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.

A simple proportional sales tax would create less distortion and not act as a price floor. This means that at the peak of the Covid lockdowns, fuel prices could have dropped much lower than $0.90 per litre if we didn’t have to pay an increasingly large proportion of tax the lower the price dropped.

Truckies and transport companies have it even worse. Whilst being able to claim GST expenses as a tax deduction, an additional Road User Charge is levied for fuel used by heavy vehicles. This is currently set at 26.4 cents per litre and has not been cut despite the record fuel prices increases. Therefore, even after the temporary excise duty cuts and deduction of GST, truckies are charged in total approximately 48.5 cents per litre in tax. At the current rates, the average semi-trailer, driving 79,000 km per annum, using an average of 53l/100km in diesel, provides over $20,400 per year in revenue to the government from taxes on fuel alone. These costs, made worse with the ballooning price of fuel, must inevitably be passed on to consumers. This hits regional and remote communities the hardest as for many communities, long-distance trucking forms the crucial supply line that keeps these towns alive.

While the excise cuts are nice for now, as soon as they expire, taxes are only set to rise.

This is not the only way the fuel excise hurts disadvantaged people. In practice, the fuel excise acts as a regressive tax, meaning it hurts high-income earners the least. From pre-pandemic data, the average minimum wage worker earning $36,182 per year, was on average paying $527 of fuel excise per year, or 1.11 per cent of their total earnings. Whilst someone earning $150,000 per year was on average paying $786 per year or only 0.4 per cent of their total income. Factors behind this discrepancy include wealthier people owning newer, more efficient cars, and low-income earners living further away from their place of work, with less public transport connectivity.

While most would agree that environmentally-conscious alternatives to fossil-fuel-based transport should be encouraged, the technology is simply not developed enough to be affordable or practical for low-income earners and regional communities. Our country is vast and lacks the rail and public transport infrastructure to provide any reasonable alternatives for these communities. Until this is solved, we must recognise that fuel taxes will continue to drastically impact much of Australia’s cost of living.

Australia has six months before the fuel excise is set to double back to its original levels, we should use this time to seriously consider whether we should maintain our punishing fuel tax system that distorts fuel prices and disproportionately hurts our disadvantaged communities.

Extracted in full from: Flawed fuel taxes cost us a fortune | The Spectator Australia