News & media

Time to reform fuel tax credits (Canberra Times)

Imagine if, in the upcoming federal budget, the government announced it would pay Australian businesses to use more water. Yes, you read correctly — an incentive to use up a precious and scarce resource that you and I have been doing our best to conserve.

The payments would come in the form of tax credits granted under new legislation — let’s call it the Profligate Water Waste Bill 2012.

The $5 billion annual price tag would be funded from cuts to health, education, environment and defence budgets.

Any business could qualify, but much of the benefit would go to existing heavy users of water, such as power generation, mining and agriculture. The government would not offer any modelling or cost benefit analysis in support of this new policy.

It would simply point out that the business beneficiaries are ''important to the Australian economy'' and therefore deserve the subsidy. Preposterous, right? Such a policy would be so transparently senseless and unfair that it would immediately be laughed out of the cabinet room, right? Of course, the Profligate Water Waste Bill is a nonsense.

It would be political death for any government silly enough to propose it.

Now replace the word ''water'' with ''fuel'' in the above scenario, and you have a pretty good idea of the current policy environment. Welcome to the world of fossil fuel policy, where ordinary standards of silliness don't apply. Of course, the policy in question isn't a new one, but has been on the books for years.

Under the Profligate Fuel Waste Scheme — oops, I mean the Fuel Tax Credits Scheme — the Australian taxpayer underwrites business fuel use to the tune of $5 billion per year.

The mining sector is among the largest beneficiaries of this handout, raking in nearly $2 billion annually. Astonishingly, the Commonwealth now spends more on fuel tax credits than it does on public education

No serious cost-benefit analysis has been conducted on this policy, nor has there been any real parliamentary or independent scrutiny in more than a decade. It originally applied only to certain off-road uses of some fuels, but successive governments on both sides have expanded it so that it now applies to nearly all fuel use by big businesses.

This policy means that a commuter in western Sydney pays 38c per litre in excise for fuel, but big profitable mining companies such as BHP and Rio Tinto pay nothing at all in excise for their fuel.

The subsidy amounts to a transfer of $174 every year from each Australian taxpayer to the mining industry alone. There is no credible justification for the policy. Recently, Mitch Hooke of the Minerals Council of Australia suggested that any reform would be a ''new tax''.

But it's not; reform would simply mean mining companies would pay the same tax as you and I do.

And it would be administratively simpler as well. We're always hearing about the need to cut red tape — getting rid of special tax breaks and handouts is a great way to do this.

Hooke also claimed that the exemption is justified as part of a general principle that business inputs shouldn't be taxed. That would be more convincing if such a general principle actually existed.

But in fact many business inputs are taxed.

The most significant input for most businesses is labour, which is taxed heavily in the form of income, payroll, and fringe benefits taxes. Land is also a major input for some businesses, but there is no tax credit there. Nor is there a credit for excise paid by business on other goods, such as alcohol.

So why should fossil fuels be any different? This simple fact is this: the fuel tax credit scheme is an unfair handout with no economic benefit and a considerable fiscal and environmental cost

It also helps reinforce our economic dependency on petroleum, a commodity that has shown great price volatility in recent years. Hints that reform is on the cards for this year's budget have already been met with predictable howls of outrage and ''sovereign risk'' from some industry sectors.

But we've heard those before — on condensate tax reforms in 2008, on fringe benefits treatment of company cars in 2011, and of course on the carbon tax and mining tax. In each case, market sentiment remains strong and investment continues to flow unimpeded to the affected industries.

Treasurer Wayne Swan has shown considerable leadership for his role in prosecuting each of these previous important reforms in the face of rent-seeking industry opposition.

Any move by the government to reform the wasteful fuel tax credits scheme this year would build on this record, and should be warmly welcomed.

Charles Berger is the director of strategic ideas at the Australian Conservation Foundation.