The Commonwealth and the states have been locked in a bitter battle on long-term health funding ever since the 2014 budget cut future funding allocations.
Now, Prime Minister Malcolm Turnbull believes he has found a way to provide the states and territories with greater responsibility.
Mr Turnbull says the states could levy their own income taxes, but he suggests there would be no overall lift in taxation.
"What we are proposing to the states is that we should work together on this basis: that we, the federal government, will reduce our income tax by an agreed percentage and allow state governments to levy an income tax equal to that amount that we have withdrawn from. So, there would be no increase in income tax from a taxpayer's point of view. He or she would pay the same amount of income tax."
Under former prime minister Tony Abbott, forward health funding was cut by $80 billion.
Most leaders from the states and territories want that funding issue dealt with before any discussion takes place on the specific tax arrangements suggested by the Prime Minister.
Victorian premier Daniel Andrews has told the ABC Mr Turnbull's plan is just a distraction.
"We want the federal government to acknowledge that they broke the commitment they made to the Australian community when they cut hospitals and schools and said they wouldn't do it. And, secondly, we want a tax plan, not thought bubbles. This stuff that, every few months, we have a new (plan) ... We're onto the third or fourth tax plan now, and this will go the way that the GST rise went, it will go the way that personal income tax went."
The federal opposition is also focused on health funding, which will be a significant issue in the 2016 election campaign.
Opposition leader Bill Shorten used a visit to a Melbourne Hospital to reject the so-called Federation Proposal outright.
"I can guarantee Australians a Labor government will not give income-tax powers to the state and territory governments. Australians already pay quite a lot of tax. If Mr Turnbull's only suggestion to fix up his budget is to increase the cost on household budgets, well, it's a bad idea."
Both parties are preparing for the upcoming election, which could be close.
Latest opinion polls suggest the Coalition could lose around a dozen seats across the country, but another eight would be required for a change in government.
In post-Second World War Australian political history, no federal government has lost office after just one term.
As things stand, the most likely outcome is a reduced majority for the government after the election.
But nothing is certain.
Nick Cater is the executive director of the Liberal Party research centre, the Menzies Research Centre, and says the Coalition does not have a lot of time to release policy.
"It was always going to be that way, because Malcolm Turnbull became leader with, what, a year to go before an election. They've got to bring down a budget, and then, straight after the budget, they've then got to go into probably something of an election cycle. It's a very tight period of time, particularly when you have a Government talking about major reform."
The Opposition has been releasing policies steadily for the last 18 months.
But it would need a uniform national swing of more than 4 per cent in voting to win office.
That is difficult to do, but Michael Cooney of the Labor Party's research centre, the Chifley Research Centre, is optimistic.
"I think Labor can win this election. Any first-term election is difficult to win, but, if you think back to 1984 or 1998, or 2010, for that matter, you see governments that, at the start of the year, were considered pretty impregnable go very close to losing. And swings of those kinds replicated this year would see Labor form government. So there's no doubt that government's there to be won by Labor this year."
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