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.
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.