Fuel Tax Inquiry - Industry Submissions

Industry Submissions

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WESTERN AUSTRALIAN MUNICIPAL ASSOCIATION WA Municipal Association

SUBMISSION
TO
FEDERAL FUEL TAX INQUIRY

September 2001

INTRODUCTION ......................................................................................2

EXECUTIVE SUMMARY

1. Terms of Reference Issues.........................................................................3

2. Administration and Hypothecation Issues.....................................................4

3. Fuel Taxation - economic and social policy issues...........................................4

WAMA RESPONSE TO KEY INQUIRY ISSUES - IMPLICATIONS FOR WESTERN

AUSTRALIAN LOCAL GOVERNMENTS AND THEIR COMMUNITIES.........................................................................................5

INTRODUCTION

The Western Australian Municipal Association (WAMA) is pleased to make this submission to the Federal Inquiry into fuel taxation policy and is wide-ranging implications for business, transport and related activities in the Western Australian context.

It is noted that the Inquiry Committee is chaired by Mr David Trebeck, with Mr John Landels AC and Mr Kevin Hughes as Members.

WAMA acknowledges the extensive business background and professional experience of the Committee Members and the importance of such issues in achieving outcomes which will ultimately be accepted by stakeholders and the wider community.

WAMA also acknowledges earlier comments attributed to the Federal Treasurer that the Inquiry Terms of Reference will require the Committee:

"...to examine the existing structure of fuel taxation in Australia, including related rebates, subsidies and grants and report on the implications for the economy and economic activity, environmental outcomes and petroleum pricing, cost structures and marketing arrangements".

WAMA is the peak body representing all 142 Local Governments throughout Western Australia, together with the Local Governments of Christmas Island and Cocos (Keeling) Islands respectively.

The nature of WAMA's membership is such that it represents a broad cross section of Local Governments which are significantly impacted by the structure of fuel taxation in Australia. Members range in size and scope from the large, diverse and growing metropolitan Local Governments and regional based bodies, to those located in rural/remote areas.

The substantial focus of WAMA's submission involves matters incorporated within Part 7 of the Committee's Issues Paper (18 August 2001) and those for which specific comment has been sought (viz: Issues Paper -Item 1.4).

WAMA trusts this submission will prove to be both informative and useful to the Committee as part of its Inquiry. The Association would also welcome the opportunity to elaborate further on these issues within the context of any nationwide hearings process that may be undertaken by the Committee, if appropriate.

EXECUTIVE SUMMARY

1. Terms of Reference Issues

WAMA notes that the terms of reference of the Committee outline three key tasks for the Inquiry, namely:

• to examine the total existing structure of Commonwealth and State fuel taxation and related rebates, subsidies and grants, including the proposed Energy Grants (Credits) Scheme (terms of reference paragraph 1)

• to report on the implications of the existing arrangements for:

- the economy, environment, the interplay between petroleum taxation and petroleum pricing, cost structures and marketing arrangements

- options available to government to reduce or eliminate any adverse effects of existing arrangements and to improve relevant administration arrangements (terms of reference paragraph 4); and

• in making any recommendations, the Inquiry is:

- bound by Government commitments to maintain the benefits of current fuel rebates, subsidies and grants; not to consider long-term real increases in the effective level of diesel or petrol taxes; by the Government's wish to achieve overall budget neutrality

- to have regard to impacts on various sectors of the Australian community (terms of reference paragraphs 2, 3, 5 and 6).

WAMA fully supports the examination of Commonwealth taxation structures for petroleum products and petroleum substitute products - particularly in so far as these impact upon business and transport activities and off road use.

WAMA recognises the importance of the Diesel Fuel Rebate Scheme (DRFS) to key resource-based industries as contributors to the state and national economies.

WAMA would encourage the Federal Government to ensure that the ongoing viability and long term sustainability of these industries, which are so inevitably tied to operation of the DRFS, will be reflected in proposals for replacement of this Scheme with the Energy Grants (Credits) Scheme in mid-2002.

WAMA would also support the extension of any new Scheme criteria so as to make Local Governments eligible to receive rebates for off road use activities - principally, road construction and maintenance.

2. Administration and Hypothecation Issues

WAMA is cognisant of the legislative and administrative framework as identified in Item 5.1 of the Issues Paper, which exists to enable Commonwealth collection of fuel taxation on petroleum products and petroleum substitute products in Australia.

Of particular note to WAMA in the context of these issues, is the impact of key case determinations - notably the 1997 High Court judgement as to the constitutional validity of State business franchise fees.

The curtailing of State Government powers in raising revenues through areas which existed pre-1997, has arguably served to limit the autonomy of the States, thereby placing a greater reliance on the Federal Government for revenue.

From a philosophical perspective, WAMA is concerned that these developments have significant implications for accountability and effectiveness of representation at intergovernmental level.

There is arguably a somewhat lesser opportunity for Local Government and their communities to influence policies and outcomes occurring federally when compared to those at a more immediate State level.

