Fuel excise lift is sound budgetary policy

ScreenHunter_04 Sep. 23 15.14

By Leith van Onselen

In 2001, just prior to the 2001 Federal Election, the Howard Government made the short-sighted decision to freeze Australia’s fuel excise at 38.14 cents a litre, abandoning the twice yearly CPI increase that had long been a feature of Australia’s excise system.

Facing an assault over the rising cost of living, John Howard’s decision was a purely political play aimed firmly at getting re-elected. However, the Budget is now paying the price, with the foregone excise revenue now totaling some $5 billion per annum – a figure that will only grow over time as inflation takes hold.

Another deleterious impact from the Howard Government’s decision to freeze fuel excise is that it has narrowed Australia’s tax base and effectively shifted the tax burden to wage and salary earners. As shown in the below charts from the Australian Treasury, indirect taxes (ex-GST) are projected to shrink in size relative to the other forms of taxation:

ScreenHunter_1913 Apr. 03 07.31

Indeed, the parliamentary budget office’s report on government revenue trends published last month revealed that excise on fuel has declined from 1.7% of GDP in 2000-01 to just over 1% in 2012-13.

According to the Treasury:

Research consistently says that reduced reliance on income taxes and increased reliance on other, more efficient sources of revenue, including indirect taxes, can support higher growth and higher living standards by increasing workforce participation and lifting productivity. Such a shift in Australia’s tax mix could also be achieved by lowering income taxes (offset by lowering spending) and leaving other taxes unchanged.

But if we turn to the far right panel of the slide [above], we see that, without conscious change, Australia’s tax mix will move in the opposite direction as personal income tax increases through fiscal drag.

We will move even further in this direction if, as we anticipate, the relative share of total indirect taxes (including GST) continues its long-term decline. Contributing to this decline is the non-indexation of fuel excise (unlike other excise rates) and a rising proportion of consumption outside the GST net, for example, in increased health expenditure.

With these thoughts in mind, it is heartening to see both The Guardian and The Australian reporting that the Abbott Government is considering raising fuel excise and potentially re-instating indexation.

Not only would such a move help to broaden the tax base, but it would also improve efficiency since fuel excise is a reasonably efficient tax, creating a “marginal excess burden” (i.e. the loss in consumer welfare relative to the net gain in government revenue) of only 15%, according to the Henry Tax Review. This efficiency loss compares relatively well against personal income tax (24% marginal excess burden) and corporate tax (40% marginal excess burden).

Moreover, a rise in the fuel excise also offers environmental benefits by effectively acting as a pollution tax. As noted by the Henry Tax Review:

…the excess burden of fuel excise may be overstated to the extent that there are social and environmental costs of fuel consumption. These externalities may be reduced as excise curbs fuel consumption, which would improve welfare.

Put simply, there are sound financial, economic and environmental reasons for the Coalition to raise fuel excise, and in turn righting one of the wrongs from the Howard era.

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Comments

  1. Raise fuel price. Scrap registration. Make illegal any insurance not based on distance driven.

    • Great when I lived in Melbourne and rode 200-300km in commuting (riding, rain, hail or shine from Hampton to Richmond).

      Not so great in Regional Australia where getting jobs is hard and means I have to drive a 110km commute. (Really).

      • “What’s in it for me now?”

        You can see the results of that attitude all around us.

    • Actually, that’s a poor characterisation of my point. I ask for nothing for the gov’t. The only gov’t handout I’ve ever had was a short stint on welfare. Prior, I was in the 2nd highest tax bracket. DINKS. No FTA, No FTB, no pink batts, no negative gearing, etc etc.

      I ask for nothing and expect nothing.

      This is not about what is in it for me, it’s about fairness.

      There are PLENTY of other places the govt could hit before excise.

      Super concessions
      Means test pension
      Family trusts
      Corporate tax avoidance (Google)
      Politicians’ extravagant retirement benefits (it’s not as if they’re on a pittance)
      Negative gearing.

      The list goes on.

      My point is real, and valid.

      But sure, if you want everyone to live in the cities, cool.

      (Not sure who will grow your beef cattle, dairy, fruit and veg, etc)

  2. “Put simply, there are sound financial, economic and environmental reasons for the Coalition to raise fuel excise, and in turn righting one of the wrongs from the Howard era.’

