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AA need to rethink GST proposal

Since at least 2008, the AA has been advocating for the government to remove GST from the excise duties collected on petrol. They call this a “tax on a tax”. I have to hand it to the AA: they’ve come up with one hell of a soundbite. Presumably this is why they’ve kept banging on about it for years, despite it being a very silly idea, and the extremely low likelihood that any government would take it seriously.

It’s worth reviewing the inputs into the price of petrol. Based on MBIE data here and here, petrol prices are made up as follows:

Petrol Price Components (in cents per litre)

Importer Cost 92.7
Importer Margin 27
Excise 64.105
ETS Charge 0.5
GST 27.6

The MBIE estimates the “importer cost” based on international prices, the exchange rate and shipping costs – whatever’s left of the ex-tax price is categorised as “importer margin”. Together, these make up 56.5% of the pump price, and the rest is tax.

The excise of 64 cents goes mainly to the National Land Transport Fund, with a bit for ACC. There’s an insignificantly small Emissions Trading Scheme (ETS) charge based on carbon prices, currently at just 0.5 cents.

GST is added last, at 15% of the total ex-GST price – just like pretty much every other consumer good.

What the AA want is for GST to be removed from the excise only, lowering prices by around 9.6 cents. As far as I can tell, they haven’t done any kind of economic analysis on their proposal, simply saying vaguely that it would “help relieve the financial burden on New Zealanders.”

They’re missing the point, and they would probably struggle to find an economist or consultancy who would back up their proposal. They seem to be standing alone on this one. Here are some of the reasons why the AA’s proposal makes very little sense:

  1. If you were going to remove GST on the petrol excise, why stop there? Wouldn’t you also do the same for the excise on cigarettes and alcohol? That’s a tax on a tax too, after all.
  2. Removing GST from the excise on petrol creates a $290 million (rough calculation, based on 2012 consumption) hole in the tax base. That’s a hole which would need to be filled from other sources – most of which are more expensive to administer than GST, and have a more distortionary impact on the way people behave.
  3. It would encourage consumers to buy more petrol, and while the AA may think this is a good idea – certainly in terms of shoring up its membership numbers – it’s unlikely to be a good thing for New Zealand. It’s bad for the environment, bad for our current account, and bad for our savings rates.
  4. It reduces the incentive for drivers to switch from petrol to diesel cars, since running a car on petrol would receive a favourable tax treatment. Diesel cars are more fuel efficient, and widely used in Europe (but not in NZ).

The AA talks about easing the “financial burden on New Zealanders”, but the reality is that this would only ease the burden for people who do a lot of driving in petrol-fuelled cars but who aren’t getting whacked by the increased tax take elsewhere. Others would lose, and we’d see slightly more distorted incentives for the economy. The country would be demonstrably worse off under their proposal.

25 comments to AA need to rethink GST proposal

  • Max

    And it would further spread the costs of driving from car drivers to the whole society, whether they drive too (a lot) or not.

    Our family has only one car, and I don’t think we should be paying for a larger share of the costs of our car culture through general taxes, just so that families with 3-4 cars, and people who drive everywhere, can be releived of some financial burden”. What about my financial burden?

    [Let alone the dire need to make sure that familis don't feel like they HAVE to have 3-4 cars in the first place!]

  • conan

    “They do have to earn their membership fees, after all.”

    I suspect most people join the AA so should they break down they have someone to call. I doubt they join because of these sorts of hare brained suggestions and I wish the AA would stop representing their members in this manner.

  • As vehicles are increase in efficiency the excise is, effectively, reducing per kilometer traveled. This means that roading is slowly no longer paying for itself (not that it did that for very long). So the best option would be to remove the excise tax from fuel altogether and put in RUC for all vehicles. This would address the concerns of the AA as well as ensure that the National Land Transport Fund gets the required amount of funding from vehicles.

    Of course, I think we’d see the AA start complaining about that as well.

    • Actually the efficiency of engines isn’t translating into lower fuel consumption per kilometre, because engines have tended to get bigger, cars heavier, and power systems more laden with the likes of power steering, air conditioning etc. Classic Jevons Effect.

      What is affecting the excise tax is that people are simply driving less kilometres per capita than they used to.