More recently, introduction of the New Tax System has seen the advent of the Goods and Services Tax (GST), as applied to petroleum products and petroleum substitute products, whilst operating in conjunction with subsides and rebates such as the DRFS and Fuel Sales Grants Scheme (FSGS).

WAMA acknowledges that implementation of the GST has brought about significant reforms and efficiencies from the perspective of administration of taxation in Australia and with it, significant potential benefits for revenue generation to the States.

WAMA however, maintains its concern that implementation of the GST has resulted in the abandonment of hypothecation of fuel taxation revenue to road funding.

Accordingly, there are associated implications for these new taxation arrangements and the need for the Commonwealth to return appropriate, transparent levels of funding to the States for distribution to Local Governments in maintaining the nation's important but deteriorating road network.

3. Fuel Taxation - economic and social policy issues

WAMA notes that the terms of reference of the Inquiry have been designed to provide the Committee with a basis for examination of key economic and social policy issues associated with the use of fuel.

To this end, it is noted that the Committee will be assessing the effectiveness of market mechanisms governing the price and supply of fuel, the impact of `spillover' costs and externalities, together with the role of governments in addressing these issues.

WAMA is generally supportive of the principle that governments should use taxation as a mechanism not only for revenue generation, but also in the achievement of economic, social and environmental policy outcomes involving the wider community.

WAMA has traditionally advocated the adoption of `user pays' philosophies as embodied in hypothecation, as a means of ensuring that (in so far as passible), the costs of fuel consumption are borne by those who derive the most direct benefit, rather than imposing a burden on the general community.

In practical terms however, it is accepted that communities often bear the consequences of spillover and externalities associated with fuel use, particularly where these are incurred in providing goods and services which otherwise would not be accessible.

WAMA RESPONSE TO KEY INQUIRY ISSUES - IMPLICATIONS FOR WESTERN

AUSTRALIAN LOCAL GOVERNMENTS AND THEIR COMMUNITIES

WAMA notes that the Committee has sought specific comment on a number of issues as part of its Inquiry.

These are:

• the role of fuel in the economy (Part 4, Box 4.1);

• administration and Measures for a Better Environment (Part 5, Box 5.3);

• resource allocation, environment, pricing (Part 6, Box 6.1); and

• the economy, regional, rural and remote communities, consumers, externalities and government revenue (Part 7).

Part 4: The Role of Fuel In the Economy

From WAMA's perspective, data provided within Section 4 of the Issues Paper provides some interesting, but not unexpected outcomes regarding the usage of fuel by various sectors.

A high use of diesel fuels by the sectors of mining, agriculture/forestry/fishing and construction, as reflected in the statistics, would be of significance to Western Australia, given its position as a resource-based state.

The Transport sector, whilst not seen as being a high consumer of diesel fuels compared to those mentioned above, is nevertheless significant from the perspective of usage of other fuel types.

WAMA submits that this data on sector-based fuel consumption highlights the importance of commercial and business activity to the economic prosperity of Western Australia and the communities for which Local Governments are ultimately responsible.

Businesses and enterprises that engage in mining, agriculture/forestry/fishing and construction activities are not only accountable to shareholders and their own particular corporate structures. These entities also have a role and influence at the local community level as contributors of rate revenue generated by regional and remote Local Governments.

The significance of the Transport sector as reflected in the data, is confirmed by the fact that Western Australia relies heavily on road transport for the conveyance of freight to regional centres and rural/remote communities.

Other factors, such as the increasing prominence of tourism to the Western Australian economy, would be expected to also exert significant influence on fuel usage throughout the State.

Accordingly, WAMA would anticipate a continuation of the current trends on fuel usage within these Sectors, with Transport in particular, serving as a key component.

WAMA is of the view that Local Government is a significant consumer of petroleum products as part of the wide-ranging activities and services which the Sector provides. Of particular significance in this regard is diesel fuel relating to road construction and maintenance and off road use of plant.

WAMA is also of the view that the DFRS and its proposed successor, should be extended to make Local Governments eligible for rebates in relation to off road activities - principally, road construction and maintenance.

Part 5: Fuel taxation in Australia

The 1997 rulings restricting States' capacity to levy excises and introduction of the New Tax System in 2000, combined to limit the fiscal independence of States and accordingly, place a greater reliance on Commonwealth revenues.

As identified in the Issues Paper the majority of States had pre-1997, levied excises on a range of products and services as part of recurrent revenue measures.

In Western Australia, a significant and successful example of such an excise involved the then Liberal-National Party's 4 cents a litre State Fuel Franchise Levy and Vehicle Licensing Fees designed to return approximately $700 million over ten years.

Revenue collected under this arrangement had since 1995, been earmarked for use in funding roads programs affecting Western Australia's entire road network hierarchy, with 25% guaranteed to Local Government.

The availability of such revenues also encouraged a substantial increase in Local Government's own contributions to road funding, as evidenced by information available to WAMA covering a six year period as follows:

Year

Local Government Funding

$millions

1992/93

31.77

1993/94

33.70

1994/95

38.77

1995/96

82.90

1996/97

111.65

1997/98

131.55

With these funding avenues having been removed since 1997, and despite Local Governments continuing to allocate substantial expenditure for roads in annual budgets, WAMA is of the view that there has also been a gradual, but significant deterioration of the national road network.

