How to fix fuel tax

Fuel tax – you might not know much about it, but winding back the $8 billion a year in fuel tax credits given to businesses could reduce the budget deficit by $4 billion.

Listen as host Kat Clay, interviews Marion Terrill, Transport and Cities Program Director, and Natasha Bradshaw, Associate, on their latest report, Fuelling budget repair: How to reform fuel taxes for business.

Read the report

Transcript

Kat Clay: Fuel tax. You might not know much about it but winding back the 8 billion a year in fuel tax credits given to businesses could reduce the budget deficit by 4 billion. Marion Terrell, Transport and Cities Program Director and Natasha Bradshaw Associate are two of the authors of our latest report, Fuelling Budget Repair, How to Reform Fuel Taxes for Business.

They’re here to tell us. How to fix fuel tax. Marion, before I’d read this report, I didn’t know a whole lot about fuel tax. What are fuel tax credits and why do they need to be reformed?

Marion Terrill: Let me start by telling you what they are. So, every time you fill up your car, you pay fuel tax or fuel excise of 48 cents a litre.

And businesses pay this too. But then they have some or all of it refunded through fuel tax credits. If you have an on road heavy vehicle, 4. 5 tons or bigger, then you’re paying a partial rate, so you get a partial fuel tax credit. And if you’re operating a vehicle off road, like a truck on a mine site, for example, or heavy machinery that uses diesel, you don’t pay any fuel tax at all.

It’s a complicated system, but the bottom line is it’s a system for refunding fuel taxes to business users. As to why does it need reform? Well, there’s a couple of reasons. I think the key reason is, that the, the budget is in a parlous state. So, the, the gross revenue from, fuel excise or fuel tax is over 20 billion a year, but it gets reduced by close to 8 billion a year because of these fuel tax credits.

So, we’re looking at 8 billion, which is, and our proposal is not to get rid of them entirely, but just to scale them back. So, there’s a budget reason for that, which is that it would contribute to solving the budget deficit. We can see savings of 4 billion at least, that would be very manageable. But I think there’s, there’s this philosophical thing as well, which that burning diesel is actually harmful to the community, and it’s undercharged at the moment.

And what I mean by harmful to the community, we’ll explain in more detail, but basically, it’s creating carbon emissions, it’s creating exhaust pipe pollution, it’s creating demand for the on road vehicles, it’s creating demand on the roads. Those harms are not fully captured by the tax. that businesses are currently paying, and it would be a bit, a more efficient system if we did recover those costs because it would send a clearer signal that would help businesses to make investment decisions that are aligned with the costs that they actually cause.

Kat Clay: I mean, Tash, one of the most interesting things in this report is reading about the piecemeal history of fuel tax and how its usefulness has been eroded over time. Why was it introduced in the first place and how have we got to this point?

Natasha Bradshaw: A tax on diesel was first implemented in Australia in 1957. And at the time, we didn’t make off road users pay for it because the funding was all used to pay for roads.

But that earmarking of the revenue for spending on roads only lasted two years. And so, for about 60 years now, that’s no longer been the case. And since then, fuel tax has mainly been used as a revenue raising measure. And eligibility for exemptions or credits for fuel have changed. Substantially over time as different users have been brought in and out to meet the needs of the government of the day.

Now, sometimes these, these needs have been budgetary, but other times it’s looked more like a political gift to certain industries, especially, regional industries. So, we often hear ministers coming out and saying that the scheme will particularly support regional areas. If we do want to support regional areas, though, this scheme is not very well targeted.

Most of the businesses in the top five industries that receive the credits are located in cities, as are most of their employees. We don’t think this is a very good measure for supporting our regions. Really, it’s difficult to avoid the conclusion that these were a political gift and the only non-care industries that have always received an exemption for paying fuel and continue to be the major recipients of fuel today are the mining and agricultural industries.

Now, over time, we’ve seen this policy change to meet the objectives of the day, but the current policy is well out of step with the objectives of the Albanese government, particularly around budget repair and reducing carbon emissions. So, diesel combustion is responsible for about 17 percent of Australia’s carbon emissions and the top five industries receiving fuel tax credits are responsible for more than half of Australia’s carbon emissions.

