Petrol and Public Policy in NZ

This morning I was reading some questions over on this post. Another related question is what are the public policy impacts of having a tax on a tax (GST on excise for petrol) and shouldn’t that be sorted?

“We think we have it bad in New Zealand paying $1.88 a litre. Converting that to gallons, so we can make a UK comparison, that equals $8.50 a gallon. In the UK motorists $12.76 a gallon, or 50% more than us. And they are closer to the oil fields….

In the UK the Labour Government taxes petrol so much that over 65% of the price at pump returns to them. We consider the 35% in taxes and levies here in New Zealand excessive. Is the government investing that money back into research on alternative fuels, or does it return to the general coffers?”

The writer used the imperial gallon measurement of 4.546 litres to a gallon when doing the pricing calculations. These comparisons can be confusing when comparing with U.S as their liquid gallon is only 3.785 litres.

When the U.S consumers complain about $US4 per gallon they are talking about $US1.05/litre which equates to about NZ$1.35 per litre (at exchange rate of .7793 on May 3 National Bank)

Most of the difference is tax. In the U.S federal tax is 18.4c per US gallon (or 22c per Imperial gallon) which equates to NZ$.89 – however we’d need to translate that to $NZ cents per litre. Note: this is about NZ$19.6cpl compared to NZ$70cpl+) if my math is correct.

The real point is that in the U.S taxes on petrol appear to be much lower than in Europe, U.K or NZ.

Add in the overall decline in easy supplies and the oil companies are getting more profit because they mostly aren’t spending that on exploration or drilling costs it’s all chasing a declining supply.

In August ’07 I wrote a series on this when oil was $70 per barrel.

In NZ most readers will have noticed a debate about how GST is added to petrol prices as an additional tax so that Government gets about 42%* of the fuel price at the pump rather than the 35% that was mentioned in the reference post. (*although as overall base prices go higher the excise rate stays the same but the GST element rises so overall tax percentage is not so easy to calculate.)

Regardless of the justifications used by the government; charging GST on the landed costs & margins and including the excise tax in the base calculation does exaggerate the inequity.

Effectively petrol is in the same category as tobacco and alcohol when it comes to tax and public policy which is plain wrong.

Given the typical distances and congestion of NZ roads most families can’t easily reduce their drive to work costs (in the shorter term) except by changing jobs or moving house if they have to be physically present at their place of work. While public transport is improving it is still not that useful either.

Add to this the element that petrol prices rises get added in to almost everything in our supermarkets as transport charges eventually and the overall effect is much more dramatic.

Sure some people can get public transport but that is not so easy for many and this shows how the calculations compound. Note: they use September ’07 prices so some ratios have changed slightly since then.

For many years the justification on the excise tax was as a roading charge yet most of the money went into a consolidated fund and only recently has it started to be actually used for roading projects again.

In fairness it is actually very hard to find out the excise tax on petrol because it is hidden away in the 3rd schedule of the Customs and Excise Act 1996 at 99.75 and is expressed as 42.52c per litres plus 8c per g of Pb (lead calculation)

Here are all the taxes / Auckland is or will be different soon due to extra local authority taxes. (from here.)

“Excise tax 42.524 cpl
– ACC levy 7.330 cpl
– Petroleum Fuels Monitoring Levy 0.025 cpl
– Local Authorities Petroleum Tax 0.660 cpl”

What do you think about petrol and tax policy? Perhaps the excise tax should be increased if the GST calculation is changed? What If it can be shown that the extra tax is used on alternative energy options?

Perhaps some clever reader might be able to tell us why this old Treasury working paper hasn’t been updated – and what “marginal excess burdens” actually means in real terms. It seems that the debate so far is light on real world impact calculation. The actual pdf of paper is here – for some reason not linked to the abstract.

And definitely the GST should be calculated on the excluding excise taxes and other levies listed above.

See these related posts in an early series last year on this blog.