More bad tax policy …

There is a good reason why I want tax policy to be set independently – so that the true cost associated with the dumping of the regional fuel tax can be realised.

Lets ignore the conjectures and hyperbole about how we are raising funds to “electrify the railway”.  If government is going to spend a certain amount of money (which it is whether it is a regional body or a national body paying for the electrification) we should be interested in raising funds for this spending in the most efficient way possible.  Furthermore, we would prefer to tax in such a way that we actually get people who benefit from the spending to pay for it.

There are two ways that I see the fuel tax as more efficient than what the government is suggesting – which is effectively higher income taxes in the future.  Firstly, the fuel tax was an externality tax.  Because the social cost of fuel consumption is greater than the private cost the government can place a tax and (potentially) improve outcomes!  Even once this justification is used up, we have another one – Ramsey Pricing.  Demand for petrol is inelastic, so we can raise a set amount of revenue with a lower “dead-weight loss” (loss of happiness from the tax) than if we taxed goods with more elastic demand.

Secondly the fuel tax was at least partially targeted – as it raised the revenue for the public good work from the region where the work was going to happen.

Dumping the this tax implies that national income taxes will have to be higher than they would have otherwise been.  This implies that we are using a less efficient, and less targeted, means of taxation to achieve a level of government spending in Auckland and Wellington (which in this case just happens to be on a railway – something that needs to have its merits debated separately).  Bad policy.

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  • CPW

    Isn’t a possible alternative that Kiwirail borrows to buy the stock, and services the debt from charges on rail passengers? I not sure that will work, but if it did you could argue it was better targeted than a fuel tax.

  • Isn’t it just the heavy hand of neo-socialists thinking that central government knows best?

  • “Isn’t a possible alternative that Kiwirail borrows to buy the stock, and services the debt from charges on rail passengers? I not sure that will work, but if it did you could argue it was better targeted than a fuel tax.”

    Indeed that is a very good point CPW. The “targeting” argument really depends on the “effective subsidy” that is provided through Kiwirail.

    However, irrespective of what is being truly spent getting rid of the regional fuel tax will lead to a corresponding increase in national fuel taxes. As a result, on efficiency grounds I don’t think the removal of the regional fuel tax is a good idea …

  • “Isn’t it just the heavy hand of neo-socialists thinking that central government knows best?”

    Interesting – I can understand why central government would have its own interests at heart when forming policy 😉

  • goonix

    I just don’t know why National have done this. Economically it’s inefficient compared to a regional tax and politically it’s suicide, as they’ve pissed off everyone outside of Auckland. It seems like the ultimate dumb policy.

  • Goonix – I think politically Auckland is key for the next election. The countryside will always vote National, Wellington will always vote Labour – Auckland is key 😛

  • I don’t agree it’s inefficient.

    The petrol tax should be set at a level that cancels out the net negative externalities associated with vehicle use. It shouldn’t be affected by the desire to build public transport. There’s no way to know for sure but I doubt very much that the petrol tax is currently less than the cost of the net externalities.

    Also, to the extent that externalities are made up of roading costs, Aucklanders are already paying more than their share as their roads are more congested so they are using more petrol per unit of roading.

    Whether tax dollars should be spent on public transport at all is a separate issue. But there is no reason the money should come from petrol taxes.

  • insider

    Actually I disagree the tax was efficient. Because it was regional and the value could differentiate by region, it could drive distortionary behaviour and severely undermine some sunk investments.

    For instance, the range of a truck with a full tank is about 500 kms. The incentive for liner traffic in an out of Auckland would be to fill up outside the boundary on the way in and out. This would then also impact sunk and future investments in fuelling facilities and hand a big cash reward to those who happened to be on the right side of an arbitrary line.

    Note there is already a regional fuel levy. It gets charged equally across the country goes to councils based on where fuel is purchased, and is very small – a hangover from the 80s I think.

    My view on this is that this decision may be driven by a distrust of local government’s ability to manage the large amounts of cash this might generate. It would at 10cpl give ARC over $100m a year to play with. Do you think they are trusted to be good stewards of that?

  • “Whether tax dollars should be spent on public transport at all is a separate issue. But there is no reason the money should come from petrol taxes.”

    Remember that I said what the money was spent on is actually a red herring. If the government is going to build the roads anyway the real comparison is between the petrol tax and a income tax.

    Even if we think that the current petrol tax corresponds to the level that sets the social cost equal to the social benefit for fuel we can still say that a higher petrol tax is more efficient than a higher income tax – as long as demand for petrol is more inelastic than demand for labour.

    Furthermore on a separate but related not, a regional fuel tax has another advantage on an increase in national income taxes – it is targeted. The spending on Auckland roads is a Auckland issue, not a “national” issue. As a result, it would be preferable to fund Auckland initiatives in Auckland – rather than getting farmers in Otorohanaga to pay …

  • “For instance, the range of a truck with a full tank is about 500 kms. The incentive for liner traffic in an out of Auckland would be to fill up outside the boundary on the way in and out”

    Indeed – it would be preferable to charge for road maintenance by actually tagging vehicles. In fact it isn’t long before we will be doing that methinks.

    However, when it comes to looking at raising funds for regional projects I still think a regional fuel tax will be MORE efficient than a national income tax – even if neither policy is perfect.

    “It would at 10cpl give ARC over $100m a year to play with. Do you think they are trusted to be good stewards of that?”

    I think this is an important question as well. However, in this case we should be trying to improve the accountability and quality of regional governance rather than increasing income taxes. If we can’t trust regional governments why give them any ability to spend in the first place?

  • I wonder if any analysis was done on this by Treasury. I can’t find any yet… any ideas. I have calls and OIAs in. I’m beginning to wonder if this was done on the fly, which makes it just as bad as Cullen’s obscenely stupid KiwiRail decision
    cheers
    Bernard

  • “I’m beginning to wonder if this was done on the fly, which makes it just as bad as Cullen’s obscenely stupid KiwiRail decision”

    Of course it was done on the fly – I bet that MFE is SPITTING TACKS right now :p

  • Hi, I can