The Insurance Council of Australia (ICA) has called for GST reform after a report found current distribution arrangements may discourage the phasing out of insurance taxes.

The Productivity Commission has published a draft report on its inquiry into Australia’s system of horizontal fiscal equalisation (HFE), which underpins the distribution of GST revenue to the states and territories.

The report says states and territories considering implementing efficient tax policies may be deterred by the effects of tax reform on GST redistribution under the present HFE system.

In a submission to the commission, ICA says it is “very concerned” the system may operate as “a material disincentive” to phasing out inefficient general insurance taxes.

“As the commission would appreciate, general insurance taxes, a form of transaction tax, can have a higher distortionary effect than other taxes; they significantly increase the cost of general insurance premiums for households and businesses and contribute to the incidence of non-insurance and underinsurance in Australian communities,” ICA says.

It says the removal of insurance taxes has been advocated by major national inquiries, such as the Henry tax review and the commission’s 2014 Inquiry into Natural Disaster Funding Arrangements.

“In this context, it is very concerning that the present system of HFE may be deterring Australian governments to adopt the recommendations of those important inquiries.

“[Since] the inquiry is considering whether the present system of HFE is in the best interests of national productivity, or whether there may be preferable alternatives, ICA strongly encourages the commission to recommend alternative GST distribution options.”