Prime Minister Julia Gillard says Western Australia will get less money for major projects and in GST payments following tax changes by the Barnett government.
The WA coalition government on Thursday announced it would increase the royalty rate for iron ore fines to 6.5 per cent as of July 1, 2012, then to 7.5 per cent the following year.
It is expected to net the WA government $2 billion over three years.
Under the minerals resources rent tax deal with the big mining companies, the federal government must credit them back with money they pay into state coffers, meaning the Gillard government could be short $2 billion under the new WA arrangement.
IT'LL COST YOU, WA
Ms Gillard told reporters in Adelaide the decision - which ran contrary to the coalition's campaign against higher mining taxes - would end up costing WA in terms of GST revenue and infrastructure.
"Today we can say that the campaign that was run in WA against the minerals resources rent tax by members of the Liberal Party has now turned out to be a pretty hollow campaign," she said.
"It's Premier (Colin) Barnett who is now increasing taxation on mining companies."
Ms Gillard said Premier Barnett had scored an own goal.
"He knows how GST works and he knows that under the current system that this means the GST money will be moved away from Western Australia," she said, referring to determinations by the independent Commonwealth Grants Commission.
"They will also lose infrastructure funds that would have flowed from the minerals resources rent tax." SURPLUS PLANS
Ms Gillard said she remained committed to returning the federal budget to surplus by 2012/13.
"We will deliver that budget surplus and, as a result of the actions of Premier Barnett, of course we will... be adjusting infrastructure expenditure for Western Australia to protect the federal budget," she said.
Treasurer Wayne Swan said he doubted WA's tax move would net an extra $2 billion.
"It's somewhat less than that, but I'm going to get the Treasury to do the work over the weekend," he told ABC Radio on Friday.
Mr Swan said he was surprised by the WA government's budget decisions, which would punish smaller miners.
Opposition frontbencher Mathias Cormann said the states should never have been left out of minerals resource rent tax negotiations, given how important mining revenues were to their bottom lines.
"The Gillard government has not engaged with the states on the mining tax at all, even though it has serious implications for their capacity to raise their own revenue," he said.
The WA senator accused Mr Swan of "going to war" with his state and pointed to Treasury modelling showing $25 billion out of $38.5 billion in mining tax revenue would come from iron ore production there.
"No wonder Western Australia made the legitimate decision seeking to protect its revenue base," Senator Cormann said.
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