    Agreed. It would be a decision that I’d certainly support and would help convince me that the government is even vaguely serious about the budget position.

    But why do I have this nagging feeling that it will end up just like the removal of the diesel rebate?

    • The Guardian says:

      the government was also seriously considering changes to the rebate paid to farmers and miners for the off-road use of diesel, but after fierce lobbying from both sectors it is understood to have dropped the idea

      Are they going to index the rebate as well? I mean, we can’t have those poor struggling mining companies paying fuel excise like the rest of us!

  3. I would prefer the NZ Road User Charge system that I currently pay for my diesel vehicle (though I would apply it for both petrol and diesel).

    To fund roads, I would scrap the tax imposed on a single product (fuel) that you then have to return in the form of rebates to offroad users.

    Instead I would charge all road users based on vehicle axle weight/ km, this levies a vehicle based on the amount of road maintenance cost it requires (heavier vehicles and more km travelled increases road maintenance costs and thus costs more in RUC).

    • This is more of a state issue, replacing motor vehicle stamp duties and registrations. I’ve always thought that implementation of such schemes is the hardest part

      Our freinds across the ditch lead the way yet again 🙂

      • The more I read, the more obvious it is that people would rather pay a huge amount of money into a big pot and then fight to get more out than they put in. The majority believes they can or are entitled to get out more than they put in, so they seem to fight any ‘user pays’ system tooth and nail.

      • Mining BoganMEMBER

        Paying your own way is Un-Australian.

        Those worse off are expected to pay more. It’s in the constitution or somethink.

      • Mining Bogan, sorry did you mean “Those worse off…or engaged in productive activities…are expected to pay more” 🙂

      • Mining BoganMEMBER

        Who knows what I mean. The air gets thin way up here on my soapbox.

      • haha! the rareified air of the ivory tower, love it….

        Spot on though, Dogbert.
        People spend too much time watching Today Tonight/ACA, showing all these non-tax paying bogans rorting centrelink. This allows them to justified (in their own little brains) that they’re the only ones to pay tax and therefore are entitled to all of it back (then some), because they dont want the bogans to have a cent of it… Little do people realise that the ACA bogans are rounding error of the billion dollar industry of rent seeker tax dodging

      • drsmithyMEMBER

        The more I read, the more obvious it is that people would rather pay a huge amount of money into a big pot and then fight to get more out than they put in. The majority believes they can or are entitled to get out more than they put in, so they seem to fight any ‘user pays’ system tooth and nail.

        If no-one is allowed to pull out more than they put in, then there’s no point in having the pot in the first place.

    • You will get buy in from cyclists. No longer will we have to repudiate the utterly stupid comment that we don’t pay road taxes.

    • drsmithyMEMBER

      Instead I would charge all road users based on vehicle axle weight/ km, this levies a vehicle based on the amount of road maintenance cost it requires (heavier vehicles and more km travelled increases road maintenance costs and thus costs more in RUC).

      In terms of road wear and test, passenger vehicles (except maybe the larger urban assault vehicles favoured by certain demographics) are basically irrelevant.

      For them, I think a charge attached to fuel – which serves as both a proxy to distance driven (ie: utilisation) and also to environmental impact – is probably the simplest and easiest method.

      • Sure, and weight could be be made the greater of the vehicle weight or 3t gvm if that is the cutoff at which wear becomes an issue (thus all vehicles under that weight would pay the same rate/km), but if you consider that km travelled relates to time on the road as well, then its a way to pay for road construction that is just as equitable as the fuel tax, without the need for any rebate schemes for off-road use (tractors, mining trucks, diesel pumps, power generation or whatever it may be) or special ‘extra’ taxes on electric vehicles.

        I’m not considering the environmental behaviour, because if you really want to put an environmental tax on the carbon, or particulate emisions, then apply it to more than just liquid fuels.

  4. Absolute no-brainer of a policy.

    By doing this, they have essentially paid for the increase in the Debt Levy threshold from $80k to $150k.

    Much better outcome for Australia – and will reduce the impact of marginal excess burden by $100’s millions per annum.

    As close to a free lunch as we’ll ever get

    • drsmithyMEMBER

      By doing this, they have essentially paid for the increase in the Debt Levy threshold from $80k to $150k.

