Carbon concessions set to cost billions in income lost

Treasury’s analysis estimates exempting agriculture and deforestation from the carbon tax will cost about $3.5 billion per year once the system is running. The 2014–15 breakdown given was roughly $2.2 billion for agricultural emissions, $1.3 billion for deforestation, and about $30 million for decommissioned mines.

The Tax Expenditures Statement is a Treasury document that attempts to quantify tax income lost because of concessions and exemptions. It matters because tax concessions can have the same effect on the budget balance as direct government spending, so understanding their size helps investors see fiscal trade‑offs and potential pressures on government finances.

Treasury warns the estimates are hard to measure with certainty. For some concessions there isn’t enough data to know what tax would have been paid without them, and for others a straight mathematical estimate can overstate the cost because people would likely change their behaviour to avoid the tax if the concession was removed.

Treasury’s top tax concessions (2011–12 estimates) include: $35.5 billion for the capital gains tax exemption on the family home, $30.2 billion in superannuation tax concessions, $5.9 billion GST exemption for food, $4.7 billion from the 50% capital gains tax discount, $3.8 billion GST financial services concessions, $3.0 billion GST exemption for health, $2.9 billion GST exemption for education, $2.0 billion family tax benefit exemption, $1.3 billion private health insurance rebate, and $1.3 billion tax exemption for charities.

Treasury says growth in the value of some tax concessions has slowed over the past two years, primarily because the global financial crisis reduced superannuation returns, which in turn lowered the estimated value of superannuation tax concessions.

The government changed the formula used to calculate the value of motor vehicle fringe benefits, making it less generous. That concession was worth an estimated $1.2 billion in 2011–12 but is expected to cost roughly half that by 2014–15. The Australian Conservation Foundation’s Charles Berger commented the change should reduce incentives to drive extra miles to boost benefits.

Treasury notes that simple mathematical estimates can overstate the true cost of a concession because, if a concession were removed, individuals and businesses would likely change their behaviour to reduce tax liabilities. That behavioural response means the actual revenue recovered could be lower than a straight calculation suggests.

The statement highlights how large some tax concessions are and that they impact the budget similarly to direct spending. For everyday investors, that underlines the importance of watching tax policy and concessions as potential factors in government revenue and fiscal policy decisions—while keeping in mind Treasury’s caveat that these estimates can be uncertain.