Public finance and bureaucratic convenience

Bureaucracy is a very important aspect of getting things done. I regularly recommend that people read Ludwig von Mises’ little book (pdf) of the topic of bureaucracy.

At the same time I’m also well aware of the problems of bureaucracy – one of them is that bureaucratic convenience comes to dominate decision making or even understanding of objectives. This is the fate of the fuel rebate. Most people now think of the fuel rebate as being a subsidy because that is how it is administered and reported. In fact the better way to understand it is as being an interest free loan to the government.

So why am I going on about this now?

This morning the always excellent Adam Creighton has a piece in the Australian talking about how government spending should be cut. So what he did was ask a whole bunch of people – including myself – to identity potential spending cuts. Reading through the article I think there was remarkable agreement on most of the issues.

But …

Little-known “fuel tax credits”, which rebate the cost of excise for businesses that use lot of fuel, chew up more than $5.5bn a year. By encouraging use of fossil fuels, they work in the opposite direction from the new carbon tax.

When you read through the budget expenditure the fuel rebate jumps out as being a huge number and people looking for savings would very easily categorise that as ‘Subsidy’ and mark it down for the chopping block. I was of the same view until I looked into the history of the rebate.

One of the most significant expansions of fuel excise occurred in 1957 when an excise on diesel was introduced to ensure that operators of diesel vehicles contributed to the maintenance of roads. It was at this time that the first exemption for excise was introduced, as diesel excise was only applied for on-road uses of diesel. This was because a formal policy of hypothecating excise revenue for road construction was still in place. …

In 1957, an exemption certificate scheme was set up to provide an exemption of excise for all off-road users of diesel fuel. This continued after the 1959 end to formal hypothecation of petrol and diesel excises to road funding.

In 1982, the Government abolished the exemption certificate scheme due to alleged abuse of the system, whereby on-road users were obtaining diesel that had been purchased duty free via the exemption certificate system.

The Diesel Fuel Rebate Scheme (DFRS) was introduced to replace this scheme. This effectively did two things:

• all users of diesel fuel were required to purchase duty paid fuel, with eligible users then being able to claim a rebate equivalent to the excise for certain off-road usage; and

• the rebate was limited to primary producers, miners, users of diesel for heating, lighting, hot water, air-conditioning and cooking for domestic purposes and for diesel fuel used at hospitals, nursing, and old-aged persons homes. It further restricted eligibility within these categories to only certain activities, for example, mining did not include quarrying.

So here is the story in a nutshell. The government initially introduced an excise on diesel fuel (as a hypothecated tax) on road users to finance road maintenance. So by definition non-road users shouldn’t pay the excise. So how to ensure that road users pay the excise and non-road users don’t? Over time different approaches have been introduced to collect the excise from road users but not from non-road users. At present the excise is collected from all diesel sales and then non-road users are refunded the excise. So while it looks like a subsidy and many individuals discuss it and describe it as a subsidy it isn’t a subsidy.

Many individual tax payers receive a refund at the end of the year having over-paid their income tax – nobody refers to that as a subsidy. So too being refunded fuel excise isn’t a subsidy. Instead of the refund being eliminated as being a subsidy, the Commonwealth should be paying interest on that money.

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35 Responses to Public finance and bureaucratic convenience

  1. NoFixedAddress

    Thank you Sinclair.

    Having grown up on a farm and also been involved with the green timber harvesting and processing industry I find it unconscionable when I hear and read how some ‘enlightened’ folk refer to this rebate of your own money categorised as a ‘subsidy’.

    There is one obvious way to get rid of this ‘subsidy’ and that is to eliminate the excise duty and not just on fuel!

  2. I am the Walrus, koo koo k'choo

    Yes this is quite correct.

    Actually since 1959, when hypothecation ended, there has been no justification for any exemption or rebate. There’s therefore a case for applying the excise to every user of diesel, especially as its price elasticity is relatively inelastic .

    However there’s no votes in taking away privileges once granted – especially for farmers! And now the times have proven that it’s even difficult to raise the tax burden of miners – although I suspect that had more to do with the incompetence of Rudd, goose and olive than anything else.

  3. Entropy

    So you are saying the excise is justified? It’s a good tax?

  4. Judith Sloan

    Absolutely. And this is Treasury’s view too. It is not counted as a tax expenditure.

