Prime Minister Scott Morrison wants states and territories to plan where migrants go so they can be funnelled into growth areas.
It will be up to states to plan where new migrants should settle under potential changes to Australia's national migration program.
Prime Minister Scott Morrison has flagged migrants could be asked to spend five years in a regional area if they want permanent residency.
Because the states plan roads, hospitals and schools, they need to say where they want population growth.
"This is a blinding piece of common sense, which is: how about states who plan for population growth and the Commonwealth government who sets the migration levels, actually bring this together?" Mr Morrison told Sky News on Monday.
The federal government sets an annual cap for skilled and family migration – currently at 190,000 – with skilled migrants distributed through a range of visa streams.
Mr Morrison said the federal government would “always” set the overall cap, but the “top-down” approach to immigration needed to be rethought.
Under the plan, the states would be asked to come to the federal government each year with a request for a number of skilled migrants.
They would be required to demonstrate they had sufficient infrastructure to handle the resulting population growth.
Mr Morrison said the push to get migrants out to regional areas could be done with conditions on non-permanent visas.
"if you want permanent residency in this country and you're on a non-permanent visa, and you haven't been compliant with the terms of your non-permanent residency visa and you go home," he said.
The office of immigration minister David Coleman refused to comment on the story when contacted by SBS News, saying the minister could not discuss matters that may or may not be the subject of cabinet discussions.
States already involved
A former deputy secretary in the Immigration department, Abul Rizvi, said greater cooperation between the Commonwealth and the states was an “excellent idea”.
But he pointed out many skilled visas, like the skilled 190 permanent residency visa, are already distributed based on nominations from each state and territory.
Mr Rizvi told SBS News the use of state-specific visas had risen to a peak of 40 percent of the skilled stream in 2012/13, but had since fallen to less than 30 percent.
“That is a big change in terms of take-up,” he said.
The other major skilled visas are those sponsored by an individual company, known as employer-sponsored.
Mr Rizvi said if the problem was cities failing to plan adequate infrastructure, the focus should be on total migration, not just the permanent steam.
Temporary visa holders like international students and tourists put more strain on transport systems and the housing market, he said.
Permanent migration at 10-year low
Australia’s annual intake of permanent migrants fell to its lowest level in a decade under the leadership of the Turnbull government.
Despite the cap remaining at 190,000 in the last financial year, where it has remained since 2011, the actual intake fell to 163,000 under the Turnbull government.
Home Affairs Minister Peter Dutton said more rigorous vetting of family and skilled applicants had led to the decline.
The 20,000 drop from 2016/187 levels was driven by a 12,000 drop in skilled visa grants and an 8,000 drop in family visas.
Business groups responded with shock and disappointment, with the Australian Camber of Commerce and Industry describing the fall in skilled migration as a "crisis", particularly for regional employers.
Prime Minister Scott Morrison appointed a new immigration minister, David Coleman, when he reshuffled the cabinet after the Liberal leadership spill.
The move took immigration out of Peter Dutton’s direct management, but Mr Coleman still reports to Mr Dutton under the Home Affairs hierarchy.
The government has flagged a new direction on population policy. It is also reportedly working on a change to direct more skilled migrants to regional Australia.
Additional reporting by AAP.