Breaking down fuel tax plan

It was bound to happen. The somewhat startling news that the Government has a $5.5 billion surplus, coming in a week where many are obsessively talking about high fuel prices, has led people to ask why the Government doesn’t use that extra money to cut the petrol excise tax.

It’s not just punters either. National suggested this week that the Government could tighten its purse strings in other areas to keep fuel taxes low.

The Government does collect quite a chunk of change every time you fuel up – about 69 cents a litre outside of Auckland, including a recent 0.4c bump in the excise tax.

But bringing down that tax by taking money out of the surplus would make little sense – and could end up hurting motorists in the long run. There are several reasons for this, but the main one is fuel taxes are very different from other taxes we pay.

Fuel taxes and road user charges are all sent to a separate ring-fenced fund that is only spent on transport. Why do this? Basically to protect money from fuel taxes from being used on things that have nothing to do with roading, and from the porkbarrel flutterings of various politicians. The National Land Transport Fund (NTLF) is administered by the New Zealand Transport Agency, rather than by any one minister, and while it responds to broad policy statements from Government ministers, they shouldn’t be able to make decisions road-by-road.

And the thing is, the NTLF does not have a $5.5b surplus. In fact, money from fuel taxes in the year ended July were down $10m on the year prior, and the country needs a whole lot of infrastructure investment.

Some argue ring-fence is already under assault. The NTLF is used not just for roads but also for walking and cycling infrastructure, and some rail spending, to the chagrin of various motor industry groups. Electric vehicle users don’t currently pay into it. It also gets topped up by normal Government spending from time to time, and roads are often funded by councils as well as the fund.

But taking money from a hard-won surplus and using it to bring down fuel taxes would all but make that line disappear. That means the next time the situations are reversed, and there is plenty of fuel tax money but not enough in the main Government coffers to pay for something else, there would be little reason for ministers to respect the traditional ring fence.

We don’t have to rely on hypotheticals to see what this could look like. New York’s subway is supposed to have tax revenues earmarked specifically for its maintenance. But a series of politicians have stripped much of this money and used it for other more politically useful spending, and the subway is now drastically underfunded, leading to a multitude of problems.

The other good reason not to do it also relates to another piece of news this week: the IPCC’s report on climate change, which finds that if we don’t make drastic changes to the amount of fossil fuels we burn within the next 10 years we are in store for something close to hell on earth. The last thing we should be doing is incentivising someone to drive instead of taking public transport or a bike.

The problem with that argument is that fuel taxes are regressive, meaning they hurt the poor the most. Rich people can afford to live close to work and drive efficient (or electric) cars. Poor people tend to live further away and drive older cars, so end up paying more at the pump.

That isn’t fair at all. Luckily, the Government already has a working benefit system to help those people with any increases to the cost of living. And that pot of money has a $5.5b surplus.

The last thing we should be doing is incentivising someone to drive instead of taking public transport or a bike.