A few years ago the idea of either the Victorian or NSW governments dropping the levies they imposed on insurers to fund their fire services was a very long-odds bet.

As former prime minister Paul Keating put it so succinctly, “Never stand between a state premier and a bucket of money”. The insurance industry’s bucket of money is the fire services levy. In NSW and Victoria it provides most of the funds that keep the states’ fire services running.

The cost, of course, has always been passed on to consumers, whose property insurance contains a considerable whack of tax courtesy of the levy, GST and stamp duty, all added cumulatively.

Remove the levy and the Federal Government loses some GST revenue; but the state government loses the stamp duty benefit of both. So it takes something big to force a change.

The Baillieu Government inherited the abolition of the Victorian FSL from the previous ALP administration, which had bowed to pressure from the regions and the recommendations of the 2009 bushfires royal commission.

Under the coalition government in Melbourne the transition to a property-based tax has already been delayed by a year.

The industry’s consultations with the Victorians have obviously been confrontational, with the Insurance Council of Australia (ICA) now sitting on the sidelines awaiting a transition that many fear will be a train wreck. 

ICA’s relationship with the NSW Government is obviously less abrasive, at least at this point in proceedings. Last week the council released a carefully prepared statement praising NSW Treasurer Mike Baird’s Budget announcement of a review for the state’s fire and emergency services funding system.

It’s expected that the review will result in the abolition of the emergency services levy (ESL), which funds the fire brigades and the State Emergency Service.

Mr Baird’s announcement while presenting the NSW State Budget fulfilled an election pledge from the National Party side of the Coalition and raised some interesting possibilities: could the Premier State really be embracing tax reform?

It appears so. Mr Baird told a post-Budget media conference that he wants to engage with the Federal Government to consider tax reform.

In the meantime, he says the state can start making taxes more efficient by reviewing the emergency services levy, which is, he concedes, “probably the most inefficient tax in this state”.

Tasmania is now the only state planning to retain the FSL system. Queensland dropped it way back in 1985, SA followed in 1999, WA in 2003 and the ACT in 2006.

Noting the high levels of non-insurance in NSW, Mr Baird said: “I don’t think it’s fair in the sense that about a quarter of the population doesn’t pay for emergency services.

“It’s stopping people insuring; it means that people are underinsuring.

“I think a fairer way to do it is across the board, where everyone pays a contribution, which will mean in the long term that insurance premiums will fall.”

Mr Baird was singing from the same very old songsheet as the insurance industry and every sensible tax review or inquiry that has ever been held on the subject.

The NSW Government receives more income from taxes on insurance than from taxes on gambling. According to the budget papers, the Government expects to receive $2.04 billion from taxes on insurance in 2012/13, compared with $1.87 billion from taxes on gambling.

The insurance tax take will decrease slightly from the revised 2011/12 figure of $2.06 billion.

Of course, it will decrease further if the ESL is abolished.

In NSW, the ESL rate is 21% for residential home and contents policies, whether in city or country areas. The rate for business insurance is 36%.

But insurance tax abolition campaigner Allan Manning calculates the real rate of tax on insurance in NSW as 63.064% for commercial and 45.079% for domestic.

There has been some momentum to remove the tax in NSW before, but factors against it have ranged from political indifference to local government opposition to the inclusion of a levy in their rates.

A 2008 report by the NSW Independent Pricing and Regulatory Tribunal supported its removal and then Treasurer Michael Costa agreed to review the levy. Nothing resulted.

In 2010 the Henry Tax Review brought the issue back onto the agenda by recommending the abolition of the FSL and all other specific taxes on insurance. The review said insurance products should carry only one broad-based consumption tax.

Insurance Council of Australia CEO Rob Whelan says he is encouraged to see Australia’s two largest states taking steps towards tax reform in line with the Henry Tax review’s recommendations.

Insurer IAG concurred, with Group GM Corporate Affairs and Investor Relations Carolyn McCann congratulating the NSW Government.

“[We] welcome a sensible conversation around transitioning to a fairer property-based tax as opposed to insurance customers funding services that we all use,” she said.

Sensible conversations are welcome indeed.