Expected extra revenue from indexation of fuel excise compared to planned Commonwealth expenditure on roads (source: Budget 2014/15 Building Australia's Infrastructure)

The Australian’s Jared Owens reported early last week that despite the Greens change of leader, the Party still isn’t prepared to give unconditional support to indexation of the fuel excise.

He says the new Party Leader, Senator Di Natale, will only support a “pollution tax” if it’s not “regressive” and if the additional revenue is used to “drive transformation” in the transport sector. Mr Owens quotes Senator Di Natale at length:

There’s no point increasing the price of petrol if you use all of that money to build more roads to fuel more pollution… Increasing the price of petrol is regressive. We need to ensure that if we’re going to increase the price of petrol, that’s the whole point of a pollution tax, is that you provide people with alternatives, you use the money that’s raised in those areas to help drive the transformation of the transport sector and that you deal with some of those regressive impacts.

Last Friday Senator Di Natale confirmed Mr Owen’s story on Twitter, saying “we have said to the Gov that if we’re to tax fossil fuel, we need to provide people with alternatives including improved public transport”.

The AFR’s Phil Coorey confirmed the Senator is looking at hypothecating some of the extra revenue brought in by indexation to public transport projects, but leaving the selection of projects with the Government.

For something as simple and as seemingly obvious as restoring indexation, this is developing into quite a saga. Back in 2014, the Greens opposed the plan to restore indexation of fuel excise unless the Government gave an assurance none of the additional revenue ($2.2 billion net over the first four years) would be hypothecated to roads.

However when the Government agreed to that condition, the Party nevertheless maintained its opposition to indexation. Now it says it’ll continue to oppose the measure unless some of the additional revenue is hypothecated to public transport.

If Senator Di Natale finally agrees to restoration of indexation but secures an assured and substantial revenue stream for public transport he will natually be praised by his constituency. While whatever deal is in the works hasn’t been done yet, there are a number of aspects to this saga worth pondering.

First, this is party politics so of course there are the usual tropes i.e. the claim that indexation is an “increase” in tax; the claim that revenue from the excise is hypothecated to roads; and the claim that indexation is regressive. The facts are that indexation only maintains the real value of the tax; the fuel excise hasn’t been hypothecated to roads since the early 1950s; and indexation is at CPI so the excise wouldn’t rise faster than wages and pensions.

Second, assuming it comes off, the success of Senator Di Natale’s deal will depend on how many dollars he secures for public transport. Even the entire $2.2 billion over four years would be modest compared to planned Federal expenditure on roads over the same period and to the total revenue from the fuel excise (indexation increases the price per litre in the first year from 38 cents per litre to 39 cents per litre). It would be especially modest compared to the scale of investment required to make a tangible difference to public transport in Australia.

Third, the desirability of hypothecation can’t be taken for granted. There’s a risk the negotiated rate might come to be seen in the future as the appropriate ceiling on Commonwealth contributions to public transport. That’s a problem if it’s limited, as seems to be the case in Senator Di Natale’s negotiations, to a proportion of the future net revenue from indexation rather than all the revenue from the excise. It might seem a big win while Tony Abbott is Prime Minister but he’s not going to stay around for ever.

Fourth, Senator Di Natale is framing what generally would be widely regarded as a very good thing – a “pollution tax” – as something the Greens will only accept if the Government accedes to its conditions. Concessions usually refer to something extracted painfully from the other side in order to win agreement to a proposal that’s mostly negative.

For example, Phil Coorey reported last week that the Greens also agreed to pass revised cuts to the age pension provided the government reverses its decision to dump a review into retirement incomes. That makes sense as a concession; but imposing conditions on a pollution tax (and mere indexation at that!) as if it’s something undesirable doesn’t.

The fuel excise is a very desirable instrument on its own merits and doesn’t need to be justified by concessions. It helps to discourage car use by increasing the cost of driving. Motorists have various ways of adapting – they can chain multiple trip purposes to reduce travel distance; they can forego some low value trips; and they can buy a car that consumes less petrol. More public transport investment would of course also be good but indexation doesn’t need it in order to somehow be “respectable”.

Fifth, by imposing conditions the Senator is making the maintenance of the real value of a tax a bargaining chip. If a tax is worth having – and surely a “pollution tax” is –then arguably the debate should be confined to the appropriate level of the tax; merely maintaining its value in real terms should not be up for negotiation. This is a matter that would probably be recognised more easily as highly problematic in another context e.g. pensions.

This saga was created in part by the Greens, but Senator Di Natale should be given due credit if he brings it to an end. It’s gone on for over a year now and forced the Government into a temporary administrative solution to get the revenue. The way it’s looking at this stage, the key benefit for the nation will come from restoration of indexation as originally proposed; whether the rest will justify the political carry-on or will mainly be about sending soothing signals to the faithful remains to be seen.

If Senator Di Natalie wants to really make a difference, he’ll negotiate an actual real (real) and significant increase in the excise e.g. a five cents per litre rise. In that event there actually would be real regressive impacts to take into account. Research by the Grattan Institute suggests the poorest 20% of households could be directly compensated for an increase in the excise if around 10% of the additional revenue raised were returned to them through the tax-transfer system.