The federal government’s halving of fuel taxes seems like a great win for struggling Aussies, but it may actually turn out to be little more than a bandaid on a flawed system.
Since the beginning of the month, fuel excise, formerly at 44.2 cents per litre, has been cut to just 22.1 cents per litre. However, a deeper analysis of fuel taxes reveals just how badly these taxes distort markets and penalise the vulnerable in society. Worse, the excise cut is only planned to last for six months. In light of the upcoming federal election, it seems as if the government is more interested in short-term political stunts than actually helping out Aussies in the long term.
Ordinarily, the fuel excise on both petrol and diesel is raised biannually in accordance with the consumer price index. This ensures that no motorist can outrun the clutches of the ATO, no matter how fast inflation rises. If you thought paying 44.2 cents of tax per litre of fuel was high, the news gets worse. GST also applies to the sale of fuel, after the fuel excise is added. This means that you are paying tax on tax that’s already been paid, as well as on the rest of the fuel price. As a result, motorists who were paying prices as high as $2.20 per litre last month were paying 64.2 cents per litre in tax, including an extra 4.42 cents of GST on excise already paid.
This reveals a fatal flaw of the fuel excise: it distorts markets. By setting the excise at a fixed and not proportional rate, fuel prices are artificially kept high, as the excise acts as a price floor. The excise rate must be paid at the same price, regardless of the actual value of oil or fuel.