  5. Rob MW

    “I was of the same view until I looked into the history of the rebate.”

    Sinclair – I am a farmer and I have been aware all the while of the history of the rebate and nearly every farmer I know is aware of this same history, so why did you not simply ask a farmer about it, or are all farmers simply lairs and not to be trusted ??

    Btw – a “Rebate” or tax credit can never, as a matter of definition, be called a “Subsidy” because a subsidy is when the Government actually gives out taxpayer’s money and alternatively, a rebate or tax credit is where the Government simply takes less of the taxpayer’s money.

    For your information the diesel fuel rebate is a simple line item attached to our BAS statements and, (the BAS) is a form of “Rebate” of itself (i.e) – GST on business revenue is offset against GST on business capital expenditure and the difference is either rebated or tax is paid, depending on which way the (+/-) difference is.

  6. NoFixedAddress

    Delingpole has an interesting challenge for everyone on this site….

    I particularly liked the comments of ‘dr’

  7. Keith

    Spot on Sinclair.
    The only fuel related subsidy I can recall was the Fuel Freight Subsidy (or something like that). It was intended to help reduce the price of fuel in the regional areas by offsetting the cost of transporting the fuel there. I think it got ditched at least a decade or two ago.

  8. Judith Sloan

    And the stupid Qld. One, now abandoned.

  9. Rob MW

    “I was of the same view until I looked into the history of the rebate.”
    Sinclair – I am a farmer and I have been aware all the while of the history of the rebate and nearly every farmer I know is aware of this same history. (apologies – hindsight is 20/20 vision)

    Btw – a “Rebate” or tax credit can never, as a matter of definition, be called a “Subsidy” because a subsidy is when the Government actually gives out taxpayer’s money and alternatively, a rebate or tax credit is where the Government simply takes less of the taxpayer’s money.

    For your information the diesel fuel rebate is a simple line item attached to our BAS statements and, (the BAS) is a form of “Rebate” of itself (i.e) – GST on business revenue is offset against GST on business capital expenditure and the difference is either rebated or tax is paid, depending on which way the (+/-) difference is.

  10. Eyrie

    Judith, get a clue. The stupid Qld subsidy wasn’t a subsidy. The Qld government had never taxed fuel as such.The other states did and also taxed tobacco. A
    “franchise fee” I think it was called. This was challenged in the High Court and ruled unconstitutional so the feds offered to collect it. So they had to collect it from all Australians including Qld. As they hadn’t introduced a tax on petrol the State government tried to refund it.
    You can argue that Qld should have taxed petrol all along or that the refund method was stupid and incompetent(like much of what the Beatty/Bligh govt did) but get the facts straight.
    If this is what passes for comment from a leading economist we’re in trouble.

  11. Johno

    I endorse your recommendation to read Mises’ Bureaucracy as it provides a good understanding of what bureaucracy can and can’t do.

    Mises makes clear that bureaucracy is a means to an end and, depending on the end you wish to achieve, bureaucracy may, or may not, be the best means of achieving it. People often criticise bureaucracy itself, when the real problem is that bureaucracy is the wrong means being applied to meet a particular end.

    For example, services, such as health and education, should be delivered by markets, not bureaucracy, because markets are a superior means of delivering services than bureaucracy. Much of the current criticism of our health and eduction system focuses on the number of bureaucrats employed and arguing for fewer bureaucrats and more nurses and teachers.

    This critique misses the point. If you have governments delivering these services, then you need a central planning bureaucracy to do all those things that markets do in coordinating service delivery for free. You may be able to trim back the number of bureaucrats, but you will still need a stack of them if you are going to persist with government delivery.

    It’s time to stop wasting our breath arguing about whether Canberra or the States should be delivering which services and how many public servants are required. The main game is that bureaucracy can’t deliver services better than markets, so it is time to get government out of the picture.

  12. Steve

    Bob Brown often refers to the diedel fuel rebate as “billions of dollars in fossil fuel subsidies going to the mining industry”. He is never challenged on this when he says it, the disingenuous old fuck.

  13. stackja

    Most people now thing of the fuel rebate…

    Most people now think of the fuel rebate..

    Oh what a tangled web we weave. When first we practice to deceive. – Sir Walter Scott , in Canto VI, Stanza 17 of “Marmion” (1808) an epic poem about the Battle of Flodden Field in 1513.

