What is petrol excise and why does Australia have it anyway?

One government in New Zealand has already cut its excise duty on fuel by 25 cents a liter during what it hopes will be the worst three months of the oil price crisis, and in the United States and in Australia, we talk about the same kind of thing.

Before determining whether it should be removed, temporarily removed, or removed in this month’s budget, it is worth familiarizing ourselves again with what it is.

As is the case with the Goods and Services Tax, it is not explicitly quoted when we buy gasoline or other fuels; it is included in the advertised price.

Currently, the excise duty on standard unleaded gasoline is 43.3 cents per litre, a tax which is itself subject to the Goods and Services Tax. That brings the total to 47.6 cents per litre, which would have been significant a year ago when gasoline prices were lower at a third of the price.

It is now less important since it represents 22% of the price of gasoline.

Fuel excise is imposed by the Commonwealth Government. By law and as required by the Constitution, all income generated by the Commonwealth is paid into “a single Consolidated Revenue Fund”. But from 1926 to 1959, all or part of the fuel excise was earmarked for road expenses.

Since then it has generally been available for all sorts of expenditure – although the impression remains that it is a crude form of user charge for government-funded roads and associated infrastructure, and for maintenance of these infrastructures.

Effectively a road user charge

Excise is collected at distribution points from refineries and local importers rather than at the petrol pump, making it easy to administer.

What makes it much more difficult to manage are the substantial discounts offered to off-road users of gasoline and diesel, which have the effect of making it a charge for using the roads. They cut total revenue from around A$20 billion to A$11 billion.

State and territory governments impose another set of taxes on the use of motor vehicles. These include registration stamp duty, annual registration fees, driver’s license fees and vehicle insurance taxes. State taxes on the use of motor vehicles amounted to A$11.3 billion in 2019-20.

Read more: It’s hard to find an argument for a gas tax cut — there are other things the budget can do

These taxes also come under general revenue and have no specific connection to state government decisions on road infrastructure and maintenance or the provision of services such as traffic policing and hospitals.

Taken together, the Commonwealth’s revenue from fuel excise duties and the states’ revenue from special motor vehicle taxes appear roughly equal to their expenditure on roads and associated infrastructure and are less than the costs totals imposed by road users on others, including noise, pollution and policing costs.

There are better ways to do it

In an ideal world, we would explicitly charge for road use, pollution and congestion in cities during peak hours.

Fuel excise duties are an increasingly inappropriate means of charging for road use, as more and more cars (including hybrids) consume less fuel per kilometre, and some (including all-electric vehicles) do not consume any.

Some states, including Victoria, charge electric vehicles per mile driven. Owners are required to provide a photo of their odometer and the fee is in addition to the cost of their registration.

Although in the spirit of user pricing, what Victoria and other states are doing is a limited first step.

Ideally, and subject to considerations of simplicity and operating costs, the user charge would vary according to axle weight, total weight and distance travelled, and perhaps according to the type of road.

Given the fixed cost of much of road investment and maintenance, a modified version of the current annual registration fees should be maintained.

The combustion of gasoline and diesel generates external pollution costs not taken into account by companies and individuals in their use of motor vehicles.

Read more: High oil prices hurt, but cutting excise duties would hurt energy security

The costs of external pollution include particulates that have harmful health effects and smog, as well as carbon dioxide emissions that contribute to climate change.

A pollution tax much lower than the current excise tax of 43.3 cents per liter should be imposed on fuel used for off-road and on-road purposes as part of a global price on gas emissions to greenhouse effect associated with the burning of fossil fuels.

Traffic jams cause costs estimated in the tens of billions in lost time, uncertainty and extra fuel consumption, only a small part of which is borne by the road user concerned. An important part of the reform package should be a peak-hour congestion charge, along the lines suggested by the Grattan Institute.

This ideal set of changes would be imposed regardless of the price of oil.

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