Gas prices are high. Would a Federal Gas Tax Cut Help?

As U.S. President Joe Biden calls on Congress to suspend federal gasoline and diesel taxes for three months to help Americans, some Canadians are wondering if a similar move could provide temporary respite from high prices north of the border.

In May, gasoline prices in Canada were up 48% from a year ago. Rising fuel prices are a major factor affecting inflation. In May, inflation rose to 7.7% from 6.8% in April. Fueling your vehicle can cost you an average of $2 per litre, down from around $1.40 in 2021 and $1 in 2020.

That’s why members of the Conservative Party and a group of Canadian taxpayers believe that a pause on the 10-cent federal fuel excise tax, sales tax and carbon tax imposed on all Canadians could help fill the hole in our wallets. The Tories have been saying since May that stopping taxes for the summer will help people as they tend to travel more in the warmer months.

The idea behind such a reduction, according to Philippe Cyrenne, professor of economics at the University of Winnipeg, is to pass on immediate savings to drivers. “More [gas] retailers don’t have a lot of market power,” says Cyrenne. “If the federal fuel tax is reduced, the retail price will decrease by the full amount of the tax reduction and, in turn, save Canadians money.

Would Federal Gas Tax Relief Work?

The federal government says it has no plans to implement gas tax relief and is instead focusing on other ways to help Canadians financially, including the 8.9 plan billion dollars from Finance Minister Chrystia Freeland to improve affordability by increasing funding for benefit programs, including child care and dental plans.

The UK, Italy and Germany have cut fuel taxes to help individuals and businesses cope with soaring fuel prices, triggered by the faster-than-expected recovery in the global economy after the pandemic and Russia’s invasion of Ukraine. So far, German officials say the cut has only temporarily lowered gasoline prices. Similarly, gasoline tax breaks in Maryland, Georgia, and Connecticut only briefly benefited consumers.

Although Canada has no concrete plans to implement gas tax relief nationwide, some provinces have suspended provincial gasoline taxes. (In addition to federal taxes, provinces also set their fuel taxes, which range from 14.3 cents per liter of gasoline in Ontario to 19.2 cents in Quebec). To help drivers, Alberta suspended the collection of 13 cents per liter of fuel taxes in April and will continue to do so as long as the global benchmark oil price remains above $90 a barrel. Newfoundland and Labrador also suspended provincial taxes from June until the end of 2022, reducing seven cents per litre.

Some experts believe that a fuel tax exemption, at the federal level, is not the right decision, because it would not solve the fundamental problem which drives up the prices of gasoline and diesel, namely a gap between supply and demand. Growing demand for fuel has rebounded faster than refineries can and instability caused by Russia’s invasion of Ukraine is affecting price increases. “Increased energy demand and reduced supply will always give you higher prices,” says Cyrenne.

Residents of Alberta pay the least for gasoline of any other province in the country. But even with the fuel tax relief, a liter of gas in Alberta costs more in June than it does in April and May. Meanwhile, Newfoundland and Labrador drivers are still paying some of the highest gas prices in Canada, thanks to tax relief and an adjustment from the Public Utilities Board.

While gas tax relief would provide much-needed relief to low-income Canadian households and those who must drive for work, it is not a long-term solution. “When taxes are restored, the overall inflation rate will go up and will not have a lasting impact on gasoline prices,” said Douglas Porter, chief economist at BMO Capital Markets.

In order to solve the problem, Cyrenne says there must be political will at the federal level to increase the oil supply. Indeed, the federal government is looking for ways to increase oil and natural gas production to stabilize oil prices, Natural Resources Minister Jonathan Wilkinson said June 21.

Porter adds that a gas tax cut could also have unexpected results. “In a roundabout way, a gas tax cut could actually fuel inflation by putting more purchasing power in consumers’ pockets than they could simply spend in other areas,” says -he. “It’s also possible that any kind of gasoline tax could be eaten up within days by fluctuations in global oil prices.”

Until global oil supply catches up with demand, you can save pennies at the pump by following these tips:

  • Use gas price apps. Apps like GasBuddy can tell you exactly when and where you can find the cheapest petrol or diesel
  • Avoid idling your car. Turn off your engine if you wait more than 60 seconds. Experts say you could waste up to a liter of gasoline for every 20 minutes your vehicle is idle.
  • Go easy on the pedal. “Jackrabbit” starts and hard braking can increase your fuel consumption by 39%
  • Use cruise control. For those going on long trips in the summer, fuel consumption tends to peak at around 80 to 90 kilometers per hour. Cruise control can help you save more fuel and get more for your money
  • Perform routine maintenance. A vehicle that is not properly maintained can consume up to 25% more fuel, so be sure to schedule an appointment with your auto shop.
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