    Quote Mistakenly Attributed to Shakespeare.

    Democracy is not a good that people can enjoy without trouble. It is, on the contrary, a treasure that must be daily defended and conquered anew by strenuous effort. Ludwig von Mises

    So we must always hold Canberra to account. But will this interfere with our sporting pursuits?
    Refunds for all! End all rebates!

  14. Sinclair Davidson

    Rob MW – when I do speak to my farming friends we tend to talk about our kids and the football and related topics. I’ve noticed that people don’t find talking about tax as exciting I do. :)

  15. Chris M

    The government initially introduced an excise on diesel fuel (as a hypothecated tax) on road users to finance road maintenance. So by definition non-road users shouldn’t pay the excise.

    So this excise is specific to diesel and not on petrol or kerosene etc, or do they call it something else for other fuels?

    And if so why do I have to pay it on fuel when I fly seeing as I’m not using the roads?

  16. Rob MW

    Sinclair – again apologies. I just thought that you, of all people, would have been aware long before this of the situation. In effect, removal of the diesel fuel rebate, and not unlike the Carbon Tax in raising the cost of living for consumers, would constitute a tax on the primary production of food, fibre, raw minerals (steel & metal production) etc.

    On the other hand, it is indeed exhilarating that some commentators are more than willing to pay the higher cost of living when primary production is fully taxed. Perhaps they expect that there will be some sort of government entitlement forthcoming from the removal of the rebate that would insulate the consumer.(sarc)

  17. Super D

    It only remains a rebate if the nexus between excise and road maintenance is maintained (which would be a largely mental construct).

    If you see the excise as an environmental sin tax or indeed just as a general revenue tax then where and how the fuel is used is of no consequence.

  18. wreckage

    I’ve noticed that people don’t find talking about tax as exciting I do.

    I was raised in a very strange family then.

  19. wreckage

    So this excise is specific to diesel and not on petrol or kerosene etc, or do they call it something else for other fuels?

    I believe they are all under slightly different tax regimes, yes.

  20. Sinclair Davidson

    Rob MW – no worries. I was probably a bit unclear. I looked into the rebate some time ago but only posted today because the article in the Oz mentioned it.

  21. Perth Trader

    The diesel fuel rebate for road transport is 15 cents per litre.If a trucking company uses 100,000 litres of diesel,no matter how much per litre they pay there reimbursed 15cents ie $15000. The $15000 is then classed as part of the companies income,so it goes back into the companies income tax assesment.Remembering that the $15000 is already capital thats had income tax assessed and paid on it .Its a happy little merry go round and a win win for the ATO.

  22. J.H.

    As a Commercial trawler operator in Qld, we used to get a rebate of 0.36 cents. I’m pretty sure it was.

    I used to go through around 700l a night(or 24 hour period counting the auxiliary which ran 24 hours, the main is only running about 14 hours.)

    I’d burn through 10000 liters a fortnight between motherships. Which was a nearly a full fuel load for the ol’ girl. When I left the industry, I was paying about 0.75 cents a litre off after the rebate was removed… So about a 1.11-ish without the rebate.

    The year I left, 2005, the price of fuel went berserk, up over a dollar ex rebate….. Whereas, back in 1998 we were paying 0.28 cents a litre and getting 18 to 25 bucks a kg for the two top grades of prawns…. Aussie dollar was about 0.48 against the Greenback then…Thereabouts anyways.

    You couldn’t do Primary industries without the fuel rebate… or just cheap fuel for that matter. Play games with fuel and energy prices, and industry just closes shop. It has too.

    I knocked off in 2005 from trawling… On top of running costs, the bureaucracy and ecofascism became too much for me in the end. The regulation became so punitive and witchhunting. You could very easily go to sea a seafaring family man and arrive back in port a criminal, a vandal of the environment. The lowest form of scum. Wasn’t worth the ulcers.

    Poor sods….. God knows how they make a living now with the Aussie dollar being so high, prawn prices so low and fuel prices off the planet?

    Last time I when down to the trawler base the place was deathly quiet and there was a trawler sunk at the moorings. The ‘Danny Mac’… Very depressing. Use to be a hive of activity. A place full of thriving, enterprising hard men. All seems to be gone now… sigh.

