Australian Local Government Association

Senate Economics References Committee: ALGA submission

Appendix 7: Fuel excise - Investment in Australia's road networks

Excise is often levied on certain goods and services for two reasons. They are related to benefits of public services, (e.g., taxes on motor vehicles and motor fuels used to finance construction and maintenance of roads and highways) or to public costs imposed by private actions (e.g. taxes on tobacco products and alcoholic beverages used to defray the costs of health care related to smoking and the excess consumption of alcoholic beverages).

There are major benefits for governments in imposing an excise. Goods and services with an embedded excise are usually price inelastic. This means that any increase in the price is not accompanied by a corresponding decrease in the consumption or good. Usually leading to a major revenue windfall to the taxing government. A major example of this is the Commonwealth's excise on petroleum products.

The excise on petroleum products (commonly referred to as fuel excise) has become a major general revenue source for the Commonwealth. The original intent of the excise was to establish a direct link (as a proxy user charge) between road users and generation of revenue required to fund construction and maintenance of Australia's road infrastructure.

That linkage has been dissolved over time to an extent where there is now no correlation between the excise on petroleum products paid to the Commonwealth by the road user and the amount of money reinvested back into the road network by the Commonwealth.

Fuel excise revenue has been a windfall for the Commonwealth. Local government has consistently advocated the position that fuel excise (as a proxy charge for road use) should be used as a mechanism to ensure road users contribute adequate funds for reinvestment into their own road network.

The hypothecation of any form of tax is not a popular policy with Treasuries or governments. It is often seen as a constraint to governments who prefer a general revenue pool where money is spent according to fluctuating priorities. Nevertheless, motorists appreciate a transparent approach where a certain amount of excise they are paying is identified, separated and then reinvested back into the road network.

In 2002-2003 Australian motorists will provide the Commonwealth Government with an estimated $13.1 billion in excise duty on petroleum products. Although indexation of excise on petroleum products was ceased, this figure will rise to $13.6 billion in 2005-2006. An average increase of $173 million a year.

In return the Commonwealth Government in 2001-2002 spent $2.0 billion on roads, which is projected to fall to $1.6 billion in 2005-2006 . The discrepancy between revenue extracted from road users and reinvestment in the road network by the Commonwealth is illustrated in chart 4.

Chart 1: Commonwealth excise on petrol and road funding