Fuel tax credits are worth $8 billion a year to the businesses that receive them, but only about half that outlay is justified in economic or social terms. Fuel tax credits are gnawing away an ever-growing share of fuel tax revenue: a decade ago, credits reduced gross fuel tax revenue by 30 per cent; today, it’s almost 40 per cent. Winding back the credits could reduce the structural budget deficit by about 10 per cent, or $4 billion a year.

Fuel tax is imposed at a current rate of 47.7 cents per litre – but not all fuel use attracts the charge. No fuel tax is payable for vehicles that only drive off–road, such as trucks on mine–sites, or for other off–road uses such as in heavy machinery, and for heating and cooling. A reduced rate of fuel tax is payable for on–road vehicles heavier than 4.5 tonnes, such as semi-trailers, B-doubles, and passenger buses.

The usual tax-policy orthodoxy is that governments should not tax business inputs, to avoid skewing business decisions about what goods and services to produce and with what inputs. Important as these arguments are, they don’t hold when the input itself causes harm - the situation with burning diesel.

This report calls for an overhaul of fuel taxes in Australia. On-road heavy vehicles should pay the same rate as utes, vans, cars, and small trucks used by Australian businesses. Off-road vehicles and machinery should still be eligible for fuel tax credits, but at a lower rate than at present, to reflect the carbon emissions and other damage they cause to the community as a whole.

Key recommendations:

• Fuel tax credits should be removed for heavy on-road vehicles, increasing the effective fuel tax rate to 47.7 cents per litre, indexed to CPI.
• Fuel used off-road should receive a reduced credit of 25.6 cents per litre, increasing the effective fuel tax rate to 22.1 cents per litre, indexed to CPI.
• The on-road fuel tax rate should apply to all fuel used on-road, including fuel used for powering auxiliary equipment.