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:
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.