Abbott introduces Carbon Tax

Shock, horror and awe. The Abbott Government announcement that it will index the petrol excise levy: Petrol tax via the backdoor will hit both motorists and servos has been greeted by predictable outrage. But more on that later.

First some history: Fuel excise stopped being indexed for inflation in 2001 in a gutless political decision on the part of John Howard before the general election. This meant that the effective rate of the excise has been reducing and is now about 28% lower in 2014 dollars.

 John Howard: capping fuel excise seemed like a good idea at the time

John Howard: capping fuel excise seemed like a good idea at the time

The problem that Abbott is facing in reintroducing the indexation of the levy is that it is a part of this legacy from the Howard era and, in particular, from Peter (tax cuts) Costello.

Costello regarded himself as a great Australian Treasurer. Despite Howard's obvious adulation, he wasn't

Costello regarded himself as a great Australian Treasurer. Despite Howard’s obvious adulation, he wasn’t

Had Costello not taken the easy option and passed all of the benefits of the booming economy back to taxpayers  as tax cuts during his time as Treasurer, the budget would not be facing the structural  problems it faces today. Abbott is now facing the consequences of this political profligacy and economic shortsightedness.

Some definitional issues. 

(i) Abbott is already arguing that this is not a new tax but merely an indexation of an existing one. He is yet to run, but will certainly soon run, the argument that it’s not a tax at all, it’s a levy.

There are a number of other things that also aren’t taxes: co-payments, imposts, co-contributions, tariffs, duties, tolls,  contributions,  tributes, tithes, charges and fees. So Abbott has a lot of wriggle room before he imposes a new tax.

Nonetheless, if it walks like a duck, quacks like a duck and fucks like a duck, it’s likely to be a duck. In this case, the impact on the motorist is exactly the same, regardless of the weasel words that are used to describe it.  So this boils down to breaking the promise of no new taxes.

(ii) This is a tax on carbon consumption and is likely to have effect similar, but lesser, effect to that of the now-abolished Carbon Tax. It will  put up the price of  petrol and to some extent limit demand and usage. Some people will not be able to avoid the  increasing cost of petrol, particularly if they live in areas not well serviced by public transport. But we can expect to see some decline in petrol consumption, particularly as the price increases get steeper.

The financial impact

This will be the real killer. The levy is currently $.38c per litre and will be increased by the inflation rate every six months. This means that the rate of the levy, not just the levy itself, will be increasing.

Modelling suggests that this increase will initially be $.06c per litre bit rising to $.13c a litre in the next decade. On top of this there is the 10% GST. The modelling suggests that, all things being equal, the price of petrol (which is around $1.40 per litre now) will rise to just under $2.60 in the next decade. This will translate into approximately $80 a week in increased petrol costs. That’s $4000 a year. And in keeping with Abbott government policy, this cost will impact most on lower socio-economic groups.

This dramatic increase is due to the compounding nature of the tax at the Abbott government is imposing.

What petrol prices will do in the next decade

What petrol prices will do in the next decade

The financial impact of this particular tax increase will be greatest for the transport companies, people who rely on vehicles for their business and motorists. Hardest hit will be motorists in the socio-economically depressed outer-urban areas which are often badly served by public transport. Early reports indicate that the farming and mining sectors will be exempt this tax, another example of the Abbott government’s socially regressive policies and mate-protection.

There will also be an inflationary effects from these increases as they flow through into  broader economy.  Expect food prices to rise as transportation costs go up

 Is this a good policy?

It depends on which side of the petrol browser you’re standing.

Given the way the Abbott government has introduced this tax, by regulation rather than legislation, it must be passed into law by the federal parliament within 12 months. Otherwise, the money must be repaid. But not to the motorists: to the petrol  companies. This tax is levied on the petrol companies, not the motorists. The fact that the cost is passed directly on to the motorist by the petrol companies is a irrelevant. So if you’re a petrol company, this tax could be a real windfall.

If you’re a motorist and you’re thinking of the hip pocket, this is a very bad policy.

if you are a motorist living in the burbs, this tax will hit you hard

if you are a motorist living in the burbs, this tax will hit you hard

If you’re the Federal Treasurer, you will be seeing far more revenue flowing into the already overstretched budget, so this is a very good policy.

If you’re an environmentalist  (and we assume that the Greens are full of environmentalists) and concerned about the consumption of fossil fuels, you will see any tax that limits consumption as a good thing.   If you’re environmentalist, you may be scratching your head in bewilderment at the climate change-denying Abbott government introducing a tax like this but don’t take it as a change of heart.

If you concerned about the state of our democracy, and were alarmed at the decision to send troops to Iraq not being debated in Parliament, you will be equally dismayed by the Abbott government sidestepping the democratic processes when it can’t get its own way.

 Should this policy be supported by the Greens and Labor?

Certainly the Greens  should support it.  It’s a very green policy, albeit introduced by the very un-green Abbott government. The Labour Party should also support it for the same reason but won’t because the political advantages of attacking a “great big new tax” are far too great for Bill Shorten to resist.