The banks' attack on South Australia shows how scared they have become. When Scott Morrison announced his new bank levy on budget night with no consultation, and no apology, the big banks knew they were in big trouble. And when Jay Weatherill announced his own state-based top-up levy, their worst fears were realised faster than they ever imagined. The entire Australian political class had finally figured out that taxing big banks to fund health and education is quite popular.
But it's not just the banks attacking the states' rights to set their own policies and priorities within their own border this week. Treasurer Morrison chose this week to float the extraordinary idea that state governments who listen to their voters' concerns and prevent the gas industry from fracking coal seam gas might have their federal government funding cut.
Think about that. The Commonwealth Treasurer is suggesting that unless state governments with the constitutional obligation to protect the environment ignore voter concerns with burning rivers, polluted farmland and fugitive emissions of methane gas, he will give them less money to run their schools and hospitals.
Will the ACT government's 100 per cent renewable energy target be next? Will the Treasurer start threatening to withhold Commonwealth funding from states who take climate change seriously? Or perhaps they will hold back hospital funding for states that legalise euthanasia or abortion.
The federal government's political strategy revolves around blaming state governments, and previous Labor governments, for all their woes. It is obviously far easier for Mr Morrison to attack the states for banning coal seam gas extraction than it is for him to tackle rising unemployment, budget deficits and Commonwealth debt.
But if the premiers are smart they can easily turn the tables on the banks and the federal government, both of which are presently weak and unpopular. There are plenty of ways that the state governments can work together to secure increased Commonwealth funding, remind the federal government of the limits of its constitutional powers, and win some votes while they are at it. The only question is if the states can work together.
The current financial relationship between the Commonwealth and the states revolves around a deal that John Howard put together. In order to implement the GST he had pursued for decades, he secured the support of the public via the state premiers. Mr Howard simply promised that all of the revenue from the new Commonwealth GST would be handed over to the states and, in so doing, created the constitutional and political fiction that the GST was "the states' tax". But fiction or not, it worked.
While the GST was never popular, as Tony Abbott discovered after the 2014 budget, spending on health and education are. Howard was smart enough to link something people didn't want to something they did want and, hey presto, got himself re-elected after breaking a "never ever" promise to introduce a "great big new tax on everything". The Liberals thought it was such a good idea that even Tony Abbott supported it.
But much has changed since John Howard waved a fistful of dollars at the state premiers. While the GST delivered an initial increase in Commonwealth funding, for the states GST revenue growth has not been as fast as expected due to a combination of the goods and services that Howard exempted from the GST and the changing shape of the Australian economy.
While in economic principle the Goods and Services Tax should apply to all goods and services, in political reality a wide range of exemptions were introduced by the Howard government and the then Senate cross bench dominated by Democrat Meg Lees. Exemptions included private schools, private health insurance, low-value imports (in an era in which there was no Amazon or Ebay) and most financial services. Needless to say, the proportion of total consumer spending on all of these categories has risen rapidly and, in turn, the proportion of consumer spending collected as GST has fallen steadily. Put simply, the GST ain't what it was back when the premiers agreed to the deal.
But there is nothing in the constitution, or the GST legislation, to stop the federal government from broadening the GST base to include the banks, introducing a new carbon tax, wealth tax, or any other tax, and handing over all of the extra money collected to the states.
The reason that the South Australian government has introduced its new bank levy is to raise the revenue it needs to fund the high quality services that the people of South Australia want. As citizens of one of the richest countries in the world, there is no reason to suggest that South Australians "can't afford" high quality services. The issue is only whether they are willing to collect the revenues to fund them, and when it comes to the bank tax the answer is a clear "yes".
The banks know that, which is why they have launched such an outrageous scare campaign about "jobs and growth". In scenes reminiscent of Gina Rinehart in the back of a ute chanting "axe the tax", the CEOs of the big banks have been doing everything they can to scare the citizens of South Australia into thinking they have to choose between high quality services and jobs for their kids. Of course if the big banks cared about jobs they wouldn't have shed so many jobs in their branches.
Central to the strategy of the big banks is to play to the insecurity of the residents of smaller states that unless they genuflect before corporate Australia they will "miss out" or be "left behind". In reality, if one of the big 4 banks actually packed up and "left" South Australia, the main winners would be the other big 3 who would stay behind and pick up market share. In fact, if one of the big four left and a South Australian customer with a mortgage of $500,000 switched to a credit union or building society, they could save around $2000 a year from lower interest rates.
While the banks are quick to claim that they have "no choice"Â but to pass on any taxes to customers, they are strangely silent about the impact of their enormous profits on the interest rates and fees they charge. It's no accident that the not-for-profit building societies and credit unions offer identical products at much lower prices. And if South Australians paid two grand less on their mortgages and spent it in the local shops it would deliver far greater economic benefits to the state economy than anything the big banks could do.
But as the foreign mining companies showed, scare campaigns can work. But if the premiers work together they can defend themselves against the onslaught from the big banks, as well as turn it to their advantage. Put simply, if the "scary" part of the banks' campaign is that one state will be left behind then why not all agree to do the same thing? Or if some premiers think that such things are best left to the Feds, then why not all ask the Feds to increase their new banking levy and pass all of the money on to the states?
John Howard knew that policy reform and political strategy go hand in hand. The scare campaign from the big banks might have just given the state premiers, or the Federal opposition, a great idea. Increase the popular bank tax. Spend the money on popular services. And show people that it is possible to get things done in Australia. But why stop there? Why not offer the premiers some or all of the proceeds of a carbon price, a wealth tax or anything else the premiers can agree would be efficient and popular.
Richard Denniss is The Australia Institute's chief economist. Twitter: @RDNS_TAI