WAMA subsequently argued in support of the hypothecation of Commonwealth fuel excise revenue and road funding allocations in the context of debate and negotiations undertaken at the intergovernmental level during the lead up to implementation of the New Tax System.

Accordingly, it is considered important that the Goods and Services Tax deliver efficiencies from the perspective of increased revenue to the States - albeit that there is no readily accountable and transparent accompanying mechanism to ensure that road funding levels are maintained.

5.2 Rebates, subsidies and grants

WAMA notes the information provided within the Issues Paper regarding the definitions of and implications associated with `rebates, subsidies and grants' in relation to government programmes.

It is also noted that the Commonwealth has allocated $2.9 billion in funding for fuel-related rebates, subsidies and grants in 2001-02.

WAMA refers to its previous comments of support for the DFRS as a basis for promoting ongoing viability of business and industry, together with associated economic and social benefits which accrue to local communities.

Similarly, WAMA also reiterates its advocacy of the need to extend the DFRS or any proposed replacement Scheme to provide eligibility for Local Governments to claim rebates for off road use.

WAMA also is supportive of the Fuel Sales Grants Scheme (FSGS) as a mechanism for promoting viability of fuel retailing outlets in non-metropolitan areas and thereby, contributing to the prosperity of local communities.

Factors such as geographic isolation and the existence of considerable distances between rural/remote communities results in an inescapable reliance upon road transport services for provision of essential products and services.

High fuel costs comparative to those applicable in metropolitan areas act as a disadvantage in providing these products and services.

Accordingly, WAMA considers that the FSGS is effective in reducing the fuel price differential which exists between metropolitan and rural/remote communities.

5.3 Measures for a Better Environment

WAMA notes that The Inquiry has been asked to examine the fuel-related measures included in the Measures for a Better Environment statement, announced by the Government in May 1999.

In its capacity as the peak body representing all metropolitan and rural/remote Local Governments throughout Western Australia, WAMA has been involved with other key stakeholders in the development of long term transport policy affecting the State.

As part of this process, WAMA has frequently been consulted by Government on measures aimed at providing a co-ordinated approach in addressing transport needs.

In the Perth metropolitan area for example, this has been reflected in Government measures such as replacement of diesel fuelled passenger buses with vehicles supported by natural gas.

Other initiatives, such as the planning and implementation of effective future metropolitan road network infrastructure, have been supported by WAMA as a basis for addressing fuel consumption and environmental issues.

6.1 Efficient resource allocation

WAMA has previously outlined within this submission, its view that it is legitimate for Government to utilise fuel taxation as a mechanism for bringing about economic, environmental, social and attitudinal policy outcomes.

It is recognised that, within the context of these strategies, Governments will endeavour to intervene in the operation of markets (ie: through price manipulation) to alter consumer behaviour and product demand.

However, it is also reiterated the pursuit of such objectives must not be at the expense of underlying principles of representation and fairness which ensure that local communities throughout the State are afforded reasonable access to products and services.

Spillover costs and externalities associated with fuel use are highly relevant issues for Western Australia from the perspective of Local Governments and their communities.

High rates of economic growth and ongoing demographic changes mean that Western Australia's metropolitan and rural/remote Local Governments are often faced with pressures in providing services to their communities.

From the perspective of rural/remote Local Governments and fuel taxation, it is clear that the need to maintain essential products and services creates spillover costs.

Ongoing road network deterioration from mining, industry and transport activity for instance, is a matter which can never be fully recovered through fuel price paid by the user. However, it is often accepted by local many communities as being inevitable in provision of products, services and generation of economic benefits.

7.3 Regional, rural and remote communities' welfare

WAMA is encouraged that the Inquiry, through development of its Issues Paper and terms of reference, has foreshadowed the important implications of fuel taxation and rebates, subsidies and grants for regional, rural and remote communities.

WAMA notes that the Inquiry has recognised and will be undertaking an examination of:

• the importance of petroleum products to the agriculture, mining and road transport sectors;

• rebate, subsidy and grant arrangements (Diesel Fuel Rebate Scheme, Diesel and Alternative Fuels Grants Scheme, Petroleum Products Freight Subsidy Scheme and the Fuel Sales Grants Scheme) that have eligibility requirements partly based around either geographic boundaries or industry sectors located in regional, rural and remote Australia; and

• the proposed Energy Grants (Credits) Scheme to replace the Diesel Fuel Rebate Scheme and the Diesel and Alternative Fuels Grants Scheme.

WAMA would again reiterate its comments regarding the importance of the DFRS and FSGS in promoting business and industry viability, which in turn, provides benefit of local communities through investment, employment and corporate citizenship.

Efficient, effective and stable Local Government is also pivotal to the success of local communities. WAMA therefore, reinforces its earlier comments that the DFRS and any future Scheme be extended to include Local Government.