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)
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:
- 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.
- 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.
- 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.
- 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.