      More accurately, it has shifted that cost to everyone who drives a car, where it will disproportionately hit lower income earners.

      Certainly win-win for a Coalition Government !

      (To be clear, I don’t have a problem with increasing the fuel excise, but let’s not kid ourselves about what’s going on here.)

      • Everything hits low income earners disproportionately .. I believe that’s less of a matter for such tax policy, but rather welfare policy.

        Besides, I’d imagine that the vast majority of the funds raised are paid by the wealthier/richer end of town. I dont have hard data on that, but (anecdotally) take petrol subsidies in places like Iran – where the wealthy are the ones who benefit the most (by far), while it’s the underclass that fights to keep such rorts ongoing. Thrown a pittance to keep them quiet, while their health/education systems crumble under the costs of subsidising transport conglomerates..

      • drsmithyMEMBER

        Besides, I’d imagine that the vast majority of the funds raised are paid by the wealthier/richer end of town.

        It’s not about funds raised.

        My point was that a greater proportion of poorer people rely more on their cars than wealthier ones do. Because they can’t afford to live closer to the CBD (or amenities in general), they end up in areas with relatively poor public transport options. They’re also more likely to work multiple part-time jobs and irregular hours that are poorly served by public transport options.

        Short version: poor people need to drive a lot more than rich people do.

  5. Somehow I can’t see abbot using playing the environment card to justify this…

    • Its a carbon tax on liquid fuels only.

      So we get a deficit levy and an increase in the fuel excise, which combined will raise less than the carbon tax we have already.

      Meanwhile, we keep the expensive compensation for the carbon tax we will no longer have.

      Amateur hour. Thank Christ the adults are in charge!

      • “Meanwhile, we keep the expensive compensation for the carbon tax we no longer have.”

        Yes. As much as I value the tax cuts, especially as a low income earner, it always seemed silly to me to keep expensive elements of the compensation. I mean did the Australian public really think it they could have their cake and eat it too?

        Although it’s not perfect, I also agree that we should just keep the carbon tax. Paying to pollute is a pretty fundamental feature of most mature economies and societies around the world.

      • did the Australian public really think it they could have their cake and eat it too?

        Probably yes.

        Paying to pollute is a pretty fundamental feature of most mature economies and societies around the world.

        Who said we are mature? We are an economy beholden to rentseekers and shills for powerful vested interests epitomised by our resident 3d1kead.

    • For once, the Kouk really does make sense!

      Stephen Koukoulas ‏@TheKouk 1h
      Revenue from carbon price (Source PEFO):

      2014-15 $2.87b
      2015-16 $2.75b
      2016-17 $4.05b.

    • Unfortunately, hydrocarbons were exempt from carbon pricing scheme anyway…

      Seems logical. Tax carbon, but not in concentrated liquified form.

      • How about we just tax carbon?

        Then we phase out all the rorts (super, CGT, NG, FBT) over four years, and reinstate the RSPT. Budget deficit fixed, no debt levy required.

  6. Refiner margin at around 3.5c /l white product and dwindling. Government cut 38c/l and rising. Sound my arse! This is what happens when you have the Goldman Sachs types run the show. They can simply not see beyond the immediate effect of any intervention. You seriously suggesting that wage earners are not going to pay for this? Maybe you should speak to some guys at Bulwer Island, I think they would like to have a vigorous “discussion” with you.

      • That’s actually a really good article. Some interesting points that I hadnt considered before

    • Okay gents, would you prefer income tax to increase instead? That’s your trade-off. You either increase the revenue burden on petrols/fuel, or you decrease the Debt Levy threshold from $150k to $80k.. Of course wage earners are going to pay for this, but you’re taxing their consumption of a product, not their productive input.

      We all understand the dogma of tax=bad. Unfortunately, we’re playing in a world of tradeoffs, not theoretical constructs. Sometimes the second/third/fourth-best outcome is the best hand you’ll ever be dealt. Take it.

      • drsmithyMEMBER

        Okay gents, would you prefer income tax to increase instead?

        What’s preferred has been covered here previously in great depth.

        Kill NG, remove the CGT discounts, remove the super rorts, remove the novated leasing rorts, tax land, etc, etc.

        Lots and lots of things that can be done without coming within a bull’s roar of taxing wages more, or disproportionately impacting lower income earners.

