Global Policy Forum

By Christian Zimmerman

What do fuel taxes accomplish? For starters, people cut back on fuel consumption. This is a positive thing for all of us, because burning oil leads to air, noise, water and soil pollution. Fuel taxes provide incentives for people to burn fuel in more efficient ways. Several countries in Europe actually call them 'carbon' taxes, since carbon is a major pollutant. It should be no surprise, then, that European cars are far superior to North American cars in fuel efficiency, and this includes cars produced by the same companies.

In Europe, fuel tax can amount to more than 75% of the price at the pump. Comparatively, gas taxes in Canada represent approximately 40% of the price at the pump, with variations between provinces and territories. In the U.S., the tax percentage is only 12.5%. Why the disparities? Well, because just like businesses, countries have different goals -- and taxes are placed on consumption goods as a vehicle by which governments attain these goals.

But it's a delicate balancing act. An effective government will try to avoid introducing taxes that discourage spending on positive activities or goods. In Canada, for example, the Goods and Services Tax (GST), introduced January 1, 1991, could be considered a 'bad' tax. It discourages consumption (and is also fairly time-and-money intensive for businesses to implement), hence reducing economic activity.

A fuel tax, by comparison, is a good tax for a government to impose because it crowds out bad taxes such as income tax or other consumption taxes. But it does something even more desirable. It makes the people who use our free (i.e., taxpayer-sponsored) roads pay for them. The more you drive, and hence the more fuel you use, the more you pay.

For the most part, roads are financed by taxes from the entire population, regardless of whether they own a car or how much they drive. Unless tolls are levied, there is no way to make those who use the roads more pay accordingly. Car licences and driving-permit fees do not take into account how much you drive. Fuel consumption, however, does. Every time you fill the tank, you pay for the roads you use. Some countries have introduced 'road cost accounting,' where funds levied by fuel taxes, tolls and permits are supposed to cover the costs of the road system (and not only highways). Even without taking into account the pollution factor, this leads to very high taxes. For example, the OECD estimates that revenues cover only 42% to 57% of these costs in urban centres in France.

Fuel taxes have yet other advantages. They smooth out the fluctuations of prices at the pump. With a higher tax share, the wild movements of prices on world markets have less bite. Europe was much less affected in the short term than North America by the recent surge in crude oil prices, for example. A doubling of the before-tax price increases the after-tax price by 70% in the United States, compared with 25% in England. And as higher fuel prices lead to less fuel consumption, foreign dependence is reduced in the long term.

Sure, some people are going to be hurt by higher fuel taxes. But it is possible to compensate them in other ways, since these taxes will bring in more revenues. For example, trucking companies will see their costs rise substantially. One solution could be to give them a tax credit for each truck they have on the road. As long as this credit is not linked to fuel consumption, the company will meet its bottom line, while still striving to save on fuel.

In the same way, our government can use the gas tax to meet its bottom line, in a politically feasible and economically positive way. Just because Canadians are still a ways off from embracing this kind of a tax, doesn't mean it isn't a good idea -- the Swiss have repeatedly approved tax hikes by referendum, once by a whopping 20 cents per litre.