Generally a good article, but I can’t help thinking the States are at least partly to blame for their predicament. The power without responsibility that comes with spending taxes raised by another layer of government is powerfully attractive - remember Sir Joh's comment that the only good tax is a Commonwealth tax. The lure of a GST "growth tax" was just as powerful - the states signed up for this voluntarily too. And they showed no interest when Labor sounded out returning income tax powers to the states in the 1980s.

The danger is that we’ll lose our federal system by degrees through neglect and indifference. There are good arguments for a Federal system and also good arguments to ditch Federalism in favour of a unitary centralised system. Rather than having the arguments and determining our long-term future in a deliberate and informed way, however, we’re moving toward bureaucratic centralism by default.

If that happens, incompetent and short-sighted state administrations will bear almost as much responsibility as rapacious and power-hungry Canberra.

This article substantiates what I have long suspected - that the States act as mere proxies for the implementation of much of the Federal government's agenda and ideology. This is evident in competition policy, health and nursing homes, education and numerous infra-structure projects.
I agree with Rhian that the States are partly to blame for their predicament and have been willing participants in the demise of their sovereignty and relevence. But this has backfired in the case of Queensland's health policies, and probably in many other instances (like transport, power and water privatising) as well.
The subservience to Canberra affects our freedom and democracy.
Freedom of people in any society depends upon the extent to which power, in all its forms, is dispersed through out that society.
We cannot count on State governments to act independently from ideologically driven policies of the federal government such as the 'anti-terror' campaigns which infringe our liberties for specious justification. Hence we need our State governments to re-assert their financial and political independence.