      • drsmithyMEMBER

        Okay gents, would you prefer income tax to increase instead?

        What’s preferred has been covered here previously in great depth.

        Kill NG, remove the CGT discounts, remove the super rorts, remove the novated leasing rorts, tax land, etc, etc.

        Lots and lots of things that can be done without coming within a bull’s roar of taxing wages more, or disproportionately impacting lower income earners.

      • Therefore you embrace a world of theoretical constructs where the cost of a product has no bearing on its demand. Where a cost of a critical input does not filter through to all products and does not impact the competitiveness of that production. Where withdrawing capital from an economy does not result in long term reduction of output. Where government spending causes no distortion in the economy resulting in an ever increasing requirement of government spending to sustain it.

        Doubleplusgood Duckspeak.

      • drsmithy, you’re completely right, but… the increase in the fuel excise is less sh*t than increasing income tax. That point goes to you too Hugh Akston.

        My point is about taking a more strategic view of public policy: if a less sh*t option is presented (i.e. tax fuel, instead of incomes), you take it!! – The chance to conduct meaningful tax reform hardly EVER comes around. Allowing a less-than-ideal outcome to slip between your fingers is worse than keeping the status quo.

        Take, for example, the Greens rejecting the CPRS a few years back, because it wasnt strong enough. They would be kicking themselves for letting that golden oppotunity slip- allowing the CPRS to create momentum for their cause. Now, instead of progress/momentum (albeit small), they have nothing.

    • Ronin8317MEMBER

      Given a choice of more income tax and re-indexation of fuel excise, fuel excise is much better. It causes less distortion since it’s harder to avoid, and it is also more politically acceptable. As to the reference to Bulwer Island’s oil refinery closure, your anger is totally misplaced, especially since BP is closing the refinery BEFORE the fuel excise is even considered!! (let alone passed into law.) The high Australian dollar killed the BP refinery, and it will only get worse at it keep staying above 90c.

    • “Mr Hockey says if left unchecked there will be $123 billion of deficits and $667 billion of debt, based on last year’s mid-year economic fiscal outlook.”

      Ouch, we’re getting more and more like those idiotic countries with stupid debt levels.

      You could be right. Although as someone who wants better housing affordability it’s a tough choice. Labor will spend like mad, probably give hundreds of billions to tradies, create more stupid government departments for their arts degree mates and kick the can even further.

      As someone who wants to crash the economy and see specufestors ruined which party would be better for that? 🙂

    • The best bit of that article is the list of Abbott quotes. Bet you can’t guess which ones were spoken before the election and which one after…

      “We are Liberals who believe in smaller government, lower taxes, greater freedom.”

      “There should be no new tax collection without an election.”

      “What you’ll get under us are tax cuts without new taxes.”

      “The only party which is going to increase taxes after the election is the Labor Party.”

      “When you’re in a difficult position, sometimes there needs to be some short-term pain for permanent and lasting gain.”

      • Ha. If your kids lied to you like this, you’d have strong words for them. Good thing we hold the leaders of our country to a lesser standard.

  7. This is still accepting the lesser more regressive option compared to a land tax which acknowledges the private benefit derived from public infrastructure expenditure.

    Disappointing that we seem perpetually destined to settle for also-ran measures when there are smarter options on the menu.

  8. As an engineer working on engine efficiency, here is my advise: a liter of petrol should power a big OZ made passenger vehicle (Falcon or Commordor) to the range of 50 to 100 km. What we have now is 10 in average. What is more important to this stalemate is that all car engines are INTERNAL combustion, not EXTERNAL combustion. What ICE has done is to restrict our freedom to access FREE fuel on top of the low efficiency problem. For example, daily waste, vegetation in farm and bush. So with these factors, we have wasted too much energy due to engine designs. That is what my company is trying to turn this problem around. But mark my words: government and oil companies will not happy to see this from happening.

    • Hmm, I’m not trusted to Edit my comment

      Add to above

      “As a cyclist I’m more than happy to have rego on my push bike and the rate can be set by a lobby of Moron Motorists. After the amount is set, we use the Fourth Power Rule to determine the rego for motor vehicles on a vehicle by vehicle basis. If we get that far a “Zero” amount isn’t acceptable for rego on bikes. Be careful what you wish for Cyclist Haters”