Is fuel tax regressive?
10 July, 2018

Auckland’s regional fuel tax has been in place for a week. It was in the Labour party’s election manifesto. It’s been debated for months. But the misinformation continues.

Last time I assessed a number of statements made by Mayor Phil Goff. This week it’s one big one claim made by a Minister, a journalist, and an enthusiast.

CLAIM: Fuel tax isn’t as regressive as you think

The Minister of Transport Phil Twyford didn’t go as far as saying fuel tax isn’t regressive, but did use some misleading-by-themselves figures to show the rich spend more on fuel than the poor.

Simon Wilson initially called it a complete reversal of the claim that fuel tax is regressive.

A couple of days later, Wilson ‘corrected’ his view, saying ‘fuel taxes are flat taxes: we all pay the same per litre. And all flat taxes are regressive’.

What changed? And what happens when the error correction is wrong?

Fuel tax is regressive as a proportion of income

Well, as many people pointed out, a regressive tax is defined as costing a low-income person more of their income than a high-income person.

With a little arithmetic, the figures released by the Minister actually showed lowest decile income people paying three times the share of their income in fuel tax compared to the next decile who also paid twice as much as the highest decile.

Figure: Share of household expenditure on fuel


But that’s the least remarkable point about fuel taxes.

The more interesting point is that, contrary to Wilson’s assertion, fuel tax is not a flat tax.

Fuel tax costs the poor more per kilometre driven

Speaking to Radio NZ recently, transport enthusiast Patrick Reynolds made the same claim as Simon Wilson. That poor people spend a greater portion of their income on basically everything – rent, food, clothes, electricity – and, like GST, the poor will pay more fuel tax as a proportion of income.

But fuel tax isn’t like GST. Dollar-for-dollar, fuel tax is worse than GST in terms of the burden on the poor.

If a poor person and a rich person buy $11.50 worth of potatoes, $10 of it will be for the potatoes and $1.50 will be GST. The poor and rich person pay the same amount of tax. It’s a flat tax, but regressive as a portion of income.

Fuel tax isn’t a flat tax.

If you’re rich and own a brand new Suzuki Alto and drive 10,000 kms a year, you would have paid $300 a year in fuel taxes last year. If you’re poor and own a 1990s Toyota Hiace and drive 10,000 kms a year, you would have paid $900 last year.

In three years’ time, and after Auckland’s regional fuel tax and the planned national fuel excise duty increases come in, these amounts will increase to $400 and $1,200 per annum.

A flat tax would involve moving petrol vehicles over to road user charges, the same as owners of diesel vehicles pay now. This would immediately mean a tax reduction in that Toyota Hiace-owning poor family’s tax bill of about $450 per annum, and a higher tax on richer families to the point where both are paying the same.

The total cost for poor people is higher than for rich

According to Wilson’s story, the Ministry of Transport provided the data showing higher income deciles spending more on fuel than lower income deciles.

It seems that the Ministry provided the Minister with the data and some commentary suggesting that rich people might spend more on fuel because they might go on more road trips.

What the Ministry and Minister didn’t seem to consider was that many poor people don’t own cars.

Students are low income and generally live close to university and work. It’s misleading to include them in the calculations to suggest that poor households with vehicles will be less affected than rich households.

The Ministry and Minister should have turned to their attention to the Ministry’s own Household Travel Survey which tells us about the kinds of vehicles different households own (and thus the tax they pay per kilometre) and how much they drive.

If they did, as I have been and reported last time, that Auckland’s regional fuel tax will, on average, charge:

  • Māori 14% more each km they drive and they drive 7% more than others
  • charge the unemployed 6% more each km and they drive 3% more than others
  • charge sole parents 5% more each km and they drive 28% more than others.

The patterns are very similar elsewhere in New Zealand.

These findings should perhaps not be surprising. While rich people might, all else constant, drive more and buy more fuel, not everything else is constant.

The richest two regions in New Zealand are Auckland and Wellington. They're also the only two regions with reasonable public transport networks. People living in low-income rural regions like Southland and Hawke's Bay have virtually no public transport, so they drive.

Even within Auckland and Wellington, poorer regions are less well serviced by public transport.

And poorer households have other reasons why they drive more: they have bigger families and live further from work and work hours when public transport isn't operating.

Fuel taxes are not just regressive as a portion of income, but in total and, worst of all, per kilometre.

It’d be unconscionable if we implemented a policy that charges poor people more to visit the doctor than rich people. It should be unconscionable in transport.


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