Should Canada Join Other Countries and Take a Gas Tax Vacation?

If US President Joe Biden succeeds in halting US gas taxes, Canada will be the only G7 country not to introduce a tax cut or subsidy to help tackle prices at the pump.

Biden on Wednesday called on Congress to suspend the federal gasoline and diesel tax for three months. Meanwhile, the UK, Italy and Germany (lower taxes), France (a consumer rebate) and Japan (a subsidy to wholesalers) have all taken similar measures.

While inflation – led by the rise in petrol prices – is reaching peaks not seen since Billie John was topping Billboard graphs and Return of the Jedi was in theaters, will Canada follow? Would it?

So far, the answer from Ottawa is: not at the moment. Natural Resources Secretary Jonathan Wilkinson said earlier this week that the federal government has no immediate plans to cut prices at the pump with a temporary exemption from the federal gas tax.

Canada is instead trying to stabilize global oil prices by increasing supply, which Wilkinson says is starting to happen. He also said aid to Canadian families in the meantime is focused on areas that Treasury Secretary Chrystia Freeland highlighted in a speech last week: increases in federal benefits, cuts in childcare costs and upcoming increases in old-age security and Canadian workers’ tens. good come.

Conservatives have for months called on Liberals to cut excise taxes on gas, including lifting the GST on gasoline, temporarily suspending the carbon price or lifting the federal excise tax from 10 cents per liter.

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Ottawa urged action against rising gas prices

Opposition parties, among others, are urging the federal government to take action against rising gas prices. Conservatives want a GST break and the NDP is calling for cuts for low-income families.

Not the solution, say experts

Rory Johnston, founder of oil market data service Commodity Context, says any kind of gas tax break seems to help the poorest in society, who are most affected by gas prices as a percentage of their income. However, he told CBC News that approach is the wrong tool for the job.

The main reason for the high gas prices is an acute supply shortage, he said; artificially lowering the price at the pump will not help.

High prices are seen at gas pumps in Yellowknife. Gas prices have pushed inflation to levels not seen since the early 1980s. (Jared Monkman/CBC)

“Prices will go up until you kill demand so the market can balance,” he said. “We’re just pumping out supplies right now, left and right. So by creating a gas tax holiday, you’re essentially subsidizing further consumption at even lower prices.”

Johnston says he’s not sure why liberals haven’t acted more quickly to cut prices at the pumps, but speculated that the government is concerned about the story surrounding the transition to cleaner energy. “Because I’m against the move in general [toward a tax holiday],,I’m not disappointed,” he said.

Prof. dr. Kevin Milligan of the Vancouver School of Economics at the University of British Columbia agrees that a tax exemption is not a good policy given the scarcity of oil on the supply side.

“If that’s the case, the market producers have more power,” he said; and that means that a tax cut is more likely to increase producer profits than lower consumer prices.

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Biden announces plan to freeze gas taxes

US President Joe Biden unveils a plan to lower gas prices.

Turnkey Solutions

Johnston says he understands that governments around the world are under pressure to do something.

“This is a moment, I think, that calls for creative, out-of-the-box policy making — things we haven’t necessarily tried before.”

He came up with three ideas:

  1. Rethink the gas tax. Create a sliding escalator tax, which falls when gas prices rise, but rises when prices fall, removing some of the volatility in gas prices.
  2. Offer cash instantly, but only at the lower end of the income spectrum. Send money instead of lowering taxes would make life more affordable without artificially subsidizing the price of a scarce commodity, he says. But both Johnston and Milligan warned that simply writing checks for everyone to tackle gas costs could exacerbate inflation.
  3. Look at restarting some facilities, such as the Come by Chance, NL, refinery, which was closed early in the pandemic and is now being converted for renewable diesel. Reducing oil production “will help reduce that bottleneck in refining and bring the price we pay at the pump back closer to the price of total global oil,” he said.

Milligan, for his part, says the federal government has a number of areas under its control that it can and should focus on to lower inflation — easing bottlenecks at airports, improving supply chains and lowering import tariffs — affecting prices for Canadians in stores.

He also emphasizes that the Bank of Canada must be able to do its job to reduce inflation.

Milligan said the challenge is that in times of crisis, governments generally try to focus on the broad middle class.

“The problem is to find something that is not inflationary in itself and that can help the broad middle class,” he said. “That’s where a lot of the challenge comes in.”

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