An independent inquiry has called for an overhaul of the mining tax to remove incentives for states to increase their royalties, but supports the current way GST revenue is carved up among the states and territories.
The GST distribution review by former premiers Nick Greiner and John Brumby and tax expert Bruce Carter was released on Friday by Treasurer Wayne Swan.
The review was commissioned after complaints from Western Australia that the way GST revenue is carved up - the so-called horizontal fiscal equalisation - is unfair.
"Following its wide consultations, the panel's recommendations have reaffirmed its clear support for this longstanding principle to ensure Australians receive broadly equal services wherever they live in our country," Mr Swan said in a statement.
The review also found the government's decision to fully credit state royalties under the minerals resource rent tax (MRRT) and petroleum resource rent tax (PRRT) had created an incentive for states to boost these royalties, which was neither "desirable nor sustainable".
As an interim measure, the government could announce it would direct the Commonwealth Grants Commission to "assess any revenue raised from royalty increases on MRRT and PRRT commodities after a particular date on an actual per capita basis".
"This would reduce, but not remove, individual states' incentives to increase their mineral royalties, while also potentially providing a windfall to other states," the report said.
However, the trio called on Prime Minister Julia Gillard to engage in talks with the states to reach an agreement on resource taxes.
If the talks failed, the government should amend the design of the MRRT and PRRT to "remove the open-ended crediting of all royalties imposed by the states".
Mr Swan said he would be discussing the recommendations with state and territory treasurers at a meeting on December 17 before announcing the government's position.
Independent MP Rob Oakeshott says it's crucial the treasurers come together and talk about this issue in a sensible way.
"Put the politics in the back pocket and think of the nation's interest as far as our standing of living for the future," Mr Oakeshott told reporters in Canberra.
But the federal opposition said the review findings clearly showed the government was "incapable of negotiating" on behalf of the Australian people.
"The coalition plans on fixing the mining tax and the impasse it has created with the states by abolishing it," shadow treasurer Joe Hockey and assistant treasurer Mathias Cormann said in a statement.
Mr Oakeshott said the substance of the report vindicated everything many people had been saying about tax reform all year.
"It's the latest example of where the two major parties must now take tax reform seriously," Mr Oakeshott said.
He said earlier this week the Organisation for Economic Cooperation and Development had told Australia it must tackle taxation reform or see the start of material damage to the economy, and Treasury secretary Martin Parkinson had made similar remarks about superannuation reform.
The Tax Institute's senior tax counsel, Robert Jeremenko, said the commonwealth and states and territories must act together to achieve a national plan for the direction of tax reform.
"The panel's report is yet another well reasoned plea for the federal government to allow for a debate on the rate and base of the GST," Mr Jeremenko said in a statement.