Labor poised to alter stage-three tax cuts for cost of living relief as bitter stoush with Coaltion looms

Photograph: Diego Fedele/AAP

The prime minister, Anthony Albanese, is poised to amend the controversial stage-three tax cuts after a crucial caucus meeting in Canberra on Wednesday in a move designed to offer “substantial” cost of living relief to low and middle income earners.

However, any tinkering of the agreed-to stage-three package sets the stage for a bitter political brawl with the opposition to claim a broken election promise.

Ahead of a cabinet meeting on Tuesday Albanese, promised that “everyone will be getting a tax cut”, comments that MPs noted did not rule out making the stage-three tax cuts less generous for some.

Labor’s caucus will meet in Canberra on Wednesday to give input into the economic plan, before Albanese’s address to the National Press Club on Thursday.

Media reports late Tuesday claimed cabinet had agreed to the changes.

The Australian Financial Review reported the changes would see the 37% tax rate maintained, which is now slated to be abolished under the legislated plan, but that it would be applied from a higher income level than current tax rates. This would mean some higher income earners would receive a smaller tax cut than legislated. The AFR also reported the plan would include increasing the Low-Income Tax Offset for those earning up to $50,000. The Sydney Morning Herald was reporting Albanese had secured cabinet agreement to offer bigger tax cuts to workers who earn up to about $150,000 a year.

A spokesperson for the prime minister would not confirm or deny these claims.

Meanwhile, business groups issued a last-ditch warning ahead of the meeting that modifying the stage three tax cuts – which flatten the tax brackets for those earning between $45,000 to $200,000 – would “undeniably dent the government’s credibility and damage the prospect” of future tax reform.

But government sources indicated Labor could deflect accusations of a broken promise by guaranteeing the full value of the tax cuts but with a fairer distribution, offering “substantial” cost of living relief, particularly to middle-income earners.

The government had rejected a report that it will lift the tax-free threshold while retaining the highest tax bracket at $180,000 instead of lifting it to $200,000 but has not ruled out other changes.

“I support tax cuts and everyone will be getting a tax cut,” Albanese said on Tuesday.

“Middle Australia particularly is doing it really tough … people who have a mortgage. So we’re looking at ways in which we can provide assistance to them.”

Julian Hill, a Labor MP and convener of the left faction, said he “warmly welcomes” the prime minister’s commitment, and people in his community will be “delighted” to hear it.

“We’ll thrash out the best way to provide relief when the government meets [on Wednesday],” Hill said.

Some Labor MPs are concerned about backlash from aspirational middle income voters and the Coalition campaign about broken promises hurting in marginal seats, particularly in Western Australia.

But even some frontline MPs privately acknowledge although reforms will be weaponised, that it is a debate Labor must have to fund greater relief for those struggling to keep up with increased prices, particularly of rent and mortgages.

“Surely there is capacity for a sensible government to tweak the tax cuts appropriately,” one MP said. “There are a lot of people who need it more than income earners on politicians’ wages.”

The Australian National University’s associate professor Ben Phillips, a member of the government’s Economic Inclusion Advisory Committee, said that $2bn a year could be saved by keeping the top tax bracket at $180,000 and lifting the tax free threshold to $20,000.

But this would provide a worker just $380 a year income tax relief, and would be “poorly targeted” because 40% of households who don’t pay income tax would not receive it, while many middle and higher income earners would.

He called on the government to instead keep the 37-cent tax bracket, which currently applies for income above $120,000 but would be eliminated by the stage three cuts.

“To remove the equity issue they really should be doing a much bigger change than tinkering at the bottom or top.”

In a joint statement the Australian Industry Group, Australian Chamber of Commerce and Industry, Business Council of Australia and Minerals Council of Australia said the tax cuts – due to take effect in July – “have not only been legislated: they have won support at two general elections”.

“It is easily forgotten that the first and second stages of the 2018 reform package were skewed towards lower- and middle-income taxpayers and that the full package is much more balanced.”