Prime Minister Malcolm Turnbull today confirmed the proposal, saying the federal government had offered to reduce its income tax by an agreed percentage and allow state governments to levy an income tax equal to that amount.

“There would be no increase in income tax from a taxpayers’ point of view – he or she would pay the same amount of income tax, but the states would be raising the money themselves,” Turnbull told reporters in Sydney.

The PM said the biggest change to income tax powers since World War II is in recognition that there is a failure at the heart of the federation.

“It is the failure of the states to have access to the revenue sources,” he said.

But Weatherill – who has been spruiking his own solution to the funding fracas, which would see the states receive a slice of Commonwealth-collected income tax revenue – said Turnbull had not raised the idea directly with him, and warned it would create “a race to the bottom” instead of raising the required funds to play for essential services.

“I just can’t imagine any state taking advantage of it, because it would put them at a competitive disadvantage,” he told reporters.

“If anything, the pressure’s all to the opposite, for the states have a race to the bottom to make sure we have the most competitive taxation regime [so] I don’t think it would solve the problem.”

He warned the scheme would be a logistical nightmare, arguing: “Imagine the confusion as you try to administer differential rates of taxation around the nation.”

“We don’t support differential rates of taxation, but what we do support is the states getting a share of income tax… that would give us access to a growth tax that more approximates the rate of growth in healthcare costs,” he said.

He did, however, laud the fact there’s a discussion about finding a revenue source that can fund cuts to health and education” ahead of Friday’s COAG meeting.

“That’s a positive,” he said.

But he doubted whether “the Commonwealth would seriously advance that proposal”.

“I hope its not a distraction… what we want to see [is] a concrete proposal to address an obvious need,” he said.

Amid speculation of a funding offer to offset some of the hotly-debated shortfalls in health and education revenue, Weatherill has poured cold water on the suggestion his Government should reinstate its remission on the contentious Emergency Services Levy.

The SA Government has long argued it would reinstate the remission “the moment the Commonwealth reinstated its cuts to health and education”.

But the Premier rejected even partial relief to homeowners, saying “even after you take into account the ESL changes we’re still over the next four years about $550 million short”.

“So there’s no windfall to be handed back to people – we still need every dollar – and plus some – to be able to meet the cut the Commonwealth put in,” he told FIVEaa.

“It’s not like it’s spare money…if you’re suggesting some of it be handed back, you’re really saying you’re prepared to cut healthcare services, and we’re not prepared to cop that.”

Turnbull said that states that needed more funding for a service such as health would go to their parliament and raise the money, then go to the people and persuade them of the merits of it.

“This is a real opportunity to make the federation work,” he said.

He said the proposal had been put forward to premiers, chief ministers and their senior officials ahead of Friday’s Council of Australian Governments meeting.

Earlier, Federal minister Darren Chester said allowing states to raise income tax was an economic reform well worth pursuing but Federal Labor insists it’s a mess.

Chester said clearer lines of responsibility between states and the commonwealth are needed to end blame shifting, frustration and duplication of services.

States and territories need to be allowed to meet their needs with their own resources, taking more responsibility for the decisions they make around health and education.

It will stop the “endless blame shifting” that goes on and the frustration that comes with the existing system, where the federal government collects money, but the states spend it.

But Labor frontbencher Ed Husic says it’ll create a double taxation mess.

“Tony Abbott even said he did not want to touch double taxation and go back to the 1940s.”

Turnbull has confirmed a proposal to maintain activity-based funding and a national efficient price – the hospital funding model established under the Labor government that former prime minister Tony Abbott planned to replace from July 2017.

Reports suggest the proposal is worth $5 billion over four years but Health Minister Sussan Ley today insisted she didn’t know what the amount was.

She denied the government’s backflip on hospital funding was an election tactic, insisting it had been an evolution of policy to achieve reform.

“This is not about just getting through the election, this is about real reform,” Ley told the ABC.

Businessman Tony Shepherd, who led the Abbott government’s commission of audit, said allowing states to set income tax rates was a great reform that would reward states that grow quickly and give them more responsibility and authority when it comes to service delivery.

It would also stop the states from the yearly “demeaning, cap-in-hand” approach to the commonwealth for more money and allow them to adjust their income tax rate to raise funds.

He rejected suggestions it would create an imbalance between the states when it comes to tax rates or service delivery, insisting voters could be trusted to keep their governments in line.

“If you reduce the level of services too much – you’ll get thrown out,” he told ABC radio.

“If you increase your taxes too much – you’ll get thrown out.”

Meanwhile, the Victorian government says it will take High Court action against the federal government in a last-ditch effort to stop $73 million funding cuts to the state’s health system.

-with AAP