Gas tax rollback

The government has just announced a reduction in the ad valorem tax on fuel from 15 to 10 per cent.  This reduction is to be temporary and will be reviewed quarterly based upon what is happening in the world’s oil market.  This move could result in a $4  to $5 reduction in the price of a litre of gasoline.  It is important to analyse this decision to see if it has been taken in the best interest of the country.

The price of oil has risen from less than $80 to more than $110 over the last month due to two factors.  The main cause is the fighting in Libya and the fear that it could spread to other oil producing countries.  The other contributor is the earthquake in Japan which has raised concerns about the viability of nuclear power as an alternative energy source.  These factors are unusual ones and it is hoped that they will also be temporary influences.  If that is the case then reducing the gas tax at this time seems to be the reasonable thing to do.  This will help to curb inflation which was threatening to soar to higher heights.

The caution here is that the government will be giving up about $3 billion in tax revenues and with the current fiscal constraints one is left to wonder where the replacement income will be generated.  This once again highlights the point that taxation reform is urgently needed so that the government does not place over reliance on one particular product.  A better spread of taxes can help to protect the income that is required to keep the country running.  Another concern is that the reduction in the fuel tax may increase the demand for gas causing problems in obtaining foreign exchange to purchase the necessary supplies of oil.

The position taken by the government seems to be reasonable as one should always consider all options when making decisions.  A review of the situation on a regular basis is also welcome as the world economy is constantly changing and we need to adapt to those changes.

My final thought rests on whether or not the same persons who are calling for the rollback of the tax will actually pass the benefit unto the consumers.  If ex refinery prices are reduced by $5 on Thursday, will we see a reduction at the pumps or will the service stations simply see it as a way of making more money for themselves?  In the end that will determine the effectiveness of the decision made.