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The ugly offspring of the NSW mini-budget, 17 November 2008

Mini-budgets are all too often conceived in haste with much fumbling in dark corners. They are usually born ill-formed and unwanted by anyone. Even their parents quickly learn to hate their own offspring.

So it will be with the mini-budget announced last week by NSW Treasurer Eric Roozendahl, who imposed a $3.6 billion impost on the state’s citizens in a bid to stave off ratings agency downgrades.

Voters are notoriously fickle, and Premier Nathan Rees is gambling that in a few years they will have forgotten the way this government – elected only in March and guaranteed a four-year term – roughed them up.

Ignoring the new financial impositions on families and motorists – the daily news journalists have had a field day with them already – we should concentrate instead on a small issue that was buried well down in the small print of Mr Roozendahl’s document.

It imposes another $39 million levy on insurance policyholders, this time for the funding of the State Emergency Service – just weeks after the state’s own price watchdog described such levies as the most inefficient in the state’s vast tax basket.

Not surprisingly, the insurance industry is furious. Its peak bodies have fought against taxes on premiums for many years, and until last week had seemed to be making progress.
ICA was the first to find the additional tax buried down the back of Mr Roozendahl’s statement, describing it as “yet another unnecessary, inefficient and ill-conceived tax to be paid by general insurance policyholders”.

The council offered only one example of the new SES tax – the impact on the average householders policy. CEO Kerrie Kelly said the cost of running the SES “will be picked up by general insurance consumers at an additional estimated cost of $10 per policyholder”.

With motorists fuming over new bridge tolls, 500 more red light cameras and congestion taxes, the mainstream media wasn’t going to get excited about an extra $10 revenue-raiser being lumped on the annual cost of insurance.

And of course, it was far worse than that, as NIBA CEO Noel Pettersen quickly pointed out. Brokers’ clients are going to be forking out a lot more than $10 on every commercial premium as they raise $40 million for the SES on top of the $383 million they already pay for the fire services. And by the time you add GST and stamp duty on top – each level being rounded up to maximise the final damage – the added cost of insurance will be even more significant for every NSW policyholder.

As Ms Kelly and Mr Pettersen said, it’s less than a month since the IPART review of NSW state taxation delivered a report calling for the elimination of the fire services levy system which is the model for the new SES levy, and for a sharp reduction in stamp duty on insurance premiums as well.

ICA even met Emergency Services Minister Tony Kelly on October 2 to discuss the IPART report, which his government had commissioned. Maybe he wasn’t listening; maybe he didn’t read the report; or maybe he’s just another NSW state politician.

Last week he hailed the mini-budget “reforms” and pointed out that the work of SES volunteers “is every bit as important as that done by our fire services, so it is appropriate for the SES to be funded in the same manner”.

Not a word about the IPART report’s contradictory findings, strangely. But wait, there’s more.

“Insurance companies are required by legislation to contribute towards the annual costs of running the fire services, in recognition of the significant savings in claims on the industry each year from properties being saved by our fire fighters from destruction by fire,” he said.

As ICA’s Ms Kelly (no relation) pointed out, the IPART report described the fire services levy as “a highly inefficient tax that creates disincentives for appropriate insurance”.

“Instead of taking advice from the IPART Review, which the current NSW Government established, the NSW Treasurer has chosen to introduce another highly inefficient tax to plug the NSW budget black hole,” she said.

NIBA’s Noel Pettersen was less diplomatic, describing the new arrangement as “a disgrace”.

“NSW’s emergency services deserve to be well funded, but that funding arrangement must be equitable and based on sound taxation principles,” he said. “In this case it is neither. This just shifts the burden from the Government’s shoulders on to those citizens who are prudent enough to insure their assets.”

The SES levy is, of course, nothing more than an opportunistic and cynical move by a panic-stricken government, but its implications are very serious.

Over the past 15 years the industry has spent a great deal of money and invested considerable time in lobbying for change to the insurance tax system. It has presented convincing evidence that insurance taxes are a direct cause of underinsurance and non-insurance and worked hard to change attitudes to insurance taxes.

The Victorian Government, whose enthusiasm for the revenue-raising potential of insurance taxes is never-ending and whose doublespeak on the subject surpasses even Mr Kelly’s, will be watching all this with interest.

As government revenues decline in the face of the global economic meltdown, how long will it be before Victoria’s Treasurer decides efficient taxes are far less important than raising a few more million from insurance premiums?