When on Tuesday the Commonwealth Grants Commission released its annual Report on GST Revenue Sharing Relativities, few would have noticed.

But those familiar with federal relations know the report is a political grenade.

It's the federal government's first pass at how it will carve up the GST pie between the states and territories.

The method for divvying up the money is notoriously murky and produces fresh 'winners' and 'losers' each year. Treasurers of the 'loser' jurisdictions can be relied upon to make their displeasure known.

Both the murkiness and the misgivings have been amplified since 2018, when then-treasurer Scott Morrison, in need of a political fix, played with the formula to give more money to Western Australia.

That has seen the state, which is Australia's richest in per person terms, get billions more in GST year after year — this year, an extra $6.2 billion.

On the other hand, it was the turn of NSW and Queensland to feel aggrieved, after both states went backwards. NSW Treasurer Daniel Mookhey declared his state had been "robbed".

How does the federal government decide who gets what, and are the states right to feel dudded?

Giving States Tax

Money raised by the Goods and Services Tax (GST) has been given to the states and territories since the tax was introduced by the Howard government in July 2000.

But the idea of the federal government giving large sums of money to the states and territories is even older — at least as old as 1933, when the Commonwealth Grants Commission was set up to oversee transfers.

The reason is simple: states have lots of spending responsibilities, but limited capacity to raise money on their own.

States operate schools, hospitals, courts and other frontline services. They provide housing and deliver public infrastructure.

But they have few tax levers to pull. Most of their money comes from property taxes, payroll taxes and mining royalties, none of which typically yield enough money to cover all their responsibilities.

That's where the federal government steps in. This year, it will pay the states $180 billion in total.

About half of that ($87 billion) is set aside for specific purposes, mostly for schools, where money is tied to student numbers, hospitals, where it is tied to patient numbers, and infrastructure, where it is tied to specific projects.

The remaining $93 billion is GST, which states can use as they see fit.

The GST formula

In theory, the federal government splits up the GST money on the basis of need.

The idea is the money should ensure each state and territory is able to provide its residents with a comparable level of services.

As a principle, it might sound straightforward, but it's not the only way it could be done.

For example, the GST money could be split up according to where it was raised — so GST from goods purchased in Victoria go to Victorians, and so on.

But that would see the richest states able to deliver the best services. As the nationwide government, the federal government has preferred to see its money deliver nationwide consistency.

The Commonwealth Grants Commission uses a formula to divide the 'pool' of GST money according to this principle.

It assesses the level of 'need' in each state and territory, based on the characteristics of its population. And it also assess the capacity of each state and territory to raise its own money.

These varying levels of need are then pitted against one another. Each state gets a 'relativity' score, which informs how much they get per person.

A score of 1 would suggest a state has an average level of need. A higher score suggests higher needs, and a lower score suggests lower needs.

Here are the scores for each jurisdiction for the latest year, 2024-25:

· WA 0.12

· NSW 0.87

· Queensland 0.95

· Victoria 0.97

· ACT 1.20

· SA 1.40

· Tasmania 1.83

· NT 5.07

In large part, these numbers reflect how 'well off' a jurisdiction is. The Northern Territory has the highest level of population need and the lowest revenue-raising ability. Western Australia has substantial revenue-raising capacity, in large part because of its mineral wealth.

But the presence of large disparities has put political pressure on the principle of 'need'. Successive Western Australian leaders have complained the state is being short-changed for its success and that it should be able to keep more of 'its own' share of GST.

The Morrison change

It was on this basis that Scott Morrison added an asterisk to the needs-based approach in 2018.

Under the Morrison changes, from 2029-30 onwards, there will be a 'floor' that limits how low a jurisdiction's share can fall. No jurisdiction will be able to receive less than the two big states of Victoria and NSW.

That means if any state has a lower 'score' than both Victoria and NSW, they will be bumped up to the same score as whichever of the two is lower.

As this year's relativity scores suggest, this change will mainly benefit Western Australia.

Before 2029-30, there is a 'transition' period between the old rules and the new, where low relativity scores are artificially inflated. For 2023-24, the minimum was 0.70, and in 2024-25 it will be 0.75. In both cases, this has meant billions extra for WA.

Since jurisdictions are fighting over the same pool, what is good for WA is bad for everybody else. Over the long term, these changes will drag down the share received by the other states.

But in the short term, the Morrison plan budgeted for disgruntlement. Until 2029-30, states receive 'top-up payments' to ensure they are no worse off under the new arrangements than they would have been under the old.

NSW, Queensland and Victoria will each receive more than $1 billion in top-up payments in 2024-25. This money comes from the federal government's general revenue, not from GST.

The top-up payments are expected to cost the federal budget about $50 billion over the next decade.

The Albanese government has committed to leave the changes in place, with the prime minister going so far as to sign a local journalist's arm in Perth last month with the words 'no change to WA GST'.

Who won and who lost this year?

The top-up payments mean no state or territory is worse off because of WA's larger share. But there are still variations based on state circumstances. The biggest 'losers' this week were NSW, which lost $310 million in the latest determination, and Queensland, which lost $469 million.

In both cases, the main reason was because the price of black coal has risen sharply, delivering extra royalties to both states.

Victoria was the big winner, gaining an extra $3.7 billion. This was in part because the 2021 Census showed a larger population in that state than had been expected, and partly because Victoria benefited from NSW and Queensland coming down.