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.