Prime Minister Malcolm Turnbull has reminded state leaders there is less money to fund more demands on government, while urging them to be "clear-eyed" in their decisions.
Opening the Council of Australian Governments meeting in Canberra, Mr Turnbull encouraged the premiers and chief ministers to have a "rational and considered" discussion on improving the federation.
"We're not here to make promises which we cannot afford," he said in his opening remarks on Friday.
States not budging on income tax plan
Prime Minister Malcolm Turnbull will have a hard time convincing state premiers of his plan to shake-up the way hospitals and schools are funded.
Leaders will be asked at a meeting in Canberra to accept a deal which would see the commonwealth lower the percentage of income tax it collects, with the states able to raise some themselves to pay for services.
Victorian Premier Daniel Andrews told ABC radio he's not convinced and the plan is a "clever tactic" to divert attention away from the federal government's $80 billion worth of cuts to health and education.
Mr Andrews said it was "paternalistic stuff" from Mr Turnbull, about whether states were being "well-behaved children".
"I struggle to take seriously a tax plan that's so important to you, you drop it a day before the COAG meeting."
He also rejected Mr Turnbull's assertion that income tax will grow faster than the grants the states now receive from the commonwealth.
"The facts are no, that's not been established," he said.
NT Chief Minister Adam Giles was up for a mature and sensible conversation with the prime minister, saying he looked forward to hearing how the territory won't be worse off under the arrangement.
"The Northern Territory will see substantial reductions in income if we were to go down this path but having said that we're quite keen to have a conversation," he told reporters as he arrived at Parliament House.
West Australian Premier Colin Barnett was disappointed his other state colleagues were rejecting the idea.
"I think it deserves a fair hearing," he said.
Mr Barnett said any state which believed the federal government would deliver $80 billion for health and education was naive.
"The $80 billion going way out was just not realistic."
Tasmanian Premier Will Hodgman said colleagues had a very robust discussion with Mr Turnbull over dinner at The Lodge on Thursday night.
He won't be supporting what is being flagged because it would put Tasmania at a disadvantage.
"If there's compensation necessary somebody is getting hurt and more likely than not under this arrangement it would be Tasmania and I'm going to stop that happening," he told reporters.
Queensland Premier Annastacia Palaszczuk compared the income tax shake-up to buying a house.
"You'd see the contract, talk to your bankers and get legal advice," she said.
"You would see the detail. Today we have nothing."
NSW Premier Mike Baird was pleased to see a recognition cuts announced in 2014 weren't fair.
"I'm very hopeful, that we see some improvement to that," he told reporters.
"We're happy to be constructive participants and we're happy to consider all ideas that are brought forward."
