Fuel Tax Reform Sparks Chain Reaction

By CHENG XIAOBEI

    The fuel tax reform draft, long-awaited by Chinese consumers, was finally released at the end of 2008. But the combined effect of the reform itself and depreciation of finished oil in the domestic market disappointed domestic consumers.

    The world crude oil price plunged almost 70 percent from its peak of US $147 per barrel last mid-July to less than US $40 last December. The retail price of the Gasoline 93 generator fuel most commonly used in China, however, underwent only a modest reduction — from RMB 6.37 to RMB 5.44 per liter. Taking into account the rise in gasoline consumption tax from RBM 0.2 to RMB 1, the actual gasoline price stands at RMB 4.64 per liter — a reduction of less than 30 percent, and one that occurred much later in China than in other countries.

    It is generally believed that the government had difficulties in formulating fuel tax reform that would bring balanced benefits to different interest groups. China has been pushing for fuel tax reforms since 1994, and economists and government officials alike held that falling prices in 2008 offered the opportunity to introduce fuel tax reforms more acceptable to Chinese consumers than at a time when oil prices are high.

    Consumers had expected the government to raise fuel tax and to annul all administrative fees on roads and waterways. But other than raising fuel consumption tax on gasoline from RMB 0.2 to RMB 1 per liter and on diesel from RMB 0.1 to RMB 0.8 per liter, the government abolished only six of the fees charged for road and waterway maintenance and management. Road maintenance fees per family auto varied according to city. In Beijing they amounted to about RMB 110 per month. The government also pledged cancellation of toll collection stations on second-class highways (roads with two-way traffic and a 60-80 km per hour speed limit but without central reservation). But toll stations on expressways and the first-class highways stay in place.

    The reforms effectively increased the proportion of value-added tax, consumption tax, city maintenance and construction tax, and educational surtax in the retail price of finished oil in the form of gasoline from 19.7 percent to 34.6 percent, and that of diesel from 17.8 percent to 30.7 percent. Car owners that exceed certain limits, therefore, would have higher cost in fuel consumption.

    China has been a net oil importing country since 1993, and imports now meet 50 percent of the domestic crude oil demand. Pollution in China has also worsened. More than 80 percent of carbon monoxide and 40 percent of nitrogen oxide in the atmosphere of Chinese big cities emanate from automobile exhaust, according to statistics.

    Although higher fuel consumption tax might curb pollution, it would inevitably spark a chain reaction within economic development. Also, abolishing administrative fees on roads is of benefit to car owners, but irrelevant to oil consumers such as enterprises and owners of agricultural machinery. Higher oil consumption tax, on the other hand, adds to the running costs of enterprises, which is bad news both for them and ordinary consumers.

    Meanwhile, toll collection stations on expressways and first-class highways, against general expectations, still operate. But hikes in consumption tax on fuel would imply higher costs for long-distance transportation and therefore higher commodity prices.

    Consumers’ assets have depreciated under the present economic turndown, which further undermines people’s purchasing power. But it is impossible to boost the economy by expanding domestic consumption unless prices are kept under control.