The panel, headed by businesswoman Kerry Schott, has also indicated it will recommend an extension to the time in which prosecutions can be commenced and more regular disclosure of political donations.

The panel was commissioned by Mr Baird to explore the prospect of fully taxpayer-funded elections following allegations at the Independent Commission Against Corruption about Liberal Party rorting of donations laws before the 2011 state election.

The panel's full report is not due until December, but an interim report was published on Thursday, just days before the government is expected to announce how it will seek to overhaul funding laws in time for next year's state election.

The report notes that while there are "very tight regulations around electoral funding" in NSW, there was "insufficient compliance and enforcement incentives".

"The panel believes there should be more serious offences and penalties for flouting election funding laws, including penalties sufficient to trigger disqualification of Members of Parliament," it says.

It says Canadian law "seems to be a good model" for NSW.

"A maximum penalty of 10 years' imprisonment would send a strong message about the seriousness of such an offence and would be sufficient to trigger the disqualification provisions under the Constitution Act 1902 (NSW)," the report states.

The Constitution Act says that an MP convicted of a crime punishable by imprisonment for life or a term of five years or more would have their seat declared vacant.

Additionally, the current three-year statute of limitations within which prosecutions can be launched in relation to breaches of election funding laws should be extended to 10 years - a suggestion that has been made by the NSW Greens.

The interim report states that under the current political donation disclosure rules, the public is denied access to details of how much has been donated, who has made donations and who has received them, until  months after an election.

This lack of transparency "fuels public mistrust and cynicism about the influence of donations on electoral outcomes and government decisions".

Accordingly the panel "strongly supports" online, real-time disclosure of political donations and suggests that this should replace the current paper-based regime as soon as possible.

As an interim measure, recipients of donations - but not the donors themselves - could be required to lodge a "pre-election disclosure report covering the period from July 1, 2014, to the date that is six weeks before the election".

Recipients would be required to declare receipt of donations within seven days and the Election Funding Authority would publish them within a further seven days.

The panel feels this would "go some way to improving transparency about the sources and amounts of donations that fund the 2015 election campaigns".

The panel also recommends mandatory education programs for candidates and MPs on ethical conduct and compliance with funding laws.