Is the diesel rebate really a subsidy?

ScreenHunter_1148 Feb. 07 09.14

By Leith van Onselen

Earlier this month, I wrote an article questioning whether the Government should abolish the diesel fuel rebate, arguing that it seemed at odds for a Government that has taken a hard line on subsidies, corporate welfare and the end of the age of entitlement.

To recap, the diesel rebate, which allows eligible companies to claim a reduced rate of excise for fuels, costs the Budget around $6 billion annually, with the lion’s share of concessions – around $2.3 billion – going to the mining industry (see next chart).

ScreenHunter_1149 Feb. 07 09.25

Public support for the rebate is also appears to be low, with a recent opinion poll conducted by Essential finding that it had only 26% support among respondents – the lowest support out of the “subsidies” canvassed (see below graphic).

ScreenHunter_1296 Feb. 17 12.22

After writing the article, I received a number of emails arguing that the diesel rebate is not a subsidy, since business input costs – be they electricity, wages, or GST – are always deductible by companies for tax purposes. Moreover, the purpose of diesel excise is as a public road user-charge, however, diesel is used off road by a number of sectors – not just in mining, but also farming and construction – for both power generation and heavy machinery.

Indeed, the Henry Tax Review argued that the diesel rebate is not a subsidy for the use of fuel:

The system is intended to remove or reduce the incidence of fuel tax from business in puts, so that its incidence falls primarily on certain private consumption of fuel. This limits the impact on production decisions. For example, fuel tax credits mean that all electricity generation using liquid fuels is effectively free of fuel tax, in the same way that coal or natural gas inputs to electricity generation are untaxed. [pg 288]

Similar arguments have been made by the Australian Treasury (see here and here):

Fuel tax credits are not a subsidy for fuel use, but a mechanism to reduce or remove the incidence of excise or duty levied on the fuel used by business off road or in heavy on-road vehicles. The incidence of fuel tax is intended to fall on fuel use in private vehicles or for other private purposes and in light on-road vehicles used by business.

Similar to goods and services tax input tax credits, fuel tax credits remove taxation from business inputs. Their purpose is to avoid distorting business investment decisions and behaviour that would occur through taxing business inputs

Given the above, I was wrong to suggest that the diesel rebate is a “subsidy”. Taxing a business input (fuel) other than as a road user charge (or to address an explicit externality) goes against the principles of good tax policy.

A better (less distortionary) option for raising additional tax revenue would to be to implement some kind of resources rents tax. Unfortunately, we stuffed that up.

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Comments

  1. dumb_non_economist

    UE,

    The rebate goes back to the 50s, how much of the diesel tax is spent on roads, or is it like other taxes that start out with a specific purpose and over the long haul become just another tax. If that’s the case it is a subsidy.

  2. It happens to be a fossil fuel – hydrocarbon. Encouraging the combustion of hydrocarbons when there are either less polluting hydrocarbons (CNG) in the short-run, or longer-term alternatives like developing hydrogen cells or DC electric vehicles, seems like it works against other policy objectives.

    Reflective equilibrium, as Rawls would suggest.

      • I was born in Townsville, and until the age of 24 lived in a number of locations between Mt Isa and Childers. I do not presume to know your motivation for comment, but my point is that having multiple policies working against each other does not make for effective governance. How the mix is settled is up to the competing forces of ideology, but it’s ridiculous to have stated policy ends that are defeated by the means of other policies.

  3. ‘A better (less distortionary) option for raising additional tax revenue would to be to implement some kind of resources rents tax. Unfortunately, we stuffed that up.’

    Indeed we did. But then we remedied: MRRT. Soon we’ll fix: abolition.

    • A better fix would be to extend MRRT into MARRT where A stands for agriculture. After all, farmers benefit from natural resources such as land and water similar to miners.

      • Strewth..you live in a city sailor with all its subsidies. Are you prepared to live in a city with the A$ at a level sustainable with the long terms sovereignty of the nation. With the artificial level of the A$ we already confiscate about half a farmer’s GROSS income. You might as well take the lot I guess.
        Gotta love these instant extreme judgements about bush stuff based largely on ignorance

      • Water: How about maybe the water that lands on a private owners property belongs to that owner until it leaves his property? There’s a better argument for paying farmers for their run-off!