And so, we think this is out of line with the Albanese’s commitment to net zero by 2050 and reducing the amount that businesses can claim in credits will be a step towards. Telling businesses that they need to start thinking about their carbon emissions, when they make investment decisions, the other reason it’s out of step with the Albany Z government’s objectives is that this scheme costs 8 billion a year, which is one fifth of the current structural deficit.

And we think about half of this is poorly justified and that would create a large saving for the government in a time when they really need it.

Kat Clay: So, I mean, you really see that double edge benefit from reforming fuel tax on the environmental side, but also on the budgetary repair side. And I mean, I’m going to resist the Dr. Evil references here, but I mean, 4 billion, that is a lot of spare change. What’s your proposal to get this kind of budgetary repair?

Natasha Bradshaw: Well, Kat, in general, budgetary repair or savings of this size don’t come without costs. But in this case, we think that our policy is also good tax policy. And so, it has other benefits.

The main benefit is that what we’re proposing to do is to ensure businesses are paying for the harm that they do to our health, to our roads, and to the environment when They buy diesel and that’s by factoring in those costs to the price that businesses have to pay for diesel. So, what we’re proposing is that for on road heavy vehicles, those are vehicles weighing over 4.

5 tons. We want to remove the credits entirely for those vehicles. Currently they get a partial credit, which takes into account their road costs. But those road costs are already underpriced. And if we then add on a cost for carbon emissions or air pollution, the cost that they do to the community for using each litre of diesel goes well above what the current fuel tax rate is.

And so, what we’re proposing is that they would lose the credit entirely. For the off-road vehicles, we’re proposing that they will receive a partial credit. So currently they receive a full credit and we’re reducing this by about half. Now that takes into account the damage that they do to the community through their air pollution and carbon emissions from their use of diesel, but we’re not proposing that they would have to pay any road costs given that they don’t use the roads.

The other benefit of this proposal is that it brings heavy vehicle charges in line with what light business vehicles pay, which is currently just an unfairness in the system where light vehicles pay more fuel tax than heavy vehicles, despite doing less damage to the roads.

Kat Clay: I mean, that’s my next question for you, Marion.

It’s about consumers. I mean, you’ve mentioned them before that we do all pay fuel tax at the petrol pump, but we have seen huge price hikes because of many factors, including the cost of gas and the war in Ukraine. Many of us are struggling with the cost of living at the moment. If fuel tax is reformed, would this be passed on to consumers either at the or in the form of increased product prices?

Marion Terrill: Cost of living pressures have been very much front of mind for us in developing this policy. Basically, the impact on households cost of living would be very, very small. So, I’ll explain to you why we, why we come to this view. Firstly, the main impact that, that households would experience if these reforms were introduced is that it would come about through their groceries.

So, groceries, food and non-alcoholic drinks for most households, average 17 percent of what they spend, there wouldn’t be any direct impact on petrol at the Bowser or on housing or some of those other big expenses. But when, if you think about people’s shopping at the supermarket, we think that our estimates are that on a 100 shopping trolley, the additional cost that would arise would be 35 cents.

Thanks. In other words, 100. 35, and this would come about through two separate mechanisms. Firstly, the cost of trucking food and groceries around would increase slightly, would increase by about 0. 10 on a 100 shopping trolley, and that’s because it would be slightly more expensive to operate a truck. The average increase, in the cost of running heavy vehicles.

with this, if this was implemented would be 2. 7%. And, and of course, transport costs, are a small component of the retail price of goods. The other mechanism accounting for 25 cents out of the 35 cents would come about because the costs to agricultural producers would also go up. a little. Now it does vary a bit because some types of production use diesel more than others, but across the board we’re thinking that that would account for about 25 cents on a 100 shop.

So, all in all, it is a very small impact that we anticipate this would have for cost, on the cost of living. And I would also add that estimates are pretty conservative. They’re assuming that. The entire cost was passed on to consumers, but in reality, it might be a little bit on consumers, a little bit on the, on the producer side of either the, transport firms or the agricultural producers or both.

Kat Clay: That actually leads nicely into my next question for you, Marion, because I mean, I’m concerned as a consumer, obviously I don’t drive a truck or a large vehicle, but how will businesses cope with this additional tax burden? We’ve talked about big businesses, but surely, it’s not all big businesses at the end of town that will be affected.

