The carve-up of revenue from the goods and services tax has been a sticking point between states ever since the Morrison government gave Western Australia a special deal in 2018.
The mining powerhouse gets much more GST income than it would under other ways of dividing the money. Other states claim the arrangement is unfair and now the federal Productivity Commission has been brought in.
Treasurer Jim Chalmers said the commission's inquiry will look at whether the current policy is good value.
"This work will ensure we have the best possible system to pay for the schools, hospitals and essential services Australians need and deserve," he said in a statement.
The commission has been asked to investigate whether the current rules are financially sustainable for state and commonwealth governments, and whether alternatives would deliver a better result.
It will deliver its final report by the end of 2026, with an interim report due by late August.
Under the 2018 reforms, all states are guaranteed 75 cents from every dollar of GST.Â
WA was the only jurisdiction to benefit from the changes, and has since received $24 billion more than it would have otherwise.
Other states were given a guarantee they would not be left worse-off, costing the federal government tens of billions of dollars more.
WA's government is now setting up a task force to defend its GST share, dubbed the "fairness fighter" team.
State Treasurer Rita Saffioti said she would push hard to keep the existing arrangements, claiming the WA economy helped subsidised the rest of the nation.
"Without that (GST) deal, Western Australia would not be able to afford the economic infrastructure or policies that continue to drive our economy and also drive new projects," she told reporters on Wednesday.
"We know there are some economic commentators over east who want to pull down this deal," she said.
NSW Treasurer Daniel Mookhey has long complained about the Morrison government's changes, describing the current arrangements as a "weird system that no one can understand, let alone explain, much less support".
"We will argue strongly that the entire federation will be better off if we can fix a busted system," he said in a statement.
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