Alberta’s $1.3-billion cut to fuel taxes isn’t so much a move to save the province’s drivers money as it is an attack on the provincial NDP and federal Liberals over carbon pricing.
“This is basically the reverse carbon tax,” Premier Jason Kenney said Monday as he announced the measure, which will suspend the province’s fuel excise tax of 13 cents a litre from April 1 to June 30, and possibly thereafter. He repeatedly drew contrasts between that reduction and the April 1 increase in federal carbon charges that will add 2.3 cents to pump prices.
But to make that political point – a few weeks ahead of a leadership review vote for Mr. Kenney – the province has chosen a cumbersome route that will end up delivering tax relief to the rich and poor alike, rather than targeting that money at truly cash-strapped households.
Alberta says it will reduce the fuel excise tax on a sliding scale each fiscal quarter, starting when the benchmark West Texas Intermediate (WTI) oil price tops US$80 a barrel, with the full tax suspended once oil prices are above US$90 a barrel. In addition, the province is sending out $150 rebates for electricity costs to most Alberta households. And there will be a cap on the cost of natural gas for households this fall.
Like in the rest of Canada, pump prices for gasoline have soared in Alberta in recent weeks, with the average cost of unleaded in the province rising to $1.543 a litre this week from $1.338 in late December, and $1.126 a litre in early March, 2021, according to the nationwide price survey from consultancy Kalibrate.
However, soaring commodity prices, not higher taxes, are responsible for the overwhelming majority of that increase, as the chart below shows. Crude prices were already on the rise before Russia invaded Ukraine on Feb. 24, and have surged even more since, with WTI hovering around US$106 a barrel on Thursday.
In fact, the increase in the cost of crude oil on a litre of gasoline over the past year, at 47.4 cents, is bigger than the 41.7-cent rise in retail pump prices. That’s because the margin for retailers and refiners has contracted over that same period. Taxes have increased slightly, with a 2.21-cent increase in federal carbon pricing and a 2-cent rise in the amount of GST paid on that higher pump price. Federal carbon charges are set to rise again on April 1 – the same day Alberta’s 13-cent excise tax cut takes effect.
The reduction Alberta is implementing equals about one-third of the increase in pump prices over the past year, with households saving an average of $130 over three months, according to an analysis from University of Calgary professors Jennifer Winter and Trevor Tombe. That is a substantial rebate, costing the province $1.3-billion if implemented over a full year, but it will be weighted toward the heaviest consumers of motor fuels – consumption tends to rise along with income.
The professors’ report indicates high-income households will reap the biggest savings. As this second chart shows, households with an income greater than $150,000 a year are predicted to save an average of $218.50 for each three-month period in which the fuel tax is completely suspended, more than three times the average amount saved by households with an annual income of less than $30,000.
The University of Calgary analysis contends that the rebate can still be viewed as a progressive measure, in that the smaller savings for poorer households represent a larger proportion of their income than for richer ones, as this third chart shows.
For households earning less than $30,000 a year, the average $67.75 savings over three months equals 0.32 per cent of their income in that same time. That relative benefit is four times greater than it is for the households with more than $150,000 in annual income. For those Albertan families, the savings from the fuel tax (even though higher in absolute dollars) are just 0.08 per cent of their income over the three months.
Still, if the same amount of money were paid out in flat-rate rebates, lower-income households would benefit even more.
Prof. Tombe agreed that Alberta’s move is an anti-carbon-tax in one sense: It blunts the impact of higher prices. “That’s going to dampen incentives for consumers to use less fuel,” he said.
But the University of Calgary analysis he co-authored rebuts Mr. Kenney’s contention that the reduction in the excise tax is a negative carbon tax. For one thing, carbon pricing applies to all types of fossil fuels, not just gasoline and diesel.
And Mr. Kenney’s excise tax cut is not tied to changes in federal carbon pricing, but to changes in oil prices. For the next three months, the per-litre savings will be higher than federal carbon charges. But if oil prices fall, that will no longer be the case.
The province has yet to lay out details on how much the tax will fall for each US$1 increase in oil prices beyond US$80 a barrel. But if those steps were even, oil prices would need to be at or above US$88 a barrel for the carbon charges and resulting incremental sales tax to be completely offset.
Of course, that assumes retailers pass on the full effect of any reduction in excise taxes. Retailer margins are currently tight in Alberta, falling by more than two-thirds from this time last year, to just 2.1 cents a litre this week. But Mr. Kenney says the province will be monitoring prices to ensure retailers do not pocket any of the tax reduction.
There would be one foolproof way to ensure that happens: Send cheques directly to Albertan households, rather than attempting to fiddle with pump prices.
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