I’m thinking about things like smaller farms and delivery services here.

Marion Terrill: So, the impact on businesses that receive the credit would be mostly very small, but it is a little bit of a more complex story than for households. Just to step you through it, the, the industry that gets far and away the most of the credits is mining.

The other industries that get a fair bit are transport, agriculture, construction and manufacturing. So, these are the, industries that are particularly high emitting, I would say. So, these, these five industries out of 19 industries. receive most of the value of fuel tax credits and they contribute more than half of Australia’s carbon emissions.

But we focused in particular on these industries, and we found that the cost additions to business Mostly be less than 1%. In fact, mostly less than half of 1%. Now, there are some exceptions. There’d be slightly larger cost increases in transport and particularly for micro, small and medium businesses that will also be slightly higher for the big miners to sort of take them one at a time.

The smaller businesses, there would be an expected increase. that’s perhaps a little over 1%. But when we looked into it in a bit more depth, we realized that, in fact, most small businesses don’t actually claim tax credits. So, we’re relying here on tax office statistics. They’re mostly, so almost all of the large businesses with turnover of a hundred million dollars or more claim the credits.

But almost none of the micro and small businesses do. And there’s probably a few different reasons for that, but the reality is, by and large, most of the small businesses in transport and these other sectors are not benefiting in any way from fuel tax credits. When it comes to, the big end of town and the, and export industries in particular, the main ones that we were concerned with were agriculture and mining because they are substantial exporters.

Now we, we found that the large mining companies, would feel this perhaps more than other types of businesses. We would expect them to have higher costs of about 0. 8 or 1%. So, it does reflect the fact that they are substantial beneficiaries of fuel tax credits. at the moment. On the whole, we think that a mitigating factor here is that Australian exporters still do face a low effective carbon price by global standards, at least for the time being.

But the other thing that we’re seeing is that increasingly, other countries and trading partners, putting in place mechanisms to try to push industrial production to lower emitting practices. And the prime example here is in the European Parliament, just in December, passed legislation for a carbon border adjustment mechanism, which will, sort of put an impost on importers.

It’s basically a levy at the border on the embedded carbon content of certain. Products and what it does is it puts European producers on a fair footing with producers in other countries, such as Australia, who face a lower or no carbon tax. It’s just trying to put, to push production into less emitting practices.

So, for various reasons, we kind of think, well, the world’s changing here. So even though we do accept that there would be some impact on these export industries, not, it’s not huge, but nevertheless, whether that pressure comes about through this sort of policy or some other mechanism, the pressure for lower emitting industrial practice will ramp up over time.

Kat Clay: So, Marion, I mean, in summing up, why should governments adopt fuel tax reforms?

Marion Terrill: The federal government is facing a very substantial budget problem. So, it’s got a structural deficit, of about 40 billion a year. So, it does need to find savings. And it’s difficult to do that because, whether you cut spending or increase taxes, it does affect people and it affects businesses.

And, and no one wants to be adversely affected by that, but it, that’s the difficult dilemma that the government faces. What we’ve proposed here, is a way of essentially updating a tax that is out of date. The problem with fuel tax credits is that they do not reflect the, they don’t adequately reflect the harm to the community that comes about from carbon emissions, from harmful exhaust pipe pollution, or from, wear and tear and demand for new roads.

So, so this is a, one of those rare examples where you can have a, a win winning tax policy where you can improve the efficiency of the system. There’s substantial revenue, but it is very much aligned with the government’s, commitment to net zero by 2050. So, we think that, you know, that in a lot of ways, this is a policy for our times.

And, and that’s really why we, we’ve, done the work to, to think through the implications of it.

Kat Clay: Thank you so much, Marion and Tash for talking through your new report. If you’d like to read it and dig into some of those numbers a bit more, you can get it for free on our website at grattan.edu.au. And while you’re there, I do recommend you also check out our Grattan Truck Plan as well, because it is quite relevant to this research.

If you’d like to talk to us more on social media, please follow us on Twitter at Grattan Inst and all other social media channels at Grattan Institute. As always, please do take care and thanks so much for listening.