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A case for increasing (or at least indexing) the petrol excise

There never was any strong reason for John Howard pegging the petrol excise at 38 cents per litre and plenty of sound reasons for at least indexing it with respect to inflation.  The tax provides a rough (and admittedly imperfect) tax on congestion and fuel-induced air pollution and provides quite a reasonable application of the benefits (or “user pays”) principle of taxation in relation to funding of new roads and the maintenance of existing roads – those who use lots of petrol, particularly heavy vehicles, should pay much of these costs.  An excise also provides motorists to think forward and shift away from liquid fuels which will inevitably become more expensive. Finally, in terms of deadweight losses (or “excess burdens”) a tax on fuels has only moderate inefficiency costs because the demand for fuel is relatively price inelastic.   To achieve these desired features in a growing economy subject to inflation the tax should grow with the economy and not be set in stone.

I therefore support moves to revisit the setting off the excise. The tax yield from the fuel excise has fallen by about 40% which costs the government around $5b.  Increasing the tax by 20 cents and then indexing it to inflation would recoup much of the revenue lost because of the Howard decision to reindex the tax and would cut the size of the underlying structural deficit facing the economy by about 1/3.

Longer term one would hope that road use charges related directly to congestion, pollution and road damages would be introduced.  These are better ways of taxing externalities than a rough fuel excise. But still I think the fuel excise should be retained.  It is a broad-based tax that still would have the desirable properties mentioned of generating relatively low efficiency costs and of forcing us all to shift our allegiance away from fossil fuel-based energy sources.

The inevitable cry will be that such a tax is regressive and that it falls on the poor.  The Grattan Institute have begun this very standard sort of moan that is raised whenever any efficiency-based reform (e.g. congestion pricing) is proposed. What matters is the overall incidence of the tax-transfer system not the equity character of a small part of the tax base.  Of course the level of excise in Australia is low relative to excises in most European countries.

Update: 8/5/14. It seems that a 3 cent increase in the levy will happen.  I don’t think, however, this would raise $1b as this article suggests.  More like $500m.

1 comment to A case for increasing (or at least indexing) the petrol excise

  • Fred

    There is one very good reason for not indexing a tax. Tax increases should be passed by the Parliament.

    Petrol excise has not increased because the Parliament has not increased it.

    Sounds all very democratic to me.

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