Media reports today suggesting the Federal Government could further reduce the Fuel Tax Credit would violate every principle of sound tax policy – efficiency, neutrality, equity and simplicity – all for sake of another revenue grab.

Cutting the Fuel Tax Credit is the same as imposing a new tax on a business input. And like all tax hikes it would result in lost output and reduced international competitiveness. It would also be the fourth new tax on mining this year.

The mining tax, carbon tax and reduction in fuel tax under the price on carbon all start on July 1. A new reduction to the fuel tax credit scheme in the Budget would make it new tax number four in 2012.

If these media reports are accurate, it would fly in the face of the Government’s criticism of the states for imposing new costs on mining through royalty increases.

The Fuel Tax Credit is not a “subsidy”. It removes fuel excise as an impost on a critical business input – a policy which has had bipartisan support since the scheme was introduced.

Miners, farmers and others pay the excess tax in the first place solely as a means of easing the administrative burden on the Government. In the context of G20 discussions on “fossil fuel subsidies”, the Australian Government has rightly held to the position that the fuel tax credit scheme is outside the scope of what is to be considered given that “the primary objective is to reduce the incidence of fuel tax on business inputs”.

Taxes on business inputs are especially inefficient and contrary to good tax policy principles, a point that Treasury has held to strongly in the past whether in the context of fuel tax or broader reforms like the GST. Such taxes cause businesses to adopt less efficient production methods.

Taxes on business inputs generate even bigger problems if they are introduced closer to the start of the production process as they cascade through supply chains distorting all subsequent decisions by downstream industries.

The fact that miners working in remote locations usually have no cost effective alternatives to diesel only compounds the inefficiency. As such, modelling by Access Economics has found previously that diesel taxes on miners destroy around 50 cents in value for every dollar they raise.

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