Gas prices: Who benefits from tax relief?

Since oil prices began their steady march back to three-digit levels, the cries for government intervention in gasoline markets has risen in tandem.  These calls have reached a fever pitch this week with reports we will soon see a US-style dressing-down of the oil executives by federal MPs as well as calls from politicians including Ontario PC Leader Tim Hudak to consider tax relief at the pump.

Often, the case for government intervention in energy markets is premised on protecting low-income consumers from the effects of price increases.  A quick look at Stats Can data suggests not only that this would be what Kevin Milligan has termed a “price solution to an income problem,” it would be an expensive and regressive policy change to say the least.

The Statistics Canada Survey of Household Expenditure compares transportation spending across income levels, and preliminary data analysis shows that the richest 20% of Canadian households spend over 6x as much on transportation as the poorest 20%. Kevin Milligan provides the breakdown of fuel expenditures, which show a similar although not quite as stark difference.

On average, about 22% of transportation dollars are spent on gasoline for private vehicles, and this number is higher among lower-income households as they tend to drive less expensive vehicles and take fewer (more expensive) trips by air than higher-income households.  Higher-income households’ expenditure on gasoline and other fuels is $3621/yr on average, 4% or less of average annual expenditures. The lowest income households spend $662/yr, which is at least 2% of annual expenditure, but likely significantly more in many cases.

The impact of any broad-based tax change would benefit high income households as much as 6 times more than it benefits low income households. Based on the numbers above, if the Federal government were to exempt gasoline from GST, the 5% savings would amount to $180/yr for the country’s richest households, and would provide only about $33 to Canada lowest-income households. Yes, the $33 may make a larger difference to a lower-income household, but if we want to help lower income Canadians deal with high energy prices, a policy which provides significant cost savings to the highest income earners in the country is a poor place to start.

Before you argue for gas tax relief for the sake of those less fortunate, consider that higher income people tend to drive larger vehicles, drive greater distances, and drive more often than do lower income people.  As such, higher income people use more gas than lower income people.  They pay more tax, and so benefit more from any tax relief.

If we want to transfer money to lower income households, let’s do so, but let’s not for a second pretend that relief at the gas pumps is a good way to go about it.

14 responses to “Gas prices: Who benefits from tax relief?”

  1. Willow Balkwill

    MCould it not be argued that since lower income families spend 100
    Percent of their income that they value 45$ more than higher income Canadians value 140$. Also, even though higher income people are more likely to fly, if they don’t fly then airlines lay people off. I’m not saying I disagree with your conclusion but more some aspects of your rationale. Eliminating the gst on fuel could help lower income people if coupled with a refundable energy tax credit of 100$ for those with low incomes. Then everyone gets the same benefit (if your numbers are precise).

    My personal feelings are let those with higher incomes pay more for energy. On a global scale we already get a pretty good deal but I doubt the current gov’t agrees with
    I really like your blog btw (and tweets).

  2. Willow Balkwill

    Could it not be argued that since lower income families spend 100
    Percent of their income that they value 45$ more than higher income Canadians value 140$. Also, even though higher income people are more likely to fly, if they don’t fly then airlines lay people off. I’m not saying I disagree with your conclusion but more some aspects of your rationale. Eliminating the gst on fuel could help lower income people if coupled with a refundable energy tax credit of 100$ for those with low incomes. Then everyone gets the same benefit (if your numbers are precise).

    My personal feelings are let those with higher incomes pay more for energy. On a global scale we already get a pretty good deal but I doubt the current gov’t agrees with me.

    I really like your blog btw (and tweets).
    Boy, I hate typing on my phone:-)
    Willow Balkwill (@chuckdawsongirl)

  3. Willow Balkwill

    Sorry, my clumsy fingers made me send that twice.

  4. Robert McClelland

    If regulation would be so beneficial to consumers, why do we not see any retailers offering fixed-price gasoline contracts?

    That’s a good question. There are fixed contracts for natural gas and home heating oil so why not gasoline. Could that be a solution to the volatility that angers consumers the most.

  5. Heather

    Hi Andrew, your blog has caught my interest. I am NOT an economist – more of a behavioral theorist trained in science and environmental resource management. So I’m keen to learn from you and your following.

    Just wondering, what do you make of BCs broad based, revenue neutral carbon tax, which is now at $20/ tonne, and set to rise to $30 by 2012? http://www.fin.gov.bc.ca/tbs/tp/climate/carbon_tax.htm

  6. Northern Gateway and Gas Prices

    [...] that the majority of the costs of a fuel cost increase are borne by the poor – that’s simply not true. If you increased fuel costs by 1%, it would cost the lowest 25% of income earners an average of $6 [...]

  7. John Dabrowski

    Sirs,
    I think we can solve our problems by moving to
    Newfoundland, Nova Scotia, New Brunswick, or PEI.
    Why, because gasoline prices are controlled by the
    Government in those Provinces.
    How, by taking the wholesale price which is
    the New York Harbor price for unleaded gasoline,
    that is traded on the Nymex Commodities Exchange
    and adding a percentage for shipping, retail, and
    profit. Check “down East” prices on Gasbuddy and see
    how low they are!! Gasoline does have a wholesale
    price and can be shipped between Canada and the US,
    so prices on both sides of the border are the same,
    except for taxes which vary by State or Province.

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