Thursday, April 17, 2008

Why cutting diesel tax is a bad idea

There is a CBC story that says groups are putting pressure on government to reduce diesel tax.

This is a bad idea. For the businesses involved it may provide some temporary relief, but we would be fooling ourselves to think it was anything more.

Oil is getting more expensive. Petroleum products are getting more expensive. Diesel is getting more expensive. If you think it is bad now wait six months.

A tax cut will never be enough. We regulate diesel prices on PEI, we could force a lower price, but that would be an even worse idea.

If we can't get off diesel then, as the story suggests, we should charge more for petroleum intensive products. Either way this will not be the last call for a tax cut and it should not be the last time the government says 'No' to a tax cut.

The golden rule for 'polluter pays' taxing is if you want them to buy more the tax is too high, if you want them to buy less the tax is too low. Right now we collect 20 cents per litre [History of PEI petrol tax]. I wouldn't want to have to make the case that at 20 cents per litre Islanders want to sell more diesel.

On a side note, does anybody know why the tax is linked to volume rather than price? The tax is 20 cents/L as opposed to 20 cents/dollar. In this way they are already getting a tax break as the price goes up.

At a dollar a litre they would be paying 20% tax.
At two dollars a liter they would be paying 10% tax.
Right now the price (before the tax) is $1.17, so the tax rate is 20/117= 17%.
So as a linked to price, as the gst, pst and property tax are, they are already paying less tax than they were before.

I would think that a good step in dealing with the petrol issue would be linking the tax to price. And let those that consume diesel intensive products pay for the diesel, not the tax payers.

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