Prime Minister Malcolm Turnbull has confirmed that he has proposed allowing states to levy income tax to assist in their funding needs.
He said the federal government will reduce its income tax by an agreed percentage and allow state governments to levy an income tax equal to that amount.
"There would be no increase in income tax from a taxpayers' point of view - he or she would pay the same amount of income tax, but the states would be raising the money themselves," Mr Turnbull told reporters in Sydney on Wednesday.
Mr Turnbull said the biggest change to income tax powers since World War II is in recognition that there is a failure at the heart of the federation.
"It is the failure of the states to have access to the revenue sources," he said.
States that needed more funding for a service such as health would go to their parliament and raise the money, then go to the people and persuade them of the merits of it.
"This is a real opportunity to make the federation work," Mr Turnbull said.
He said the proposal had been put forward to premiers, chief ministers and their senior officials ahead of Friday's Council of Australian Governments meeting.
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