  23. If the fuel excise is only for road maintenance, why can’t people who use fuel for pleasure boating, aviation or exclusively off-road vehicles (e.g. Dune Buggys, Trail Bikes) get the fuel rebate?

  24. J.H.

    Yobbo…. The Fuel rebate only applied to diesel and was only for Primary industries…. and only fuel used for the business or company… Not private diesel vehicles.

  25. wreckage

    If the fuel excise is only for road maintenance, why can’t people who use fuel for pleasure boating, aviation or exclusively off-road vehicles (e.g. Dune Buggys, Trail Bikes) get the fuel rebate?

    Mainly because there was no hoop to jump through, so then everyone would be able to have their fuel taxed less… and we couldn’t have that!

    Technically it is legally required that excise and non excise fuel never mix. Fuel tanks stationed at property entrances so that prior to leaving the property a tractor can have its fuel tank siphoned of non-excise fuel and be filled with excise fuel. If only crossing a road it would then reverse the operation on the other side of the road.

  26. Tim

    The former Diesel Fuel Rebate has become the Fuel Tax Credit, and now applies to not only diesel but also petrol and I strongly suspect Av Gas & Kerosene. If you use it off road you get the largest rebate, but there is still some rebate for big trucks or farm machinery operating on roads.

    If you use the equipment partly on road and partly off you have to apportion. I don’t believe you need to drain your tank to cross the road, just keep a log book.

    I could look up the actual details to be 100% correct, but then so could any of you.

    http://www.ato.gov.au/content/76594.htm

  27. Milton von Smith

    Actually since 1959, when hypothecation ended, there has been no justification for any exemption or rebate. There’s therefore a case for applying the excise to every user of diesel, especially as its price elasticity is relatively inelastic .

    False. It would then be a tax on production which is very inefficient. For the same reason we allow businesses to claim an input tax credit for the GST.

  28. Tim

    It would then be a tax on production which is very inefficient.

    Which is the answer to Yobbo’s point on why anyone can’t claim it – the FTC is only available to business as it is meant to rebate business costs. The government wants consumers to bear the final incidence of the tax.

  29. “Any tax on energy inputs costs the economy more than it raises for the government.”
    I say this not as a fact, but as an article of faith – and I’d bet my left ovary that I’m correct.
    Cut the bloody taxes and regulations on production, and watch the economy fly.

  30. Chris M

    “…now applies to not only diesel but also petrol and I strongly suspect Av Gas & Kerosene. If you use it off road you get the largest rebate…”

    The system is distorted. I can claim the tax credit on fuel used in the generator and burner but not in the aircraft so it isn’t as simple as on vs off road.

  31. wreckage

    Really the rebate should be extended to all non-road use, and all business inputs.

  32. Tim

    OK, you are right, Av Gas not included, for some unknown reason.

    FUELS WHICH ARE NOT ELIGIBLE
    Some fuels are not eligible, including:
    * aviation fuels
    * fuels you use in light vehicles of 4.5 tonne gross vehicle mass (GVM) or less, travelling on a public road – for example, a car, small van or taxi
    * fuel you acquired but did not use because it was lost, stolen or otherwise disposed of
    * fuels, such as ethanol or biodiesel that have already received another grant or subsidy

    Really the rebate should be extended to all non-road use, and all business inputs.

    The system as set up is based around having an ABN and filling in a BAS. So that would make practical difficulties. But I agree, if it is a tax for road use, all non-road use should be excluced from paying it.

  33. Entropy

    I am still trying to get my head around Judith labelling an excise as a good tax.

  34. NoFixedAddress

    Sinclair,

    I skimmed through that Fuel Tax Inquiry you linked to your post and I was struck at the time by Box 2.1 Key events in the history of fuel taxation where they stated that in 1994 and 1999 the Government Policy Objectives were Environmental.

    Also, 2.7 The 1990s: addressing fuel substitution, implementing administrative changes and considering the environment and just before Section 2.8 of the document it mentions This was the first such inclusion of an environmental mechanism within the excise system.

    Keating was Prime Minister in 1994 but 1999 I did not look although the Victorian election occurred in 1999 and Steve Bracks became Premier!

    What I wonder is what similar “environmental legislation” programs were undertaken in State Government Parliaments since that time and what impact has that made, cumulatively, over the years to the consumer cost of electricity supply?

    We in Australia should be paying virtually nothing for electricity and “I reckon” we can still do that!

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