The Productivity Commission has given the federal government several options to climb down from its GST deal. (ABC News: Adam Kennedy)
The Productivity Commission has published its interim report into the WA GST deal, calling it a "costly mistake" and recommending the government scrap it.
It has also presented alternative options for addressing WA concerns that the GST carve-up formula unfairly penalises its strong economy.
The final report will be published in December.
The deal struck with Western Australia eight years ago to boost its GST share is costly and inequitable and must be changed, a landmark review has found.
In an interim report that has already inflamed bitter interstate tensions over the tax carve-up, the Productivity Commission has told the federal government that if it does not want to scrap the deal entirely, it should find a less damaging way to appease WA.
The deal struck by then-treasurer Scott Morrison ensures WA gets a bigger slice of GST revenue every year than it would under the national formula, which is meant to give more money per person to states with the highest need and lowest financial means.
The commission found this had cost the federal budget $23 billion in its first six years, $22 billion of which had flowed to WA.
It warned this cost would grow even larger in future, and that the deal was also worsening inequality between states.
Prime Minister Anthony Albanese, whose government has endorsed and extended the deal to at least 2029, said today that WA would "get [its] fair share" of GST but signalled he would wait for the final report in December to comment on specifics.
While the WA government has reacted negatively to the report, other states and territories have seized on the report as vindication of their hostility to the deal.
New South Wales Treasurer Daniel Mookhey said the report was historic and the deal had been "an expensive failure".
"An Australian living in Cabramatta in Sydney, Carlton in Victoria, Coober Pedy in South Australia or Cairns in Queensland is worthy of the same supports from their governments as an Australian living in Cottesloe in Western Australia," he said.
Daniel Mookhey hailed the report as historic. (ABC News: Floss Adams)
Queensland Treasurer David Janetzki said the present system was unfair and led to "perverse outcomes".