Petroleum Taxes: Trends in Fuel Taxes (and Subsidies) and the Implications

In 2000 the price of crude oil rose to levels not seen for more than 20 years, and as a result so did the price of oil products. The price hikes prompted public debate about the level of taxes determining the final prices paid by consumers. By one estimate, taxes accounted for 68 percent of the final price in the European Union in 2000 (OPEC 2000). But what about developing countries, where petroleum product taxes are often an important source of government revenue? In particular: ▪ How important are petroleum product taxes for developing countries? ▪ What principles should govern the level and structure of taxes on oil products? ▪ Is the general level of oil product taxes in developing countries similar to that in industrial countries? ▪ What is the pattern of relative tax rates on different products? How important are fuel taxes? Calculating total government revenue from all taxes on petroleum products in a country requires extensive data, and even for OECD countries separate figures on such revenue are generally unavailable. But a 1990–91 International Monetary Fund survey of 30 developing and industrial countries does provide data on tax revenues from petroleum products, and thus allows an analysis of their relationship to the government budget and GNP (Gupta and Mahler 1994). Statistical analysis drawing on these data reveals the following relationships: ▪ The consumption of petroleum products rises almost as fast as GNP (elasticity of 0.8). ▪ Total government tax revenue from all sources tends to rise faster than GNP (elasticity of 1.2). ▪ Tax revenue from petroleum products rises more slowly than total tax revenue (elasticity of 0.7). Recent World Bank analysis shows that taxes on petroleum products are a critical source of government revenue for low-income countries. And if the experience of industrial countries serves as any guide, the rates of these taxes will have to rise sharply as low-income economies develop. But policymakers must be mindful of how taxes (or subsidies) affect the relative prices of fuels, since too large a difference in prices between products can lead to fuel switching and adulteration, adversely affecting the government tax take and pollution levels. Petroleum Taxes