Australia is at risk of entrenching inequality if it does not take action to end an unfair tax carve-up, the ACT Treasurer says.
Chris Steel also believes the lose of a no-worse-off guarantee would strip the territory of 900 school teachers' salaries.
The Treasurer has called for the end of changes to the way Australia distributes revenue collected by the goods and services tax that were designed to insulate Western Australia and have been patched over by billions of dollars in no-worse-off payments.
"Every state and territory should absolutely be free to benefit from their natural resources, natural endowments, industry structures, economic strengths, and specific policy choices. Celebrating the success, innovation, and prosperity of our strongest states is essential for a growing national economy," Mr Steel wrote in an opinion piece for The Canberra Times.
"However, this regional success must not come at the expense of all other governments and the broader citizens of Australia. Nor does one state's extraordinary economic dominance justify permanent and preferential treatment within our national revenue distribution system.
"The same rules should apply to every state and territory to ensure that the Federation is maintained equally for all Australians."
Mr Steel said the ACT government supported returning to the pre-2018 method for dividing up the GST revenue between Australia's states and territories, ending a population share floor and temporary no-worse-off payments.
"There simply is no economic, fiscal, or practical rationale for providing a GST subsidy to the fiscally strongest state in our federation, with some of the best performing fiscal and economic indicators of any federated state in the world," he told the Productivity Commission this month.
"The fiscal contrast is significant. Western Australia's net financial liabilities as a share of their gross state product are the lowest of any Australian jurisdiction. At the same time, the ACT and other states face growing costs in health, disability services, infrastructure, and justice, with much less capacity to absorb revenue losses."
The Treasurer also told the commission the ACT faced a significant impact if the federal government ended the no-worse-off guarantee, which could result in a cut of 900 teachers in the territory.
"The current arrangements are not sustainable without the no worse off guarantee. The Commonwealth recognised this when it established and later extended compensation for all jurisdictions that would otherwise lose from the reforms in 2018," he said.
"The no-worse-off guarantee is material. Without it, jurisdictions face the unenviable decision of lowering services, raising additional revenue, or adding to debt."
Mr Steel said defending horizontal fiscal equalisation - the approach to ensuring all Australian states and territories can deliver the same level of services - was a defence of the country's core egalitarian values.
"To understand the true value of the principle of equalisation, we only need to look at the United States. The American federation operates under a fundamentally different model, one where the quality of a child's education, the standard of healthcare a family receives, and the basic safety nets available to citizens can vary wildly depending on the state in which they reside," he said.
Mr Steel and the ACT government are at odds with Prime Minister Anthony Albanese, who has said the GST deal would not change and it was "reasonable that WA get its fair share and that's what this represents".
The Productivity Commission last month recommended scrapping the 2018 GST arrangements and warned taxpayers were paying more than $6 billion a year to top up Western Australia's budget because of the "perverse" deal.
The Western Australian government rejected the commission's report and dismissed it as the work of "east coast clowns". Mr Steel told the commission he thought their work had been "factual, unbiased and pragmatic".
Productivity Commission chair Danielle Wood pushed back against Western Australia's Premier, Roger Cook, for the "name calling" and "schoolyard"-style criticism.
"It was a message that understandably was not going to be well-liked in Western Australia. We were not at all surprised at the strong position the government took. But we were surprised to be labelled a bunch of 'East Coast clowns' and 'dodgy, deceitful and ... dumb'. We should absolutely not let it become part of our culture," Ms Wood said this week.
The ACT government has long called for improvements to the way the capital's population is counted, with historical undercounting leaving the territory worse off when the GST revenue is distributed.
ACT Treasury has estimated the territory lost out on about $550 million between 2016-17 and 2022-23 because of the population undercount.
"Fixing this issue would have cost the Commonwealth a fraction, a seventh as much on a per capita basis as it has now spent on subsidising the residents of Australia's fiscally strongest state for investments and reforms the [Productivity Commission] has now found to be inconsistent with the intended purpose," Mr Steel said.
