Should Canada join other countries and hold a gas tax holiday?

If US President Joe Biden succeeds in his attempt to halt gas taxes in the United States, Canada will be the only G7 country not to introduce a tax cut or subsidy to help deal with prices at the pump.

Biden on Wednesday called on Congress to suspend federal gasoline and diesel taxes for three months. Meanwhile, the UK, Italy and Germany (lower taxes), France (a consumer rebate) and Japan (a wholesale subsidy) have all taken similar steps.

As inflation – with the main line of petrol price increases – hits heights not seen since Billie John topped Billboard diagrams and The return of the Jedi was in the cinema, will Canada follow suit? Should it?

So far the answer from Ottawa is: not at this time. Natural Resources Secretary Jonathan Wilkinson said earlier this week that the federal government has no immediate plans to lower prices at the pump with a temporary deferral of the federal gas tax.

Canada is instead seeking to stabilize global oil prices by increasing supply, something Wilkinson said is starting to happen. He also said that assistance to Canadian families, meanwhile, is focused on areas highlighted by Finance Minister Chrystia Freeland in a speech last week: increases in federal benefit checks, cuts in childcare spending and upcoming increases in old-age security and Canada Workers Benefit.

Conservatives have called on the Liberals for months to cut gas taxes, including raising the GST from gasoline, temporarily suspending the carbon price or abolishing the federal excise tax of 10 cents per liter.

Not the solution, experts say

Rory Johnston, founder of the oil market data service Commodity Context, says any kind of gas tax seems to help the poorest in society, who are most affected by gas prices as a percentage of their income. But, he told CBC News, that approach is the wrong tool for the current job.

The main reason for high gas prices is an acute shortage of supplies, he said; artificially reducing the price of the pump does not help.

High prices for petrol pumps are seen in Yellowknife. Gas prices have driven inflation to levels not seen since the early 1980s. (Jared Monkman / CBC)

“Prices will rise until you kill demand so the market can balance,” he said. “We’re just emptying inventories right now, left and right. So by creating a holiday for gas tax, you are essentially subsidizing additional consumption at even lower prices.”

Johnston says he is not sure why the Liberals have not moved faster to reduce the prices of the pumps, but speculated that the government is concerned about the narrative surrounding the transition to cleaner energy. “Since I’m generally against the move [toward a tax holiday]I’m not disappointed, “he said.

Prof. Kevin Milligan of the Vancouver School of Economics at the University of British Columbia agrees that a tax holiday is not a sound policy, given how tight oil is on the supply side.

Ottawa called for action on rising gas prices

The opposition parties are among those calling on the federal government to take action against rising gas prices. The Conservatives want a GST break, and the NDP is calling for discounts for low-income families.

“When that is the case, market makers have more power,” he said; and this means that a tax cut is more likely to increase producer profits than to bring down consumer prices.

Out-of-the-box solutions

Johnston says he understands the pressure governments around the world are under to do something.

“This is a moment, I think, that calls for creative, out-of-the-box policy-making – things we haven’t necessarily tried before.”

He came up with three ideas:

  1. Reconsider the gas tax. Create a sliding escalator tax that falls when gas prices rise, but rises when prices fall, removing some of the volatility from gas prices.
  2. Offer direct cash, but only to the lower end of the income spectrum. Sends money instead of lowering taxes would make life more affordable without artificially subsidizing the price of a scarce resource, he says. But both Johnston and Milligan warned that simply writing checks to everyone to deal with gas costs risks making inflation worse.
  3. Look at restarting some facilities, like Come by Chance, NL, the refinery, which was closed early in the pandemic and is now being converted to renewable diesel. Bringing back oil production “will help reduce this bottleneck in refining and bring the price we pay at the pump down again closer to the price of total global oil,” he said.

Milligan, for its part, says the federal government has a number of areas under its control that it can and should focus on in order to bring down inflation – tackling airport bottlenecks, improving supply chains and lowering tariffs on imports – which would directly lower prices for Canadians in stores.

He also stresses that the Bank of Canada must be allowed to do its job to bring inflation down.

Milligan said the challenge is that governments in general are trying to focus on the broad middle class in times of crisis.

“The problem is trying to find something that is not inflationary in itself that can help the broad middle class,” he said. “This is where a big part of the challenge comes in.”

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