Experts slam '1940s' tax proposal

A new way of funding schools and hospitals risks tearing the country apart rather than bringing the nation together.

Tax experts have slammed Prime Minister Malcolm Turnbull's proposal to allow states to levy income tax as a way of funding state services, taking the tax system back to the 1940s.

CPA Australia boss Alex Malley was stunned by the proposal, saying it will create enormous dysfunction in Australia.

He said it will make people think more about their state rather the country as a whole, like in the US and Canada, make switching between states more likely, while doing nothing to move the nation forward.

"We are struggling to find how this is a sustainable model for the future," he told AAP on Wednesday.

Mr Turnbull confirmed he has put forward the idea to premiers and first ministers that would see the federal government reduce its income tax by an agreed percentage and allow state governments to levy an income tax equal to that amount.

The Tax Institute described it as a "retrograde and flawed" concept.

The institute's president Arthur Athanasiou said he has been continually urging governments to shift away from income and inefficient taxes for the bulk of revenues.

"Whilst the proposal may present some theoretical advantage, government time and resources would be far better spent on reforming the present tax system," he said in statement.

Mr Turnbull said there would be no increase in income tax from a taxpayers' point of view, but Mr Malley disagrees, saying every state has a different set of circumstances, cost structures and problems.

"It will create more red tape, more taxes, everything this government says it doesn't stand for," Mr Malley said.

Constitutional expert George Williams said the states would be able to impose their own differential tax rates, something the constitution does not allow the commonwealth to dictate.

There would be no need for a collective agreement - meaning individual states could go it alone.

"That might complicate any settlement reached as to grant payments and the like," he told AAP.

Market Economics managing director Stephen Koukoulas said it will allow the states to cover the costs of heavily in-demand services and make them more responsible for managing their own books.

However, the tax system is already complicated by a range of provisions for tax deductions and exemptions from the GST.

"Having the six states and two territories imposing their own tax is just one horrendous level of complexity," he told Sky News.