Last Friday, a new fuel tax break came into effect in Alberta. The policy, championed by Premier Jason Kenney, would dispense with the existing 13 cent per litre provincial tax on gasoline and diesel.
It seems like a straightforward strategy: help reduce the burden of soaring fuel prices from consumers. It’s also immediately visible.
Perhaps that’s why so many governments, including those of the UK, Japan, and France, have done the same.
However, the tax cuts are fundamentally at odds with basic economic principles and the status quo of the cost of living.
On Taxes and Energy Supply
Firstly, the tax break will only offer temporary relief.
A slightly lower gasoline price tomorrow will only encourage further spending on fuel, with an increase in consumer demand.
It’s important to recognize that the actual supply of oil, natural gas (in the case of heating bills), and their refined products does not change. Even a slight increase in consumer demand furthers the increase in prices at the pump.
The price of gasoline in the end will likely fluctuate before arriving back on the trajectory it was already headed in—up.
Moreover, in the long run, it’s difficult to see how a fuel tax break helps discourage a reliance on non-renewable energy.
Such a transition away from gasoline and natural gas is on its way. Fuel taxes serve to disincentivize unnecessary trips in the car, pushing people toward carpooling and public transport.
The government ought to be trying to reduce the consumer—and commercial—usage of fuel, not elicit more.
The fuel tax break is but a band-aid solution to a problem that cannot be solved from the parking lot of a Co-op gas station.
Everything Costs More
On Friday, Kenney said, “We need to take real action to reduce the cost of living.”
Yet the results on consumers’ wallets from a fuel tax break will be marginal at best. Other actions, such as targeting demand for fuel, would likely fare better.
However, these target only one part of the inflationary pressures consumers are experiencing on a daily basis.
Prices are rising and will continue to rise—at least in the short-term—with little recourse from wage growth.
Indeed, the effects of energy markets in turmoil will spread to not just the gas pump or heating bill, but also to electricity prices, shipping costs in e-commerce, and grocery aisles.
Support for the people who are most affected is doubtless necessary.
But how we go about that and where we go from there is shaky or simply unfeasible, if not uncertain.
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