Some commentators claim the federal government’s fuel tax credit for business is a $7.8bn fossil fuel subsidy (e.g. see the Australia Institute’s Fossil fuel subsidies in Australia), but the Productivity Commission has provided me a great explanation regarding why the fuel tax credit isn’t actually a subsidy. I got in touch with the PC after I noticed in its latest Trade and Assistance Review that, according to its estimates, the mining sector receives a much lower level of industry assistance (from the federal government) relative to its economic contribution than manufacturing or agriculture. I wondered how this was compatible with the increasingly popular view that mining is heavily subsidised, so I asked the PC why the fuel tax credit, which the Australia Institute often highlights, isn’t included in its assistance estimates. Here’s how the PC replied to my query:

The Australian government introduced, as early as in 1929, an excise on fuel (initially on petrol, later on diesel and other fuels) to charge the road users and subsequently introduced Fuel Tax Credits Scheme to remove the effect of the excise on business inputs to ensure that production decisions are not distorted. Like the goods and services tax (GST) system, fuel tax credits simply ensure the end consumer pays the tax only for transport use of fuel on-road.

However, the way in which fuel tax credits are administered may make it appear that they act as a subsidy because of payments from the government back to business. The reason that the government introduced a rebate system was it was more efficient and administratively easier (similar to the concept of input tax credit mechanism for the GST) to charge all users the same price upfront for fuel and have eligible users claim back the excess excise, than to have the complexity and integrity issues involved in a certificate system in which eligible users are not charged excise at the pump.

As such, while it looks like a subsidy, the fuel tax credit[s] (to primary production, mining and other off-road users) are effectively rebates of the excise tax levied on road users.

This confirms the point Queensland Senator Matt Canavan made on Q+A last year, which was noted in this Crikey Fact Check:

The justification for the rebate is that many users of big vehicles or machines don’t use the roads and therefore should not pay fuel taxes ostensibly imposed to pay for public roads.

This argument was made by Canavan on Q+A. He said the credit was to refund fuel taxes paid by businesses not using the road system.

“The idea being that the petrol tax you pay at the pump is to help pay for our roads, but obviously the big trucks in our mines are operating off-road and on roads that they have paid for,” he said.

The PC’s explanation should give us some comfort that the Australian Government isn’t massively subsidising fossil fuels. There is still the question of whether we’re properly pricing greenhouse gas emissions, as John Quiggin notes in the Crikey Fact Check, but at least we’re not doing something as obviously dumb as providing a $7.8bn fossil fuel subsidy through the tax system.

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