In Praise of Gas Taxes

I recently read an article in the Northumberland News with the headline “Most Canadians oppose reinstating the federal gas tax Sept. 8, new poll finds. What Ontario drivers pay in fuel taxes — and what’s being proposed.” The article lays out a few key facts:

• We pay taxes on fuel, almost 45 cents per litre for gasoline
• The federal government reduced gas taxes by 10 cents per litre in April in response to the rise in fuel costs caused by the United States attacking Iran
• The Canadian Taxpayers Federation commissioned a poll asking Canadians if we think the federal government should extend the “tax holiday”, with a majority agreeing that the government should keep gas taxes low
• The Canadian Taxpayers Federation is calling on the government to permanently cut taxes (nothing new for them)
• The Conservative Party of Canada is arguing that all taxes should be removed from fuel for the rest of the year
• Gas taxes go into general revenues, but $2B annually goes to municipal infrastructure

Northumberland News then asks readers what they think, and almost half (at the time I’m writing this) think all taxes should be scrapped from fuel:

Note the wording of the question: “There should be no taxes on fuel because it drives up the cost of everything we buy” is an assumption, and the truth of the matter is much more complex than that. But given that that’s the way they phrased the question, I’m surprised it isn’t higher than 44.4%.

So let’s dig into it a little bit more: what’s the purpose of gas taxes, and why do I think that they should be reinstated? (And why am I irritated at this news story?)

What are Gas Taxes Actually For?

I frequently hear people complaining about gas taxes, and it usually includes some sense that these are arbitrary taxes that just go into general revenues. I get why people have this perspective, because that’s how sales taxes work: a tax on all economic activity that goes toward the cost of the government services we enjoy in general, including everything from education to healthcare to the military. But that’s not entirely true of gas taxes.

Both the federal and provincial governments charge gas taxes, and they are some of the least arbitrary taxes that we have. While GST (federal) and PST (provincial), or their combined form of HST, are arbitrary tax rates charged to all economic activity (with some exceptions, like food and books), gas taxes are largely earmarked for “municipal infrastructure,” which is to say, roads. Roads are egregiously expensive to build and maintain, and they are owned by municipalities. By earmarking a significant portion of the fuel surcharges for municipal infrastructure, the federal and provincial governments ensure that the roads are being paid for by the people who are using the roads the most: the people who are driving on them. Those who drive more on the roads, pay more for the roads. These tax revenues also often go toward funding transit systems, which can get drivers off the roads entirely, reducing the wear on the roads as well as the amount of traffic congestion. And the portion of gas taxes that is not earmarked specifically for municipal infrastructure still largely goes toward grants delivered to municipalities for major projects.

To put it into perspective, about 10% of the municipality of Brighton’s revenues come from grants from the federal and provincial governments, so without them our property taxes would increase by 10%. And that’s aside from the $35M grant Brighton received from the province for our new wastewater treatment plant, which we could never afford on our own.

What Happens When Gas Taxes are Cut?

The government cutting gas taxes is hardly new. The Ontario provincial government cut their gas taxes significantly in 2022, from over 14 cents per litre to 9 cents per litre. The federal government cut the carbon tax at the pump entirely. The reason for these tax cuts is almost purely political. Ostensibly they’re about making things “more affordable”, but they’ve done nothing to halt inflation, or even to keep gas prices low. Here’s a chart for recent inflation:

Inflation is an index of the cost of things, and how much those costs are increasing. Note that this is calculated for “all items” but also for “all items excluding gasoline” and “all items excluding food and energy,” because internationally traded commodities like gasoline (and to a much lesser extent, food and energy) have very volatile prices: they’re changing all the time. While the Canadian Taxpayers Federation and the Conservative Party of Canada argue that high costs at the pump make everything more expensive, and that the cost of things like food goes up when the cost of gas goes up because the transportation cost is built into the price (all largely true), there’s a lot left unsaid in that argument. They imply, whether intentionally or not, that if we just cut the gas tax then the price of everything will go down. There’s very little evidence, whether in the chart above or in our daily experience, that that’s the case.

This is for a number of reasons, but it’s evident in the fact that gas prices continue to climb even after gas taxes are cut. Oil and gas will continue to get more and more expensive. Carbon taxes were designed to speed up that process so that we would seize the opportunity to transition away from oil and gas, rather than continue to hold out and wish for lower costs; they failed in that respect (I would argue because they became the focal point of political disinformation), but even in their absence the cost of oil and gas continues to climb to unsustainable levels. Geopolitics is only part of the problem, too: yes, there’s a war in the middle east that’s currently causing price spikes, but sadly, that’s all too common. Just as importantly, we’ve used the easy-to-get oil, and gasoline increasingly comes from hard-to-reach places or in forms that need further processing (e.g., bitumen or shale oil). Oil and gas boosters will say that oil is more plentiful than ever, but the story at the pump says otherwise. Gas companies are in no hurry to offer us lower prices. Meanwhile, the cost of electricity, particularly from solar, continues to drop.

So no, cutting gas taxes doesn’t necessarily even mean lower gas prices. What it does mean, though, is that there’s less government revenues. And the things that those government revenues pay for don’t miraculously get cheaper just because there’s less government revenues to pay for them, and they’re rarely actually expendable services. We need them. So whether the federal or provincial government decides to cut services, or just fund them from somewhere else, it amounts to the same thing: the costs still exist, and they still get paid, just from another source.

Keep in mind that a significant chunk of these federal and provincial revenues are normally given out to municipalities through predictable grants to fund infrastructure, and that without these grants we would need to make up the difference by raising property taxes. Likewise for the portions of the gas tax that are not earmarked for municipal grants: when the province decides to cut services, like healthcare or social services, municipalities scramble to make up the difference through our own programs, which are rarely as efficient or sustainable. So we end up paying as much or more, just getting the money from the municipal level instead of through gas taxes. And our services aren’t as good as they could be.

Consider also that while gas taxes fund road maintenance by charging the people using the roads proportionately, property taxes are a blunt instrument that charges everyone much more evenly. People who don’t drive at all still pay property taxes. And while gas taxes affect the cost of everything because virtually everything we own comes to us on a truck, those trucking companies don’t pay taxes in Brighton (unless there’s a major trucking company based here that I didn’t know about!), so cutting gas taxes takes a trucking company’s portion of the road maintenance cost and shifts that burden to local property taxpayers, including those who don’t drive at all. It’s hard to imagine saving enough on groceries to make up for the increase in property tax if we had to replace the grants we derive from gas taxes with local property taxes.

Conclusion: In Praise of Gas Taxes

As always when I see a story about the Canadian Taxpayers’ Federation, I feel the need to repeat a simple truth: there’s no such thing as a free lunch. Taxes are a way of paying for things that we all need, and they’re incredibly efficient at doing so.

Gas taxes, more than almost any other tax, are fair: they serve as a pricing mechanism that allocates the cost of fixing our roads (and providing transit alternatives) to the people who use those roads, proportionate to how much they use them. This pricing mechanism is far more efficient than anything we can do at the municipal level, and without gas taxes we would have to raise property taxes by 10% or more, creating a more expensive and less fair society without necessarily reducing the costs of anything at all.

And if you’re wondering why property taxes have been going up so much this term (since 2022), just remember that the province cut gas taxes by 5 cents per litre in 2022, and that we spend hundreds of thousands of dollars in Brighton every year for healthcare and social services, both things that fall under provincial responsibility. Turns out we still need those things, even when it’s politically inconvenient to collect gas taxes.