Competitive federalism is a conservative ideology which holds that the public sector should behave just like the private sector. The idea is that, if states are made responsible for their own tax revenue and spending, they will compete to provide the highest quality services at the lowest prices.

Well, that's the theory. The reality is a race to the bottom that benefits tax dodgers, punishes taxpayers and disadvantages the general population.

Michael West's column on foreign bookmakers avoiding tax earlier this week contains a prime example of the "jurisdiction shopping" that is an inevitable consequence of competitive federalism: "There is increasing concern in government and racing-industry circles over the small contribution made by corporate bookmakers in taxes and levies in Australia," he wrote. "... a motion by National Party senator for Victoria, Bridget McKenzie, was carried at last weekend's party conference for online gambling to be regulated by the Commonwealth.

"Such a move would thwart the big corporate bookmakers – Ladbrokes, Paddy Power and William Hill – from 'jurisdiction shopping' to find the best odds on tax and licensing.

"Most corporate bookies are licensed in the Northern Territory where, on the most recent figures available, the entire sector paid just $2.3 million tax on turnover of $5.7 billion and profit of $469 million."

Good luck with that, Senator McKenzie. The Commonwealth taking over state responsibilities is precisely the opposite of what your coalition colleagues want for this smallish nation.

I presume National Commission of Audit chairman, Tony Shepherd, will be on the phone to Treasurer Hockey, appalled at the idea of federal regulation curtailing the competitive instincts of our states and territories that otherwise will deliver lower tax rates.

In many a conservative business heart, there still glows a shrine to Joh Bjelke-Petersen – a champion of state rights and competitive federalism. Grey-beards might remember that Joh scrapped death duties in Queensland, part of his boast that Queensland was the nation's lowest taxing state.

He was right. And Queenslanders got what they paid for – a low standard of services, particularly in education.

With tax minimisers deciding Queensland was a good place to die, the other states soon enough matched the Queensland offer. Australian states lost a fine revenue source, becoming more reliant on such inefficient and inequitable taxes as real estate stamp duty and levies on insurance policies.

That's competitive federalism for you.

There's more of it in the federal Liberal Party pipeline courtesy of the budget move to scrap $80 billion of promised state health and education funding. They're supposed to find the extra revenue themselves and/or cut spending.

That reduction is from the previous government's Gonski projections – and never mind the NSW Education Department study that found the state is facing a $7 billion shortfall and reduced education standards if it doesn't double its school spending to handle increased population.

Our demographics mean all states are, to a greater or lesser degree, heading towards a fiscal brick wall if they keep delivering the standard of services the public wants. A popular perception of the $80 billion hit is that it's designed to galvanise the states into demanding an increase in the breadth and depth of the GST.

(You can almost hear it now: "Sure, I promised no change in GST, but it's a state tax and the states are demanding it, so it's not about me, it's them.")

As part of a broad and equitable tax reform package that included appropriate compensation and a crackdown on the multi-national tax avoiders and jurisdiction shoppers, extending the GST could be a reasonable thing. But such uniform change is not the goal of competitive federalism which would like to see a proliferation of competing state tax rates.

The federalism white paper has been something of a sleeper with attention focused on the plethora of other papers, inquiries and royal commissions, but while it's quietly ticking now, it could be the most dangerous of the conservative policy bombs.

At a tax forum on Thursday, former NSW Premier Nick Greiner criticised the way the Federalism and tax white papers are being formulated - they're solely the work of the federal bureaucracy.

Federalism is being kept under the watchful eye of the Prime Minister's own department – the office that has consistently produced doctrinaire choices from guiding the Renewal Energy Target inquiry to selecting the potential candidates for the ABC and SBS boards.

Greiner's specific beef was that the reform needed to be owned by all the governments. If the states are only invited to comment after the event, the chance of reform getting anywhere is low.

If the Commonwealth is prepared to ruthlessly use its purse strings' power, what the states want might be irrelevant.

A quick check of our demographic outlook demonstrates what a disaster competitive federalism would be for the laggards, South Australia and Tasmania. The nation has a challenge as our dependency ratio (the percentage of workers to non-workers) falls, but for South Australia and Tasmania, the ratio plummets.

The relatively poor states would either have to raise tax rates, scaring away investment and people, or further slash services – scaring away investment and people. The United States has competitive federalism, with the result that the poor states generally stay poor and keep their people poor.

It sounds nice for a federal government to promise red tape cutting, to be handing power back to states from evil Canberra, to abolish a level of bureaucracy. In several costly areas, that means trimming one national level of bureaucracy while preserving the much greater duplication inherent in seven or eight state and territory administrations.

For the ideologues, for the jurisdiction shoppers, for the influence peddlers, that's a wonderful thing, ripe with opportunities. For the nation, it's potentially the most dangerous aspect of the Abbott/Hockey government.

While waving our parochial flags, we tend to lose sight of 23.6 million people making one decent-sized state, perhaps with a dozen or so regional administrative hubs. The tax dodgers would hate it.

Michael Pascoe is a BusinessDay contributing editor.