Govt Rejects Increasing Fuel Tax While Price Is Low

CBT asked Transport Minister Simon Bridges for his opinion on increasing fuel excise while petrol was low. At the time of the letter, petrol prices were around $1.72 a litre:

Dear Minister,

The recent drop in the retail price of petrol gives rise to the opportunity to introduce a variable fuel tax on petrol and diesel. Such a tax could potentially be a significant amount per litre, but would also be removed when petrol climbs above a certain threshold again (for instance $1.90) to improve public acceptability.

You will be aware that Auckland is facing a potential funding shortfall for the transport projects that it wishes to achieve – both public transport and roading projects. Elsewhere in New Zealand, regional councils are also challenged with finding the funds to maintain and build local transport infrastructure. Central government projects are also affected, as excise tax revenues are flat or declining as cars become more fuel efficient and vehicle kilometres travelled remains static.

While the pending 3c a litre increase in excise tax in July 2015 will go a small way to addressing this funding shortfall, a more significant increase in excise tax while retail prices are low would result in more revenue, be relatively painless for consumers and potentially negate time-consuming arguments for alternative funding mechanisms such as increased rates, tolling and motorway charging schemes. According to a recent Treasury paper, every 1c a litre increase in excise tax generates $35m in revenue. Therefore an increase of 20c per litre, for instance, would equate to an additional $700m annually.

New Zealand is also taking very little action on climate change. As other countries such as the USA and China take positive steps to reduce transport related carbon output, New Zealand is doing nothing to reduce transport related emissions. The ETS tax on fuel amounts to just a fraction of a cent, and has had little effect in incentivising consumers to choose low carbon transport options. For this reason I suggest that funds from a variable fuel tax be dedicated to transport projects that reduce our reliance on fossil fuels, allowing NZ to benefit from the resulting infrastructure when petrol prices almost inevitably rise again.

There are a number of different approaches that could be undertaken to implement a Variable Fuel Tax, however I would appreciate your initial thoughts on this.

A  month later the CBT received the following reply from Simon Bridges, the highlights of which I’ve retyped here:

Unfortunately, there are a number of issues with a variable fuel tax that means it would have unintended consequences and be difficult to implement.

Currently, vehicle owners are taxed for their use of the road network. These taxes are based on fuel consumption by petrol vehicle owners (through petrol excise duty), and on kilometres travelled by diesel vehicle owners (through road user charges). This is designed to match the costs of the roads to those who use them, and raises more money for further projects when people drive more. A variable fuel tax based on the price of petrol would reduce the link between tax and road use.

I’m not sure why this is a bad thing. Make hay while the sun shines surely?

Another unintended consequence arises in times of slow economic growth. Before the recent price falls, the last signficant petrol price fall was in 2008 during the global financial crisis. A variable fuel tax would have taxed people more at a time of increasing unemployment and uncertainty.

This isn’t the case now.

A further obstacle is that fuel prices vary across the country. It would be unfair to levy different tax rates on road users based solely on where they are located.

That isn’t what we are advocating.

Alternatively, a tax could be levied at the point of entry into New Zealand, but this would not be practical as there is a lag between when the tax is collected (when the price might be high) and when the fuel is purchased in the market (by which time the price might be low).

We aren’t suggesting a new tax, simply a larger increase than the existing fuel excise than the 3c a litre the Government will implement in July.  As petrol rises again above a certain threshold, remove the “extra” increase.

A variable fuel tax also discourages competition, where companies selling petrol at lower prices would face higher taxes.

This is false.  The amount of fuel tax would be the same for every retailer around the country.

I note your point on the need to address climate change. The Government is committed to reducing transport related emissions and reliance on traditional fossil fuels. Through the Government Policy Statement on land transport 2015, the Government has increased investments in walking, cycling and public transport in part to reduce environmental impacts including climate change. Additionally , the Government has committed to an exemption from road user charges for electric vehicles until 2020.

The investments mentioned are insignificant compared to the multi-billion dollar spend up on new Roads of National Significance, which only make the country more reliant on imported fossil fuels.

Overall, a disappointing response from the Minister.  As it turns out, the Minister has been too slow off the mark to take advantage of the five year low. Instead the petrol companies themselves seem happy to be making extra profits, prompting the Minister to put them “on notice”.