State and territory leaders have rejected a coalition plan to let them raise income tax, while taking over funding of public hospitals and schools.
Along with tax, health and education were also high on the agenda at the Council of Australian Governments.
Income tax changes were just one of the proposals brought by Prime Minister Malcolm Turnbull to the COAG meeting in Canberra.
The idea to allow states and territories to set their own income tax rates would have also made them fully responsible for public-school funding.
At the conclusion of the summit, Mr Turnbull conceded he'd failed the secure the support he was after. He said
"There was not a consensus among the states and territories to support further consideration of the proposal that would enable states to levy income tax on their own behalf in circumstances where the federal government withdrew from a portion of its income-tax collection."
The reactions of premiers and chief ministers were mixed, given the government had intended to extend funding for private education.
West Australian Premier Colin Barnett expressed his support.
"I think what Malcolm Turnbull's done is exactly appropriate. Let's look at trying to match up expenditure and revenue-raising. And let's look at trying to divide responsibility clearly. So, even in the education area, dividing responsibility for state schools and Catholic and independent schools makes sense. And, after all, the states already fund 90 per cent of state schools. It's not a big deal."
Northern Territory Chief Minister Adam Giles also saw benefits in the scheme.
"The Prime Minister has said that there will be no tax increase on Territorians and on Australians. So it's about the work-arounds in the system. But the big benefit in this is giving states and territories the freedoms to be able to make decisions without Canberra telling you what to do."
There was no commitment on additional education funding.
And Tasmanian Premier Will Hodgman believes the government's tax proposal would have put his state in a position of disadvantage.
"We're quite prepared to engage in a sensible discussion about how income tax might be available to the states to better fund essential services, perhaps dispense with arrangements that are duplicitous, that don't deliver good, efficient services. I think that's what Australians would expect us to do. But what has been flagged, as I say, is something that would put Tasmania at a disadvantage, so it's not something we're entertaining."
The prime minister did sign a deal with the attending leaders on public hospital funding -- but only until 2020.
The agreement will see the Commonwealth provide an extra 2.9 billion-dollars for health in exchange for state and territory efforts to improve services.
Victorian Premier Daniel Andrews welcomed the move.
But he says any new contributions to the public hospital system were not enough to make up for steep funding cuts in the 2014 federal budget.
"Whilst an agreement today is a positive, there's no getting away from or getting around or politely explaining away the fact that many billions of dollars will not be flowing to hospitals in my state and hospitals right across the nation as a result of decisions made in the 2014 budget. They are not reversed today."
The leaders also reaffirmed the view that the provision of universal healthcare is a shared responsibility.
Agreement was also reached on new counter-terrorism legislation and a domestic violence summit in Brisbane in October.
