The glaring inconsistency in Abbott's fuel-tax grab

Automatic indexation of excises makes it too easy for governments to lift spending and is inconsistent with our fixed income tax thresholds.

The Abbott government’s move to increase fuel excise duties without legislation raises questions of legitimacy -- it’s not just about the way they are doing it, but also about the principle of automatically indexing a tax.

There is no doubt that the method is tricky and flies in the face of the principle of no taxation without representation. The government is risking the wrath of the electorate not just by increasing something as sensitive as the cost of fuel, but also by doing it in such a tricky way. They can say that what they are doing is legal and that legislation will still ultimately be needed to validate their action, but the mechanism they are using was not put there as a way of circumventing Senate obstruction, however frustrating that may be.

Turning to the principle of indexation, there is no textbook answer as to whether this is right or wrong. There is no principle of sound taxation that says the real value of an excise duty should be preserved through automatic indexation to the consumer price index. Whether it is done or not really comes down to how desperate governments are for more revenue.

Indexation was adopted in 1983 as a pragmatic measure by a Labor government that was scraping the barrel to shrink the budget deficit. It was abandoned (for fuel only, not for tobacco and alcohol) by the Howard government in 2001, when the budget was in surplus and in the midst of heightened public angst about petrol prices. Now, the Abbott government wants to reinstate indexation because shrinking the budget deficit is again a high priority.

Automatic indexation of excise duties is popular with economists who want the government to raise more revenue to pay for expenditure programs. But those who like their government lean and mean see automatic indexation as making it too easy to finance the growth of government spending. According to this view, if any government thinks excise duties should keep pace with inflation, they should introduce legislation with each year’s budget to increase the rates of duty. This is more open and subjects the process to parliamentary scrutiny -- which is exactly what governments don’t want.

It should also be said that there is a glaring inconsistency between indexing excise duties for inflation but not indexing thresholds in the personal income tax scale. Failure to index thresholds results in bracket creep -- the tax increase by stealth. If the government was defending the principle of indexation rather than being pragmatic about maximising revenue, it would be consistent.

The government would lose a lot more through indexation of tax thresholds than it gains through indexation of excise duties, but that is where the principle leads. Indexing one but not the other is a ‘heads you lose, tails I win’ outcome.

Nobody should be lulled into accepting the fuel excise indexation because “it’s just half a cent a litre.” If the practice becomes re-established, the cumulative effect will be substantial. Had indexation not been terminated in 2001, a litre of petrol would cost about 17 cents more now than we are actually paying and the government would be raking in an extra $8 billion a year. That doesn’t mean the deficit would be $8 billion less, because governments with more money at their disposal would have committed to spend more on something along the way.

Until such time as the government is consistent and introduces automatic indexation of income tax thresholds (and don’t hold your breath waiting for that), I would prefer to see them have to front up to parliament every time they want to increase excise duties. That goes for alcohol and tobacco as well as fuel. And if they can’t get the parliament to agree, that should be the end of the matter -- no tricks please.

Robert Carling is senior research fellow at the Centre for Independent Studies.