Anthony Albanese has rejected claims some eastern states are being deliberately short-changed after NSW and Queensland's share of GST revenue was slashed.
The distribution of GST revenue is an independent process designed to be free of political interference, the prime minister says.
The Commonwealth Grants Commission on Tuesday announced the recommended 2024/25 distribution, with the national GST take estimated to grow to $89 billion from about $85 billion in 2023/24.
But NSW and Queensland's share of the GST pool will fall because rising coal royalties have put them in a stronger budget position to provide services relative to other states, according to the commission's official advice.
All other states were estimated to receive more in total GST and so-called "no-worse-off payments" than they received in 2023/24.
Victoria is set to receive a $3.7 billion increase in its GST distribution because it is less able to raise royalties from mining.
Victorian Premier Jacinta Allan said the extra funding would give the state budget certainty and stability as it stares down a forecast net debt of $177.8 billion by mid-2027.
She admitted to frustration over the annual debate among states about the carve-up.
"Up until this year, Victoria has never ever received back every dollar that it has contributed," she said at a Committee for Economic Development of Australia event on Thursday.
"In the last financial year, hundreds of millions of Victorian funds have gone to Queensland and South Australia - that's how the system works."
NSW Treasurer Daniel Mookhey called the distribution "absurd" and said the nation's most populous state would be $1.65 billion worse off.
The figure is based on the state's GST payments decreasing by $310 million in the coming financial year, contradicting previously forecast projections that NSW would receive a higher share.
"We're not expecting anybody else to bail us out, but we're making the point that a system like this will continue to see NSW transfer a lot of its wealth to other states," Mr Mookhey told Sky News on Thursday.
"We accept our responsibility as the biggest and best economy in the nation, but we need fairness, particularly because our population is growing faster than elsewhere."
Premier Chris Minns also questioned whether the changes to the GST carve-up were "planned or accidental" and singled WA and Victoria out for pointed criticism.
"A lot of that money is going to be sent to Western Australia, which is chock full of cash from the mining boom, or down to Victoria, which is now a welfare state receiving a whole bunch of money from the pockets of NSW families," he told Sky News.
Queensland Treasurer Cameron Dick flagged the redistribution was set to rip $380 million out of his state's coffers next financial year, making for a "tight" budget for the Miles government ahead of October's election.
The prime minister said state governments knew the Commonwealth Grants Commission was an independent agency that calculated the distributions based on a "long-standing and complex methodology".
The commission "operates at arm's length from the government," Mr Albanese told reporters on Thursday.
"It's not something that my government has direct involvement in or any other government.
"Every year there is a debate about this, every year ... this is not anything new.
"What I don't think any state would want, is for the federal government to be able to make decisions on a political basis."
He said the government understood the pressures on state budgets and had committed more funding to hospitals and housing.
Federal Treasurer Jim Chalmers will meet virtually with state treasurers on Friday.
