Governments loath to cut gasoline taxes

Political pressure will force them to consider options

It

is not hard to understand the

anger of so many Canadians over the high price of gasoline, and the coming of winter will exacerbate the problem as it is likely that heating costs will soar. Any fair-minded person has to concede that no country is able to insulate itself from any soaring commodity price. The only recourse individuals have is to try to reduce consumption.

Basic economic theory shows that if there were a world-wide reduction of demand, the price of any commodity would fall. But, of course, given so many other factors in play, the issue of reduced consumption on an international basis is a dubious proposition.

But what truly drives the anger in Canada is the fact that Canadian governments reap huge benefits from high-priced petroleum products. This is true of Alberta and other producing provinces, where the oil and gas is extracted from the ground, to the federal and provincial governments, which benefit from both excise taxes and both federal and sales taxes levied not just on the gasoline, but also on the excise taxes.

One would think that it is a political “no brainer” for governments, either federal or provincial, to reduce their tax bite to help ameliorate the situation. But that view does not take into account the ways finance departments and — because of their advice — politicians in power, see the problem. Several decades ago when I was with the Department of Finance, we were treated to a lecture as to why certain “hidden taxes” such as the (then) federal sales tax should not be reduced.

The first reason is that if there is a reduction of a hidden tax (and essentially all taxes on petroleum products are “ hidden”), there is no guarantee the actual price to the consumer will drop. The concern always was that somehow between the wellhead and your gas tank, somebody would take the opportunity to pocket the tax cut and not pass it along.

On the other hand, if a tax is not hidden” (the income tax or even the usual GST, as opposed to hidden GST, such as we find in taxi fares or at the gas pump), a government can rest assured that the cut ends up putting money in the pockets of those who pay the tax.

Tied into this is the second “problem,” a concern that if a hidden tax were cut, the government which reduced it would not get any credit, even though it might be forgoing many millions of dollars in tax. The idea of giving a tax reduction without reaping some political benefit is anathema to all governments. And there is a lot of truth in this perception. After all, if the feds cut the gas tax by, say, 5¢ a litre and assuming that the full reduction were passed on to the consumer, how much credit would the government get, given the day-to-day fluctuations of the price at the pump?

Third, there is always a concern that if the rate of tax were dropped because of a “ temporary” price crisis, it couldn’t be raised subsequently without a political price being paid. We all know how seldom a “ temporary” tax increase disappears; the problem of a temporary reduction is much more of a political trap.

On the other hand, there is not much doubt that all governments in Canada are getting a windfall because of higher prices. The logical approach to the “problem” which avoids all of there aforesaid issues is to embark on transfer programs of the “windfall” taxes.

For example, we already now have a program under which a part of the federal gas tax goes to municipalities. Perhaps those transfers should be increased to reflect the windfall gas tax profits.

Or we might have a one-time payment of a supplement to the poorest, say, to offset heating costs for the coming winter by increasing the guaranteed income security payments. The possibilities are legion and both the federal and provincial governments could pick their own approaches.

One thing is certain, however. There will be political pressure to do “something.” And this means that governments will be looking to all options short of actually reducing hidden taxes. Watch for developments.