      • StatSailor. The key difference between farming and mining is that the former can produce goods over and over again using the same piece of land, whereas the latter is simply digging up and selling a non-renewable resource.

      • Removing land tax exemptions for agriculture would be a simpler way of taxing the economic rents accruing to farmers.

      • How about maybe the water that lands on a private owners property belongs to that owner until it leaves his property?

        Okay with this as long as 100% of risk of water not landing is borne by property owner.

        Concede point on land re-use, as long as the Commonwealth never intervenes to improve land viability.

  4. Good stuff Leith. I’m glad you looked into this because I’ve always maintained a strict definition of a subsidy as a payment by government to lower the cost of a good/service. The “fuel rebate” is just a lower tax rate on fuel. The term subsidy would apply if the government actually paid for use of that fuel which results in a below market price for the fuel consumer.

    While you may say there is lost revenue for the budget, I would also highlight the reduced economic activity as a result of lower profits in sectors that would face higher fuel input costs.

  5. As Per Capitalist…Great stuff UE! That is independent thought…that we can be wrong every now and again.

  6. I’m of two minds about this.

    On the one hand, yes, it’s a business expense and therefore deductable.

    On the other hand, removing it will result in a glaring cost on balance sheets. It might actually act as an enormous incentive to find other means to generate power. Prior to fuels, miners and farmers didn’t think twice about building a windmill/waterwheel for energy harvest .

    Now? When diesel is so cheap, why bother?

    It’ll be stunningly hilarious if the coalition scores a green goal with this!

    In fact, the best thing the greens can do is to oppose it (but not too vigorously), which will force Tony to do it come hell or high water!

    • Prior to fuels, miners and farmers didn’t think twice about building a windmill/waterwheel for energy harvest
      And prior to electricity, sheep shearers used hand-shears, washing was done on a washing board and the fastest personal transport was by horse. Maybe we should go back to those ways of doing things too.

      • No, I don’t think so. I think it’s more likely that your point is so illogical that you can’t explain it and it’s easier for you to say that it went over my head.

        As best I can tell, your point was that we should “find other means to generate power” even if that means working in a less efficient way and being less productive. Using a washing board is an example of one way to achieve that.

  7. The RSPT was a stuff up, no question. Nevertheless the option to keep the MRRT is available and would contribute to the budget repair task.

    The largest part of the MRRT’s compliance costs, valuing starting bases, is sunk.

    Henry Ergas had the good idea of allocating MRRT revenue to the states. This would internalise to the States the costs of increasing royalty rates (which they otherwise have an incentive to do because of the credit against MRRT).

  8. Taxing a business input (fuel) other than as a road user charge (or to address an explicit externality) goes against the principles of good tax policy.

    Aren’t carbon emissions an explicit externality in this case? Not they we’re addressing that anymore…

    I understand the economic arguments against abolishing the diesel rebate, but this is a winner politically. If the average punter knew that Gina, Twiggy and Clive pay 37c/L less for fuel than they do, they’d be ropeable. And a $6 billion boost to the budget bottom line wouldn’t hurt either.

    • As part of the carbon tax mechanism, offroad users of fuel are denied a full tax credit, with the amount denied being broadly equivalent the the carbon tax applying to other emitters. This non-creditable component will go with the rest of the carbon tax from 1 July 2014.

  9. Diogenes the CynicMEMBER

    Rebate or subsidy it needs to go. Why subsidise remote power stations for mining processes powered by diesel fuel? They could just as easily be concentrated solar towers producing the same amount of power at a cheaper price and without the diesel fuel risk (price and being shipped/trucked to site)? Seems kind of a no brainer. Kicking the miners off this rebate would force them to rethink their power fuel source at site.

    • Seems kind of a no brainer.
      If you meant that only a person without a brain would think that’s viable, then you’re probably right.

  10. Labor should have done this instead of trying to introduce MRRT. It is always simpler to remove an existing subsidy, rather than introduce an entirely new tax. It would have been easy to get it through back in 2010/11, but with the new Senate post-July 2014 it will be impossible.

    • Politically yogi yup. Its a modest resource rent tax from left field given it targets high volume production via typically higher fuel use.
      And when the snivellers turn up with the non highway use argument, tell ’em it runway maintenance tax to pay for the shit FIFO has inflicted the mining regions.