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CANBERRA, Nov 30 AAP

November 30 2012, 2:07PM

An independent inquiry has called for an overhaul of the mining and petroleum taxes to remove incentive for states to increase their royalties.

The report by former state premiers Nick Greiner and John Brumby and tax expert Bruce Carter, released on Friday, found the federal 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 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".

The report suggested the link should be severed between the royalty allowance provided and state policies. Then state royalties on iron ore, coal and petroleum should be cut by around one-third.

And the commonwealth should then guarantee to increase payments to each state to offset the royalty revenue foregone.

"Most of the revenue to do this will come automatically through increased MRRT and PRRT collections," the report said.

"The commonwealth should consider tightening aspects of its resource taxes to ensure an approximately revenue neutral overall result is achieved."

After an independent assessment of the money flow, the funds should be shared between the federal and state governments "following a similar approach to that used for the National Competition Policy reforms".