Colin Barnett, Premier of resource-rich Western Australia told CNBC on Friday that the federal government's mining tax is unfair and unconstitutional.
"What is often forgotten and not known throughout Asia is that under the Australian constitution the minerals are owned through the state government, not the central government," said Barnett.
The premier told CNBC that the Minerals Resource Rent Tax was discriminatory as it singles out iron ore and coal and since China is a huge importer of these commodities, it was in fact a tax on China.
"It's seen as quite offensive to China, because that's where the major market is," he said.
The MRRT was introduced last year, and the Senate is expected to pass it next week, after which it will come into effect in July. The tax will be levied on 30 percent of profits from mining iron ore and coal.
According to Barnett 65 percent of revenues from the new levy, will come from Western Australia.
He added that there was a need to reorient the Western Australian economy to make up for the revenue loss owing to the mining tax. He said he was looking to tap investments from Asia and had set up a trade office in Singapore on Thursday for this purpose.
"We have A$120 billion (US$126.4 billion) worth of projects under construction and another $160 billion in the pipeline. So I cannot let the West Australia economy stand still," he said.
The Premier also plans to set up a sovereign wealth fund from the state's mining royalties.
"I would hope we would ultimately get to around 2.5 per cent (of mining royalties) which would be around $200 million a year going into the fund. But it will start slowly and build up and we would protect or preserve that capital for probably at least 20 years," said Barnett.