Historically, lowering the petrol tax to reduce the expense of living was viewed as the political equivalent of a joke.
In 2008, both failed US presidential contenders John McCain and Hillary Clinton attempted it. Their bipartisan support for a “summer gasoline tax vacation” was ridiculed as foolish, a turkey, and a “metaphor for the entire campaign.”
In 2008, when 230 economists signed a letter opposing it, Clinton stated, “I’ll tell you what, I’m not going to throw my lot in with economists.”
Barack Obama, her opponent for the Democratic primary, dismissed it as a gimmick and went on to win both the nomination and the president.
However, it is no longer seen as a joke. There is discussion of it in the United States, New Zealand has reduced its fuel excise to ease cost-of-living concerns, and Australia is exploring a similar budget action.
Petrol’s price collapse is astonishing. Unleaded costs approximately $2.18 per litre in capital cities, up from $1.60 at the start of the year. This implies that whereas filling up a Toyota Corolla might have cost $80 at the start of the year, it now costs one-third as much – $109.
If you fill up on a biweekly basis, as many people do, the additional charge is larger than if the Reserve Bank increased its cash rate by 0.25 percent and increased the cost of mortgage payments.
If you own an SUV, which is now Australia’s most popular new vehicle type, the additional tax will be larger. And, as with interest rates, there is a strong possibility that petrol costs will continue to rise.
In New Zealand, where petrol costs more than $NZ3 ($A2.80) a litre, the government has reduced the excise duty on petrol by 25 NZ cents per litre for three months, in the hope that the worst consequences of the Russia-Ukraine conflict will have passed.
Australia levies a modest tax on gasoline.
Astute readers would have noticed that, even with the reduction, New Zealand petrol prices will remain far higher than those in Australia. That is because, like the majority of affluent nations, New Zealand charges a higher tax for road use than Australia does.
Until Tuesday, New Zealand’s petrol excise was somewhat more than 77 New Zealand cents per litre (72 Australian cents), compared to about 43 Australian cents here.
Low in comparison to international norms
The addition of the goods and services tax in both countries raises the New Zealand excise to around 89 NZ cents per litre (83 Australian cents), compared to our 48 Australian cents.
If these figures appear low, it is because the price of gasoline has risen dramatically. One of the oddities of taxes set in cents per litre (and increasing only in line with inflation) is that as the price of gasoline increases, the tax as a percentage of the overall price decreases.
Fuel excises accounted for 40% of the cost of petrol in New Zealand and 35% of the cost of petrol in Australia a year ago. They have become self-cutting at 28% and 22%, respectively.
If we completely eliminated fuel excise and reduced the price of unleaded in Australia by 22%, the price would only return to where it was five weeks ago.
And then, as I anticipate would occur in New Zealand after three months, the government would have a difficult time reinstating it.
It is having difficulty ending the $1080 tax relief for low- and middle-income earners that was supposed to expire two years ago.
The shambles it has created by implying that it will decrease the levy and by continuing the $7.8 billion per year low- and middle-income offset provide no indication of a path out.
The offset is ill-conceived. It is paid out as a tax refund following the end of each financial year, making it the polar opposite of the “stimulus measure” that Treasurer Josh Frydenberg described it as when he renewed it last year. If he renews it for the next fiscal year, it will not be paid until the second part of 2023.
The petrol component of the fuel excise generates $5.8 billion in revenue annually. The government may be able to retain that and utilise the $7.8 billion that would have been spent on the offset to assist people now, when they are in need and when gasoline prices are high, rather than a year from now, when they may not be.
The $7.8 billion would go to Australia’s lowest income, who are being struck the hardest by the country’s exorbitant petrol prices. Low-income earners (the bottom 40%) spend an average of more than 3% of their income on gasoline. The wealthy spend less than 2% of their income.
Support should not be conditional on petrol consumption.
Direct assistance to low-income earners should be provided in cash, not as a subsidy to gasoline costs. Recipients would be able to spend it on petrol if necessary, but also on other items.
If supplied as a petrol subsidy, it would disproportionately benefit the wealthiest households, for whom high petrol costs are merely an irritation. In absolute terms, high-income households spend more on gasoline (on average 50% more) than low-income families.
If it is supplied in cash rather than as a gas subsidy, it will have little effect on the impetus that high prices create for individuals to switch to more fuel-efficient automobiles and reduce their reliance on petrol through activities such as telecommuting.
It’s difficult to make a case for lowering Australia’s petrol tax, but it’s simple to build a mechanism to assist those who are suffering from high prices. The budget is due in two weeks.
Peter Martin is a former editor of The Canberra Times’ economics section. This post first appeared on The Conversation.