Gas tax is the fairest and most efficient tax in Jamaica

Saturday, November 21, 2009 5:57 AM

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Business

Keith Collister

Wednesday, April 22, 2009

On Monday, both the Observer and Gleaner newspapers suggested that an increase in the taxation of gas was coming. The argument was made by "highly placed sources" that without a cess on gas, it would not be possible to pay for needed infrastructure, particularly roads and bridges. This is certainly true, as for literally decades the capital budget has effectively been treated as a fiscal cushion to be cut when the inevitable revenue shortfalls endanger Jamaica's ability to meet its fiscal targets.

Leaving aside the issue of Jamaica's financing constraints for a moment, cutting back capital expenditure is exactly the opposite of what is economically rational. The current environment of declining demand and reduced private sector capital expenditure (and consequently sharply falling building and material costs) is precisely when governments need to increase their capital spending to offset the fall in private sector demand.

However, the primary argument for a gas tax is not that it is the best means to finance the fixing of our roads (as important as that is) but that it is far and away the fairest and most efficient tax in Jamaica, precisely because of the administrative weaknesses of our tax administration.

The gas tax is the fairest tax because it impacts everybody according to their ability to pay. Many of the wealthy are able to take advantage of loopholes to avoid taxation, but the better off driver of a huge gas-guzzling SUV will pay infinitely more in tax than a commuter taking public transport, whilst the person riding a bicycle or walking to work pays no direct gas tax at all. Part of the proceeds of a gas tax could also be used to pay for school lunches or increase the funding of the health service, further increasing equity.

A gas tax is also the most effective way to spread the burden of taxation. Because of its indirect impact eg on the cost of the transportation of goods, nobody escapes the tax. This burden-sharing aspect is particularly important in an economy like Jamaica, where the informal sector is estimated at above 40 per cent of our gross domestic product, one of the highest levels of informality in the world. Indeed, in the short run, a gas tax is almost the only way, other than GCT, of making the informal economy pay something approaching their fair share of taxation.

A related point is that the gas tax is horizontally equitable, meaning that those with similar incomes are likely to pay the same amount of gas tax. If part of the revenue from a gas tax is used to raise the income tax threshold, leaving those currently paying income tax, mainly PAYE, paying less tax, a gas tax would actually increase horizontal equity substantially, as the many not paying any direct tax are forced to make some contribution. If it finances a rise in the income tax threshold, the gas tax also increases the level of "choice" available to the consumer, as it gives them additional personal disposable income. In his role as a consumer, the taxpayer now has the choice: "Do I spend my additional dollar of disposable income on gasoline, or on other expenditures (caloric intake, education, savings) that in my own view would serve to increase my welfare?"

The gas is also by far and away the most efficient tax administratively. If a special consumption tax (SCT) is introduced, rather than an increase in GCT as proposed in the Matalon report, then there is only one tax collection point. This is even more efficient than the relatively efficient GCT, where you would still have to collect from several hundred gas stations.

Collected as SCT, however, a gas tax would have a 100 per cent compliance rate and the lowest cost of administration of all the major tax types (near zero). The introduction of any other new tax measure is likely to be very inefficient administratively, and will take time, perhaps a long time, to be effective. Gas is therefore the best way to achieve the required short-term gains in tax revenue.

Jamaica's excessive dependence on imported oil is very dangerous

Jamaica does not produce a single drop of oil, and last year the price of energy rose to a level that posed a clear and present danger to our balance of payments, when at one point the oil bill exceeded the earnings from our top two exports. Whilst incentives for renewable energy can help at the margin, only higher prices from the increased taxation of energy will substantially increase energy conservation, and thereby lower the demand for foreign exchange.

Such a result would also be environmentally friendly, as lower consumption of gas and energy is generally good for the environment, and ultimately the economy since our main competitive advantage is sun, sea and sand.

Jamaica also needs to reduce our dependence on foreign energy as a strategic imperative. Almost all of our energy consumption is oil, which in the future will be an increasingly scarce resource, that may even be subject to severe supply disruptions.

