Goodbye Low- & Middle-Income Tax Offset

This week we found out that more than 10 million Australians are facing a large tax rise. The tax hike comes from the removal of the Low- and Middle-Income Tax Offset (LMITO), which last year gave those with a taxable income of less than $126,000 tax relief of up to $1,500.

The LMITO was paid as a rebate, so most taxpayers received a nice boost in their tax return last year. Something that will be sorely missed from taxpayer wallets this year, while the government saves some $11 billion a year by its removal.

Apparently, the Albanese government had no intention of giving the LMITO a further lease of life, since it was introduced as a ‘temporary’ measure by the Coalition government to buffer households during the COVID lockdowns in 2020.

However, the timing of its removal is brave, as the fictional Sir Humphrey would say, as Australian household budgets are hit by sustained cost of living pressure from higher interest rates, rising energy prices, accommodation costs, and ever higher food prices.

Part of the appeal for the federal government in allowing the offset to lapse, is that it helps to lower inflationary pressure through reducing the amount of money injected into the economy. Which is important as it helps the RBA to maintain their pause on raising interest rates and, helps the federal government to commence repairing the budget.

The budget has long-term structural problems because of the projected growth in big spending areas, such as the National Disability Insurance Scheme and recent defence acquisitions. In the medium to longer term, the need for budget repair is a significant problem.

But for this budget, the Treasurer will enjoy a windfall reward from higher-than-expected commodity prices, which might be used to sweeten the pot for taxpayers. Which given the fact the fact that the government has a larger pot of money, makes the timing of the LMITO’s removal rather curious. Since it would be politically and economically useful to extend the offset for another twelve months until inflation has been tamed.

This decision makes me question the government’s wisdom in not either amending the proposed Stage 3 tax cuts or removing them entirely. The tax cuts will get rid of the 37% marginal tax bracket, lower the 32.5% marginal tax rate to 30% and raise the threshold for the 45% marginal tax rate from $180,000 to $200,000. Meaning everyone earning between $45,000 and $200,000 will pay the same 30% tax rate.

The total cost of implementing stage 3 tax cuts is $243 billion in foregone tax revenue over the decade following introduction or around $24 billion and change per year. So, if the Stage 3 cuts were abolished and the LMITO kept in place, the government would still be in a stronger fiscal position.

There will still be some assistance for those on welfare payments as part of a deal with Senate crossbencher and Wallaby legend David Pocock last year. The deal established the Economic Inclusion Advisory Committee led by former Labor minister Jenny Macklin.

Its brief is “to provide advice on economic inclusion including policy settings, systems and structures, and the adequacy, effectiveness and sustainability of income support payments ahead of every federal budget”.

The committee’s influence is strengthened by the fact its suggestions must be made public prior to the budget release. The government may respond to the committee’s recommendations when released, it doesn’t have to accept their recommendations either. While the committee cannot force the government to do anything, it will make things harder for them to do nothing.

Considering the extreme pressure currently felt by most household budgets and, the fact that the committee is likely to shine a spotlight on these and other ‘cost of living’ issues. Makes me think it is likely that there might be a few cost-of-living initiatives to be announced by the federal government in the upcoming budget, which could have been avoided by keeping the LMITO in the first place.