The unexpected results of the fuel tax holiday

Opinion

Hey there, time traveller!
This article was published 06/09/2024 (365 days ago), so information in it may no longer be current.

Manitoba’s fuel tax holiday on gasoline and diesel is scheduled to end Sept. 30. Advocates on all sides have been advancing their positions, whether to extend it (Taxpayers federation calls for extension of gas tax holiday, Aug. 29), or to halt it (Gas tax cuts are bad fiscal policy, Aug. 28). In moving forward rationally, it is important both to examine successes of the tax holiday, including unexpected results, and to consider revenue replacement options.

The tax holiday has accomplished its expressly intended purpose, which was to provide inflation relief.

Interestingly, Niall Harney and Molly McCracken, both pretty obviously opposed to the tax holiday, obliquely suggested that inflation here “remained within the Bank of Canada’s target rate or lower.” That comment dramatically understated the full story of our performance.

Statistics Canada data shows over each of the first six months of 2024, Manitoba had the lowest year-to-year inflation in the country. Indeed, inflation here averaged 1.9 per cent lower than Canada overall. This is a good indication of success. Based on a recent road trip, I can personally confirm our fuel prices are lower than the rest of the Prairies, also a sign the tax holiday has been working as intended.

The outcome of the tax holiday includes a very unexpected result. It provides preliminary practical evidence that the inflationary effects of another fuel tax, namely the federal carbon tax, have been underestimated.

The federal Liberals initially claimed the carbon tax was not at all inflationary. The Bank of Canada eventually relented, confirming the carbon tax does contribute to inflation, but suggested an annual impact of only 0.1 per cent for each $10 per tonne carbon tax change.

The 14 cent per litre tax holiday equates to being roughly equivalent to a carbon tax level of $60 per tonne. The implied inflationary impact, based on the Bank of Canada, translates to only about 0.6 per cent. Yet, the effect of the tax holiday in Manitoba compared to the rest of Canada has been more than three times greater! Our situation obviously involves more complexity, requiring further assessment, but the observed effects are pretty dramatic and cannot be merely waved-off or ignored.

An unanticipated follow up result is emergence of some consensus across the political aisle that changes in fuel-related taxes can have unexpectedly significant effects in reducing or increasing inflationary pressures. The tax holiday was implemented by Wab Kinew and his centre-left NDP government, while opposition to the carbon tax, including specifically the inflationary impacts, has been the strong position of the centre-right federal Conservatives.

If only the federal Liberals were listening to either side.

Observations on inflationary success of the tax holiday, with their obvious implications for the federal levy, appear to just add to the growing litany of failures with the carbon tax. On-going evaluation has shown the carbon tax to remain ineffective, producing no appreciable reduction of emissions itself.

Recent detailed analysis confirms it is unfair too, especially to lower-income families, with the claim that “eight of ten households are better off” no more than a cruel hoax. More on these latter points separately.

This leads to the second important question, namely, how to ensure revenue replacement for the Government of Manitoba? As a start, it is useful to unmask a bit of fiction.

The connection of the fuel tax to infrastructure is only notional. The tax just goes into general revenues. The Government of Manitoba, though, still needs adequate revenue, including to support infrastructure. At the same time, we are all supposed to be transitioning away from fossil fuels.

As such, some new, but fair, form of tax or revenue collection will be ultimately required.

We need to explore new options, with many possibilities available. There are multiple considerations to include: a progressive shift away from fuel purchase transactions; express inclusion of zero emission vehicles, which also still need to use roadways; fairness across household income levels; proportionality to roadway damage, noting for example that electric vehicles, being comparatively heavier, cause more damage; and other impacts, including greenhouse gas emissions.

One possibility could involve an annual levy (monthly as an alternative for more convenience) applied to all operable light-duty vehicles via Manitoba Public Insurance. This could start with a minimum fee of $120 per vehicle plus an additional $20 times the official combined city/highway fuel consumption in litres per 100 km, as already outlined by Natural Resources Canada for each respective vehicle and model year.

This ensures better transparency, provides an incentive for more efficient vehicles, and still nets roughly the same amount of revenue.

Further public discussion is warranted on how best to replace the fuel tax. There are obviously more perspectives to consider, so we need to start thinking about this issue sooner rather than later.

Robert Parsons teaches mathematical methods, logistics, supply chains and sustainability economics at the I.H. Asper School of Business, University of Manitoba.