Economic History
At the time of Federation, New South Wales was a free trading state (as opposed to protectionist) with a broad revenue base including income tax. The state earned more revenue than it needed to run its services. This situation was reversed during World War 2 when the Commonwealth took responsibility for the collection of income tax. Following the war, the states attempted to re-enter the income tax field but were rebuffed by High Court rulings (Income Tax decisions).
The loss of income tax collection meant NSW became totally dependent on Federal Government funding in order to deliver the services it was constitutionally entitled to do (e.g. health, primary/secondary education, transport). It also forced a greater reliance on indirect taxations such as excise duty on cigarettes, alcohol, and gambling. However, this was challenged by an individual who argued the constitution forbade the states from collecting taxation in this way. The High Court upheld the complaint and the Commonwealth was forced to collect these excises on behalf of the states. Since NSW expends far more than it can ever earn, it has little choice but to comply with Commonwealth demands.
Read more about this topic: Economy Of New South Wales
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