The Turnbull government insists it's doing everything it can to bring down household power bills but has slapped down a proposal that could save the average household about $150 a year.
The Senate is debating a private bill, proposed by Liberal Democrat David Leyonhjelm, that aims to exempt electricity from the GST, just like water.
Independent modelling of the plan shows power bills could drop immediately by about 9 per cent.
"You might say that this is the greatest moral challenge of our time," Senator Leyonhjelm told parliament on Thursday, channelling Kevin Rudd's comment about dealing with climate change.
But Treasurer Scott Morrison says it would cost the states $2 billion a year that would have to come from somewhere else.
"I have no doubt they would be running around saying now we've got to shut hospital beds or schools or the rest of it because you've ripped $2 billion a year out of the GST," Mr Morrison told ABC radio.
"Creating a tax merry-go-round like that where it's ... given away on one hand and taken back on another, I think it's a bit of smoke and mirrors."
The prime minister shared his treasurer's view, saying it was a reality the states would need to raise the money from somewhere else.
"I'm telling you from long experience of dealing with premiers and chief ministers ... in reality what they would do is they would say you've got to give us the money as a top-up payment so we'd have to put up taxes elsewhere," Malcolm Turnbull told Neil Mitchell on radio 3AW.
"We're not advocating it and I haven't heard any advocacy from states."
Parliamentary Budget Office modelling found the Leyonhjelm plan would actually boost commonwealth coffers by $600 million over the next four years because the foregone GST meant Canberra wouldn't have to pay the states as much.
Senator Leyonhjelm said the PBO figures show removing the GST would have a tangible impact on power bills.
"It's a worthwhile exercise," he told reporters.
"It doesn't fix the underlying problem. But it is something and at the moment the government's come up with nothing."