      Nonetheless I would agree with switching to an all-RUC system, assuming it’s not too cumbersome to administer. One question though, why not charge GST on RUC? GST is a service tax, road user charges are effectively how you pay for road use, a service. We pay GST on electricity supply, water supply, public transport supply, why not road supply?

      • Jacob

        There already is GST on RUC rates, as specified in the regulations. The vehicle fleet isn’t getting newer though, so there’s no current risk to excise revenue there, especially when it’s so easy to apply a simple excise to all petrol when it is imported, compared to charging a few million vehicles RUC individually.

        • The vehicle fleet isn’t getting newer though, so there’s no current risk to excise revenue there, especially when it’s so easy to apply a simple excise to all petrol when it is imported, compared to charging a few million vehicles RUC individually.

          We don’t find it too difficult to individually put a registration and WOF on each vehicle individually and a RUC on all vehicles would just be a small increase on that. It may have been an issue 30 or 40 years ago because it would have required the use of another few thousand people but with modern computers and the internet that is no longer true.

      • Actually the efficiency of engines isn’t translating into lower fuel consumption per kilometre, because engines have tended to get bigger, cars heavier, and power systems more laden with the likes of power steering, air conditioning etc.

        Although there is some of that I don’t think it’s eating up the entire efficiency gains that have been realised in car design and engineering. Throughout the 1990s I was happy to have a car that did 10l/100km but a lot of modern cars even with bigger engines, greater mass, power steering and air-conditioning are managing 8.5l/100km. That’s a fairly large saving.

        Nonetheless I would agree with switching to an all-RUC system, assuming it’s not too cumbersome to administer.

        RUCs don’t seem to be that cumbersome to administer as is. You can buy them online from the NZTA.

        One question though, why not charge GST on RUC?

        I probably would but the AA wouldn’t be able to say that it was a “tax on a tax” because it would be obvious that it was a tax on a service :D

      • SteveC

        the truism that engines are getting bigger doesn’t stand up, at least in european cars. the base model VW Golf has a 1.4 litre turbocharged engine, down from 1.6 a few years ago, modern engines might produce a bit less power but torque is up and in the end it’s twist that gets you down the road

        • MFD

          “but torque is up and in the end it’s twist that gets you down the road”

          Not this old chestnut. In this context power is the product of torque and rotational velocity. A transmission trades one off against the other. You can have any torque you want with the appropriate gear ratios. It won’t get you down the road any faster. Peak power is relevant, peak torque is not. Efficiencies notwithstanding, power is the constant through the transmission, differential, wheel diameter etc. Torque is not.

        • John Polkinghorne

          The main thing isn’t engine size, it’s vehicle mass – see http://transportblog.co.nz/2012/12/11/trends-in-car-fuel-efficiency/

  • Ran Derson

    New Zealand’s GST system is one of the most efficient in the world. It’s efficient because it has so few exceptions.

    The need to save motorists a few cents here and there is not outweighed by the need to keep our GST system robust. It’s the one of the reasons I also oppose removing GST off food or fruit or vegetables.

  • Jacob

    Re point 4, you’d assume that if they take the GST off petrol, they’d also take it off road user charges (which all include GST), so it shouldn’t affect the relativities between peteol and diesel any more than now. its also another $150m or so GST revenue that’d be lost.

  • jonno1

    GST is and must remain universal. End of story. Sure, there’s some zero-rating (eg for residential rents), but that doesn’t change the principle.

  • SteveC

    and let’s not forget that business gets to claim back the GST component, so it doesn’t have an adverse effect there

    • greenwelly

      Of course they can claim it back, its because GST is ,and has always been, a 15% final tax on consumers.

      But it is not a total “claim back GST on everything a business purchases” , they can only claim back the net amount of tax paid less the amount of GST that they collect off good and services they then provide,

      If a firm only purchased fuel, and then did not then make any sales, yes they could claim back the GST, but when they eventually sold something they would have to return the GST they charged to the government,

      Anyone who pays GST and doesn’t then on sell a good or service is a final consumer and thus should rightfully pay it.

