Cutting petrol taxes an easy but false response

2008/06/04

Cutting petrol taxes an easy but false response

By Benjamin K. Sovacool

HIGH oil prices have once again sparked debate over whether governments in the United States, Europe, and Australia should suspend, reduce, or eliminate taxes on motor fuels such as petrol and diesel. Elimination of these taxes, however, would harm the public more than it would help it.

With oil prices hovering around US$130 per barrel and gasoline prices in the United States surpassing an average of US$3.79 (RM10) per gallon, policymakers everywhere, under pressure from constituents, seem to be reconsidering taxes on petroleum.

American presidential candidates have discussed permanently lowering federal government taxes on fuel - currently about 18.4 cents on every gallon - and the House of Representatives introduced three proposals last month for suspending the gas tax for the summer.

In Germany, Greece, and Italy, lorry drivers have staged strikes to protest government taxes on petrol.

In Australia and the United Kingdom, farmers and fishermen have called on their politicians to reduce or eliminate fuel taxes to protect small-scale enterprises suffering from higher fuel costs.
While the frustration with escalating oil prices is understandable, lowering gasoline taxes will only increase government deficits and encourage waste and higher prices.

First, government taxes on petrol, diesel, and other motor fuels often directly fund much-needed transportation infrastructure.

Abolishing the federal petrol tax in the US, for instance, would cost the government about US$9 billion in annual revenue (and 300,000 jobs associated with it). The Highway Trust Fund, which provides financing for national road projects, says it already faces a US$3.4 billion shortfall.

Moreover, the American Society of Civil Engineers reports that investments in highway infrastructure facilitate huge economic benefits. They project that every $1 invested in highways and roads produces $5.40 in economic benefits from reduced congestion, improved safety, enhanced fuel economy, and better vehicle maintenance.

Thus, eliminating or reducing petrol taxes will only lead to poorly maintained roads, more accidents, fewer jobs, and the need for even costlier investment later.

Given that 1.2 million are now killed in road crashes every year, along with an additional 20 to 50 million injured, road accidents, and the burden of death, disease, and injury they bring, are hardly something we need more of. The healthcare costs of cutting petrol taxes and investment in infrastructure alone could be staggering.

Second, eliminating petrol taxes encourages excess consumption and erodes incentives to conserve fuel. One of the fundamental tenets of economic theory, and perhaps common sense, is that consumers need accurate price signals if they are to use resources properly. In the case of petrol, a failure to include many of the external costs associated with motor fuel usage - noxious particulate matter and ozone emissions, climate change, noise, fuel shocks and price spikes, degraded land, traffic congestion - already incentives drivers to use more of it than they should.

Cutting taxes only muffles the price signal further, discouraging consumers from seeking cleaner alternatives, encouraging the over-consumption of oil and thus higher use and prices, and leading to capacity developments and consumer patterns in excess of true needs.

No, removing petrol taxes will do little to mitigate the fundamental factors behind rising oil prices: preferences for more and larger cars, urban sprawl, billions of dollars in oil and petrol subsidies, and the role that un-priced externalities play in the price disparity of petroleum.

The tendency for acceptable responses to the problem of higher oil prices to be limited to lowering taxes tells us how weak governments have become, and how deep the problem goes. Years of truly colossal profits for oil companies have given them the ability to erode government capacity and regulation that counters their interests.

The US House of Representatives, for instance, tried to repeal US$22 billion worth of subsidies for the oil and gas industry in 2007 during preliminary discussions of the Energy Independence and Security Act. The senate squashed the idea, however, under direct threat of a veto from the White House when finalising the bill. Some governments, it appears, have little control over their own energy subsidies.

The fact that publics around the world are pressuring their governments to reduce petrol taxes - but not to use less oil and petrol , alter consumption patterns, research and develop alternative modes of transportation, or eliminate profligate subsidies - tells us just how difficult reducing our dependency on oil will be.

Dr Benjamin K. Sovacool is a research fellow in the energy governance programme at the Centre on Asia and Globalisation, National University of Singapore.