Friday 11 March 2022

Things that should be common knowledge that seem not to be: Petrol and excise and GST edition

Petrol excise is charged per litre of petrol. It isn't ad valorem. 

That means that excise's fraction of petrol prices have been going down as petrol prices go up. MBIE says it's $0.77/litre, plus another $0.10 in Auckland. Check it for yourself on MBIE's website.

Excise is $0.77. Add $0.10 for Auckland gets you to $0.87. Add carbon costs of maybe $0.20 when carbon is $80/tonne gets you to $1.07. GST on excise and carbon gets you to $1.23. 

GST over the base fuel cost would add more. If petrol is $3/litre all up, then total GST is $0.39. GST on excise and charges is $0.16; GST on the rest is $0.23.

There's good reason not to add GST in here at all, unless you're making a generalised case for abolishing GST.

Consider a family that spends every dollar it earns. If the price of petrol goes up and it's paying a lot more GST on petrol, it's by definition spending less on other stuff. Its GST expenditures on other stuff goes down. Government gets 15% of that family's spend through GST before and after the change in petrol prices. 

Yes, GST on petrol goes up as the price of petrol goes up. But the effect works both ways. Would you argue that excise or GST should increase to compensate whenever oil prices drop? I know I heard some calls for that when oil prices were lower, but those were also stupid. 

Or think of it this way. Cutting excise when fuel is particularly expensive is a tax cut particularly benefitting owners of less efficient vehicles. Does that seem like the kind of thing that is likely to make sense?

And remember that the relatively inelastic side of the market bears the burden or enjoys the benefit of tax changes. When global oil markets are a mess and ordering in more fuel is likely to be hitting all kinds of chokepoints, does it seem likely that fuel supply is relatively inelastic in supply? Would a ditching of petrol excise not lead to a bidding up of fuel prices from the demand side, getting us most of the way back to where we were ex-ante?

Petrol excise (and Road User Charges) go into the National Land Transport Fund. That money gets used to build and maintain roads. Unless you think the costs of building and maintaining roads is countercyclical in oil prices, it is dumb to want them abated just because petrol costs are currently high. For a start, aren't roads made using bitumen? Isn't that an oil derivative that should covary in price with oil and petrol? Don't all the big yellow machines use a lot of diesel?

That's also the simplest explanation of why GST has to be charged on top of excise. Excise covers the cost of providing road services. Imagine if all the roads were privately owned and charged a fee for driving on them. There'd be GST on that fee, right? Same for excise. 

It would be coherent to argue that government raids NLTF for a bunch of stuff that shouldn't be funded out of road user charges. Some people like the idea of funding rail lines or public transit out of there, but the case is pretty weak. 

You could then sensibly argue for a permanent end to that, which would result in permanently lower excise and RUC. 

Except for one thing. 

Central government often also uses general revenues to pay for big highway projects that otherwise have a hard time passing a cost-benefit hurdle. It'll have to stop doing that, if you want to be consistent. And that will make RUC and excise go up again, unless you run a tighter CBA on roading projects. And I have no clue which way that cashes out. 

Here is the defensible argument that could be made. 

The Government's ETS revenues have gone through the roof. Carbon is $80/tonne. The government in 2022 will collect enough money in ETS revenues to give a cash transfer of over $1200 to every family of four in the country. It could even weight the thing so that more money went to households with Community Services Cards, and a bit less to households like mine. Call it a carbon dividend, tell families that they should use it however makes most sense for them in adapting to higher energy costs. 

It's almost surprising that the government hasn't gone for this yet. They're under a lot of pressure over rising petrol prices and rising prices of everything else. Some of that is rising carbon prices. Most of it is RBNZ letting inflation get out of control. But government could announce a carbon dividend, right now, give every family a big cheque, and buy a lot of insulation against complaints about rising fuel costs. 

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