CEBR Fuel Duty Impact - Nov 2020

6 © Centre for Economics and Business Research 2. Background 2.1. Introduction Excise duty is charged on most hydrocarbon oils in the UK. The two main categories of road fuel – ultra-low sulphur petrol and ultra-low sulphur diesel – are charged duty at 57.95p per litre. When VAT is included, tax represents 62% of the final pump price for petrol, and 61% of the final pump price for diesel (as of September 2019). Fuel duties are estimated to have raised £27.6 billion in 2019/20 1 . The Institute for Fiscal Studies looked at the Government’s options for taxing motoring in their Green Budget, published in October 2019 2 ; as part of this, the authors considered the distributional impact of fuel duties, finding that duties paid on households’ fuel purchases (both duty and VAT) ‘are, on average, roughly proportional to household spending, accounting for between 2% and 3% of the non-housing budget for all income g roups’. The report added: ‘Among car owners, fuel duties take up a larger share of poorer households’ budgets. But since lower-income households are much less likely to own a car in the first place (in 2015 only half of those in the lowest income decile owned a car, compared with over 90% in the highest income decile), the average budget share across all households is broadly constant over the income distribution (though slightly lower for the poorest tenth and the richest tenth). ‘That said, “the burden of fuel duties varies widely within income groups”: ‘Right across the income distribution, around 4– 5% of households find fuel duties (and VAT on the duties) consuming more than a tenth of their budget, and it is for these people that rates of fuel duties are a particularly sensitive issue … ‘A 2015 YouGov survey ( YouGov / Times Red Box Survey, March 2015) found that just over half of respondents thought fuel duties were unfair; only inheritance tax received a more unfavourable response. It is particularly striking when contrasted with tobacco duties, which are highly regressive and which many economists would bracke t with fuel duties as ‘corrective taxes’ designed to discourage harmful behaviour, but which were considered the fairest of the taxes listed. ‘Evidently the harms that motoring causes do not make people think of fuel duties as a legitimate ‘sin tax’ like a lcohol or tobacco duties. One reason for this may be that many people feel they have little option but to drive – it may be their only way to get to work, for example – and resent being penalised for something they can do nothing about.’ The IFS in this commentary makes the elementary economic mistake of justifying additional taxes on motoring through the impact of motoring on congestion. Congestion is actually a ‘club effect’, a cost imposed by members of a group on the other members of the group. The standard economics for 1 https://commonslibrary.parliament.uk/research-briefings/sn00824/ 2 https://www.ifs.org.uk/uploads/Green-Budget-2019-Chapter-9-A-roadmap-for-motoring-taxation-2.pdf