties recovered (and increased the state’s ability to fund its own services), it has continued to get money from other states that might “need” it more.

This problem was partially dealt with through the federal government making a promise in 2018 called the “no worse off” guarantee: it would pay extra money from its own coffers to make sure no state would get less money than they would have under the old GST system.

The problem is that that has ended up being pretty costly at $23 billion in 2024-25 – pretty much still paid by taxpayers around the country.

WA argues that the additional revenue has helped its investment in things which have had a flow-on benefit to the national economy through trade with other states and higher federal government tax receipts.

The Productivity Commission is, however, rightly critical of the 2018 changes in its latest report, pointing out some perverse consequences of the GST distribution formula.

For example, when NSW or Victoria faces a natural disaster and therefore has to spend lots, its ability to fund its needs technically decreases, meaning the amount of GST revenue it’s entitled to under the formula increases.

But since, under the recent changes, the state with a higher entitlement becomes the minimum benchmark for every other state, WA which would otherwise have a relatively low entitlement, gets boosted to the same level as NSW or Victoria … even though a bushfire in NSW probably has no effect on WA.

The Productivity Commission’s solutions focus mainly on reverting to the 2018 system and allowing either the grants commission or federal government to make additional decisions or payments. But we need a system that can encourage development and ensure services are provided to all Australians. We can do both.

The Market Recap newsletter is a wrap of the day’s trading. Get it each weekday afternoon.