THE next New South Wales Labor leader will be elected by both rank and file members and the caucus after the party's annual state conference voted to back the reform.
NSW general secretary Jamie Clements told the 880 delegates assembled at the conference in Sydney the reform would be similar to those adopted at the federal level.
He said the rank and file vote will be given equal weight with the caucus ballot.
"You will be asked to support the most significant reform yet passed by NSW Labor," he said.
"For 75 years the decision about who leads our parliamentary party has been in the hands of the Parliamentary Caucus.
"You will be asked to change that."
Federal Opposition Leader Bill Shorten took the opportunity at the conference to attack the Abbott Government's budget to the party faithful.
He said Labor would continue to fight for Australians.
"This arrogant, cigar-chomping Treasurer's hopeless biography reveals that it took Tony Abbott to block him from deeper, harder cuts," he said.
"Seriously. If it is up to Tony Abbott to tell you that you have gone too far, you have really gone too far."
Mr Shorten said Labor had a very clear direction moving forward and urged members to throw their support behind the party.
"Labor has to rebuild as a party of members, not factions," he said.
"A bigger, bolder, broader party - 100,000 strong.
"A party where your membership card entitles you to genuine participation in our party, in the choice of our leaders, our candidates, our policies and our dreams of Australia."
Earlier, the conference backed a motion calling for a future Labor government to recognise a Palestinian state.
Former NSW Premier Bob Carr said the motion was about reinvigorating the two-state solution and largely adopted the former federal Labor government's position on Palestine.
Key aspects of the motion included voting to enhance Palestinian status in the United Nations, describing the West Bank as occupied and opposing illegal Israeli settlements.