States that fail to permit coal seam gas mining would be penalised under a fresh proposal from the Grants Commission to change the method of distributing goods and services tax revenue.
The adjustment would hurt Victoria, New South Wales, Western Australia, Tasmania and the Northern Territory, each of whom has complete or partial bans on coal seam gas exploration or development or has a moratorium on fracking.
The proposal, in a position paper prepared for the commission's review of the principles behind the GST distribution, is to treat royalties from coal seam gas in the same way as taxes on gambling. It would apply from 2020.
States that choose not to allow poker machines and collect poker machine revenue are regarded as having voluntarily forgone income and not compensated for earning less than the states that do.
The commission wants to consider whether "similar considerations arise in certain potential mineral and energy developments".
"In these circumstances, the commission could take the view that all states that have coal seam gas have the opportunity to exploit it and whether they do or not solely reflects policy choice," the position paper says.
The change would also apply to uranium. The commission says until now it hasn't needed to consider the question because neither coal seam gas nor uranium royalties have been big enough "to result in a material assessment".
Victoria imposed a moratorium on coal seam gas exploration in 2012. NSW banned all activity within 2 kilometres of residential areas in 2013. The Victorian decision was taken by the Coalition government of Ted Baillieu. The NSW decision was taken by the Coalition government of Barry O'Farrell.
The Baird government in NSW temporarily froze new exploration in 2015 while implementing a report designed to ensure the safety of coal seam gas mining by the NSW chief scientist Mary O'Kane.
Prime Minister Malcolm Turnbull attacked Victoria's position on Thursday, saying the only obstacle to getting Victorian gas out of the ground was the Labor government.
"The idea that Victorians are going to have to pay the cost of shipping gas from the Middle East or from Louisiana or from north-west Australia because they have a government that is not prepared to access the gas resources in Victoria is extraordinary," he said.
"It is a shocking indictment of Daniel Andrews and his government. There is plenty of gas in Victoria, onshore gas in Victoria."
Victorian Treasurer Tim Pallas ridiculed the Grants Commission position paper on Friday, saying Victoria would not be "held to ransom or bullied by an inept government that blames everyone else but itself for its own incompetence".
"If Scott Morrison wants to know how to grow an economy and manage debt he should follow Victoria's lead."
NSW Treasurer Dominic Perrottet??? said unlike other states, NSW did not have a ban on coal seam gas. "We believe states should make the most of what they have. When it comes to GST distribution, NSW is sick of subsidising inefficient and non-reforming states," he said.
A proposal by Santos to mine coal seam gas in the Pilliga Forest on the North West Plains is before the NSW Planning Assessment Commission.
The Andrews government said this week that it is "proud" of its permanent ban on fracking in Victoria, which became law in March.
The ban is supported by the Coalition, but the political agreement does not extend to the Andrews government's moratorium on conventional onshore exploration. The moratorium is due to expire in June 2020. In the lead-up, the government has asked scientist Amanda Caples to inquire into the "risks, benefits and impacts of onshore conventional gas".