      • MFD

        “it’s because GST is ,and has always been, a 15% final tax on consumers”

        IIRC it started out as a 10% tax, then went to 12.5% then 15%. I won’t be surprised if it increases again. The higher the rate the more clamour there will be for silly exemptions (such as the AA’s)

      • Bryce P

        But generally you get to claim a bucket load back. Also, just purchasing a single new motor vehicle gives you a big payback in GST. GST encourages businesses to buy capital items.

        • MFD

          If a business has income greater than expenditure (which most do) then the amount they claim back is less than the amount they charge. Simple really. I run a business. The amount of GST I pay is a lot more than the amount I claim back on the inputs to my business because I add a lot of value. That’s how a value added tax works. As for GST encouraging a business to buy capital items? How? Whether the rate of GST is 0%, 10%, 20% or 50% it makes makes no difference to the cost of the item. The net price is exclusive of GST; you pay it then get it back again. There’s no magic source of money here.

          • jonno1

            Spot on MFD. I marvel at the ignorance of many who have never operated a business or even bothered to think about what is involved. Also capital items, while depreciable (or expensed if <$500) are still a net cost, so no business spends capital just for fun. You replace your vehicles or plant or computers when you have to, and not a moment before. And then there's FBT.

            OTOH, running your own business does allow you to waste some time on blogs…

  • Greg N

    Well, I (and probably most of you here too, whether you know it or not) pay more GST a year on my Auckland rates than I do on the petrol I put in my car to drive around Auckland.

    As an AA member, I’d prefer they lobbied the Govt to get rid of the “Tax on a Tax” on my Local body Rates first, than worry about removing GST from my petrol.

  • JimboJones

    This is the kind of campaign that appeals to the common man but sounds really stupid to those who have a better understanding of economics. I thought the AA would be better than this!

  • Anthony

    The RUC system, without sealed hub odometers, is open to the rort of people disconnecting or otherwise tampering with their vehicle odometer. From what I have observed, this is widespread amongst owners of diesel cars and light diesel vehicles. An excise tax on diesel makes more sense to me.
    15% GST already makes retailing in NZ difficult, when goods are available GST free via the internet. There is no sensible way of imposing GST on internet purchases, so I don’t think raising GST further is such a good idea from this point of view.

  • Mark Todd

    Actually it’s the opposite. Removing some tax on fuels would mean a fairer system of tax for everyone because at the moment the motorists are paying a disproportionate level of tax which goes into the general slush fund. There are many people lobbying that fuel taxation should only be spent on roads

    • Steve D

      Since 1 July 2008, fuel taxation, road user charges and registration fees do all go into the National Land Transport Fund, almost all of which is spent on roads or road policing. Most of the rest goes on public transport services, there’s also a pittance spent on walking and cycling (if you even count that – the spending on walking and cycling hardly makes up for the environmental and severance effects caused by car-dominated roads in the first place).

      But that’s also topped up with billions more on roading from local body rates nationally, and private sector spending on parking that’s required as a resource consent condition for pretty much all development.

      And even this is recent – motorists benefit from having getting the lion’s share of the use from the more than a century of roads that we’ve inherited. Roads that were built at either public expense, on public land, or required to be built as part of subdivisions.

      All modes of transport are “subsidised” to some degree, but private car travel is perhaps the most subsidised of all.

  • Mark Todd

    In the UK there is a very well organised lobby group called Fairfuel.co.uk it is run by a professional lobbiest organisation owned by members (including an mp) of the Lib Dems who are supposed to be for increasing fuel taxes. Who ever would be surprised of a politicians double standards. The group is funded by the UK Road Haulage Association who stand to gain enormously from lower fuel tax. Cleverly the Fairfuel people have got the public to support the cause by making them think that a reduction in fuel taxes will create jobs and boost the economy. They employ Quentin Wilson an ex Top Gear rent a celeb as spokesperson and have the support of the Sun news and RAC. Some of the economic ‘studies’ show how the UK will grow its economy by reducing fuel taxes. It’s not dissimilar to the tobacco lobby or NRA. Worryingly they have managed to frighten the UK Govt into backing down on planed fuel tax increases so to a point they have been successful. I recommend you visit their website or Facebook page just to see some of the twisted arguments. It’s quite an eye opener.

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