Guest Post – Stephen Dawson: How a Tobacco Decision Turned Tax Free Petrol into Subsidised Petrol

Sinclair Davidson (‘Public finance and bureaucratic convenience’) notes that through the passage of time what was once a kind of road-user-pays fee on diesel morphed into a subsidy. But that’s not the only thing to have done so.

Because, of course, what was once tax free petrol in Queensland became ‘subsidised’ petrol, all thanks to the proprietor of a ‘duty free store in suburban Sydney’, as the 1997 court case described it.

It was Mr Ha’s store, and in the early 1990s he and a partner were selling tobacco products from the store without holding relevant licences required by New South Wales law. Obtaining those licences required paying fees roughly in proportion to the amount made on tobacco sales.

The amounts were not inconsiderable. With back fees and penalties, the NSW Government eventually sought more than $22 million dollars.

Lots of fine and eminently arguable points of law are never authoritatively decided because it is in no-one’s interest to bear the legal costs. With this much money at stake, that was not the case here.

In the end, this case found itself in the High Court of Australia, and the pivotal question was whether the fee under the NSW law was an excise, within the meaning of Section 90 of the Australian Constitution. Under that provision the power to levy excises is ‘exclusive’ to the Commonwealth.

The Court decided narrowly (four to three) that it was indeed an excise, and so a significant shift in the finances of the Australian States commenced, since most states had similar arrangements to those employed by NSW, and for things beyond just tobacco products.

Petrol, for one.

Queensland back then was a rarity, in that its petrol was excise free. It seemed almost to be a point of pride. New South Wales did tax its petrol, a tax now held in effect by the High Court to be an unconstitutional excise.

A simple fix was arranged. Instead of each State raising its fees from these various commercial activities, the Commonwealth would raise them and pass the money back to the State governments. Really, all it would involve would be a few more public servants to manage the process.

Except for one wrinkle: under Section 99 of the Constitution the Australian government cannot ‘give preference to one State … over another State’. The Commonwealth could not apply an excise to petrol in New South Wales, but not in Queensland. It had to be uniform.

So, that was easy enough. Petrol prices in Queensland went up by the amount that the Commonwealth levied as an excise. They stayed more or less unaltered in New South Wales; it was only the destination of the money that changed for them.

The Commonwealth sent the amount of money raised in each State to the respective State. New South Wales continued to fritter it away just as before. Queensland reimbursed it to its petrol stations to the same level at which they’d paid it.

So the flow of money was convoluted, but everything was much the same as before, aside from that small Federal bureaucracy, plus another one in Queensland, to manage the process.

Everything was the same, that is, except the name. And there’s a lot in a name.

What before had been tax free petrol was now subsidised petrol.

With that name change the movement of Queensland’s petrol prices regime into alignment of that with the other States became inevitable.

Politically, removing a ‘subsidy’ is a much less unattractive option than raising a tax. So it was only a matter of time, but how much time? How long before memory of the reason for the ‘subsidy’ ebbed to make its elimination politically feasible?

Prior to the 2009 Queensland election Anna Bligh promised to retain the subsidy, so perhaps she judged that enough time had then not yet passed. But facing dire budgetary problems a few months later, she seems to have convinced herself that perhaps enough time had passed after all.

Big mistake.

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13 Responses to Guest Post – Stephen Dawson: How a Tobacco Decision Turned Tax Free Petrol into Subsidised Petrol

  1. Gavin R Putland

    …the pivotal question was whether the fee under the NSW law was an excise, within the meaning of Section 90 of the Australian Constitution. Under that provision the power to levy excises is ‘exclusive’ to the Commonwealth.

    The Court decided narrowly (four to three) that it was indeed an excise…

    The same four Justices would have found that stamp duties on new vehicles are excises: http://is.gd/vduncon .

    All seven Justices would have found reason to conclude that payroll tax is an excise. If an excise is “an inland tax on a step in production, manufacture, sale or distribution of goods”, as held by four of the Justices in Ha v. NSW, then paying the workers is such a “step”. If “A State tax which fell selectively upon goods manufactured or produced in that State would be an excise duty”, as held by the remaining three Justices in the same case, then a domestic payroll tax is indeed selective in that way, because it falls on the labour content of local goods but not imported goods. If an excise is a tax whose “criterion of liability” is “a step in a process of bringing goods into existence or to a consumable state, or passing them down the line…”, as held by Justice Kitto in the Dennis Hotels case (1960), then again paying the workers is such a “step”. By any of these definitions, a State payroll tax is unconstitutional in so far as it affects goods; and its effects on goods are not undone by its similarly adverse effects on services and real estate.

  2. Gavin R Putland

    P.S.: Employers’ associations should therefore be advising their members to pay their payroll tax instalments “UNDER PROTEST” to maximize the chances of recovering the instalments if the tax is eventually ruled unconstitutional.

  3. entropy

    Quite so, GAvin. That is why this statement is so apropos:


    Lots of fine and eminently arguable points of law are never authoritatively decided because it is in no-one’s interest to bear the legal costs. With this much money at stake, that was not the case here.

  4. Amortiser

    Gavin:
    Dont hold your breath. When the states lost their case in the High Court, a large number of businesses in Queensland issued writs for the recovery of all the tax that had been illegally collected.

    Now you would think that this was a natural outcome. They had paid taxes that had been illegally imposed. Therefore it was refundable. An open and shut case. The government was no different from a common brigand.

    Peter Costello came to the rescue with probably the greatest abuse of power ever perpetrated against citizens. Costello threatened all plaintiffs with retrospective legislation to tax 100% and court ordered refunds.

    If any other citizen had threatened another with such a detriment if they took court action, the perpetrator would be charged with serious contempt of court and jailed.

    Governments regard the constitution as an administrative inconvenience rather than a leash that properly constrains them. They are now happy to be regarded as common brigands. There is no pretence at all.

  5. Gavin R Putland

    P.P.S.: Of course anyone who buys a new car (not a used car) should likewise pay the stamp duty “under protest”. If anyone tries this, I’ll be curious as to what response, if any, is received.

  6. Toxic

    I’m much more curious as to the destination of funds raised by the federal fuel excises today. Sparing the economists’ lecturing on the evils of hypothecation, I’d like to know what of the amount raised is granted back to the states, and under what conditions. Ha v NSW intrigues me, like any court case which turns out to corrode federalism, but reading material on the aftermath seems scarce.

  7. Eyrie

    I was right. Judith was wrong.

  8. Nonsense

    Toxic

    The revenue replacement payments ceased with the introduction of the GST revenue sharing arrangements.

    Ha v NSW was a catalyst to the introduction of the GST.

  9. Stan

    Technical note – diesel is not petrol.

  10. NoFixedAddress

    Thank you for that Stephen and Sinclair.

  11. Rob MW

    “What before had been tax free petrol was now subsidised petrol.”

    Thanks for that Stephen. We can all see how the so-called ‘Progressives’ commit to their very own hypocritical definitions for words and phrases.

    The leftoid geniuses applauded the “Tax Free” threshold for low income earners being lifted to about $18k per annum without once referring to it as a “Low Income Subsidy”.

    The mind boggles at what would happen if all those “Subsidies” were removed from the Tax Act. Perhaps we could run the whole show as a type of “Trust” without the necessity of an incorporated “Trustee”.(sarc)

  12. ar

    Maybe they could have used those repaid excises for infrastructure flood insurance?

  13. mundi

    This is another reason why we shouldn’t even have a constitution. All it means is that they have to add more red tape to abuse us, which makes the abuse worse.

    I’ll take a local representative over some document written 100 years ago. At least I can have a say to have one removed.

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