In short, not using taxation to help diversify our energy mix is simply irresponsible, putting the future of all Jamaicans at risk.

The main reason oil prices have fallen since last August is the acceleration of the international economic crisis. When the crisis ends, oil
prices are likely to rise as oil consumption recovers internationally. The Jamaican economy needs to adjust now, rather than to wait for some future crisis, when oil exceeds last years high of US$147. If the taxation of gas is gradually increased in the current period of relatively low prices associated with the world economic recession, it may then be possible to reduce the tax when the price of gas eventually rises.

Just under one month ago, in the Observer of March 27th, as part of a panel of commentators, I warned again of the seriousness of the economic situation and the need for Jamaican's to come together. In the article, I noted:

"Avoiding a fiscal crisis will require even tougher measures than were taken in 2003, as the international economic environment is continuing to deteriorate in what may turn out to be a modern day depression. In direct contrast, the international economy was improving in 2003, and consequently, Jamaica was in the process of benefitting from a new wave of foreign direct investment.

In 2003, a wage freeze was negotiated with the unions, and combined with a united private sector response dubbed the partnership for progress and a neutral opposition allowed confidence to return to the financial markets. Interest rates fell, allowing the government to refuse a proffered debt swap.

This time around every measure will need to be taken, namely a zero increase in the overall wage bill, restraint on capital and recurrent expenditure, and increased taxation (including energy) to achieve a sustainable budget deficit. Interest rates will also need to fall from current levels, requiring a unified response by the country to maintain investor confidence."

Even these measures may not be enough, as in the absence of an improvement in the international economy, or substantial debt relief (neither of which is an immediate prospect), the Jamaican government is very likely to be forced to cut jobs, return to the IMF, or both in the coming months (this is particularly likely in the absence of a substantial gas tax). To avoid such an eventuality, the public sector unions would be well advised to throw their weight behind a gas tax now to avoid layoffs in the future. If a gas tax allows a rise in the threshold, they would also achieve an increase in the net pay of their members.

Even with the rumoured increase of $10 per litre, as mentioned by the Gleaner, the cost would be below the price paid last summer. In any case, if a gas tax allowed the budget deficit to reach a sustainable level, it would substantially reduce the chance of an uncontrollable devaluation of the currency that would have a far bigger negative effect on the poor, as well as increasing the cost of gas to the motorist by far more than any proposed tax.

If the government is concerned about the political problem of raising the tax on gas all at once (reflecting the seeming lack of desire for a genuine social partnership in some quarters), then it should raise it gradually as the price falls, achieving a kind of ratchet affect (the price does not fall as much as it rises). If we are really lucky, another opportunity may be emerging to put a tax on gas without raising the price at the pump.

For the past month, oil prices have been hovering around or above the US$50 a barrel mark despite US domestic crude supplies swelling to 18-year highs. On Tuesday, the futures price of light, sweet crude for May delivery was down US$1.82, or four per cent, at US$44.06 a barrel on the New York Mercantile Exchange, after falling as low as US$43.83 a barrel, whilst June Brent crude on the ICE futures exchange fell US$1.37 to US$48.49 a barrel.

Oil prices have been supported by positive equity markets since March 9th, but the old stock market adage "sell in May and go away" is often correct. If plunging equity markets lead to a decline in the price of oil over the next few months, this would provide an excellent opportunity to finally implement the energy equalisation tax (increase the tax on gas only when the price of oil falls so the price of gas at the pump doesn't rise) as was suggested by the PSOJ/JCC to former finance Minister Omar Davies in 2003, and by the combined PSOJ/JCC economic committee's for the National Planning Summit in November 2007. Under this scenario the price of the pump wouldn't increase, at least in the short run, until the next rise in prices.

Alternatively, the tax could be increased by a low number, between $2 and $4, with the rest of the increase being achieved very gradually over the course of a year, so that there would be no sudden increase in the price of gas.

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