Pump Prices and Taxes

Most of us are aware that Europeans paid three to four times more for gasoline than Americans or Canadians. Last year seeing the difference during last year’s visit to Italy reinforced that impression afresh. Like most I have assumed that the primary difference was that these countries relied exclusively, or almost exclusively upon costly imported oil whereas Americans and Canadians have a greater amount of their own national oil that was cheaper to recover and transport. Hence, the cheaper oil helps to bring down the overall price at the pump. I have also been aware that there may well be differences in taxes too.

Whenever we drive north of the boarder we are immediately cognizant of the difference in gasoline prices at the pump between the United States and Canada. The difference is remarkable given that both countries consume about the same amount of oil produced from national resources. As with the US, every region within the Canada has different prices that are influenced by competition, volume of sales and the costs of transporting gasoline from the refinery. Differences in state/provincial taxes are also a factor, and in the US so are local taxes also, a factor that further accentuates differences.

While the level of imported oil is a factor, taxation differences account for the differences between the US and Canada. According to the Tax Policy Center, if one eliminates tax differences, there is only a 5% price per gallon between the US and Canada, much of which can be accounted for by transportation and volume factors. On the federal level taxes, excise taxes are 110% higher in Canada than in the US (only Mexico has lower excise taxes than the US). Federal sales taxes are also 110% higher in Canada than in the US which has the lowest the lowest sales in the world (Canada, the second lowest).

Using August 2005 as a defining point, an American Petroleum Institute study indicates that US excise and federal sales taxes increased the gas coming out of the refinery by 29% (state and local would be on top) whereas in Canada the same taxes increased the gas by 58%. The same report indicates that the UK and Germany actually had a lower cost per gallon coming out the refinery but the pump costs were greater due to taxes. In the UK the two federal taxes increased the costs of a gallon coming out of the refinery by 179%, and in Germany, by 162%. In Australia the taxes increased the costs by 88.5% and in Japan, by 99%.

While Canada has about 10% of the population of the US and Canada, it has 20% of the miles of the number of miles of its larger neighbor. This means on a per capital basis, Canada’s highway system is about twice that of the US. This is not surprising given the number of small rural and remote communities scattered across such a vast country. In Canada gasoline taxes are higher due to the ratio between highway miles and population. Also in Canada there is an expectation that gas taxes cover a greater share of construction and maintenance costs and with less funding coming from general revenue. In the US, a higher level of general revenue goes into the highway system than occurs in Canada.

In the US, gasoline taxes do not come even close to covering road construction and maintenance costs. Over the last three decades general revenue has covered a growing share of such costs. For the most part taxes of have remained fixed, so much per gallon, even as construction and maintenance costs have increased. While the simple solution would be to increase taxes and modify the tax structure, pump prices are a politically sensitive issue. Any politician who advocates such changes puts his election prospects at risk. Even before the current anti-tax/cut taxes to the bone environment, changes were not likely to occur. Politicians have felt it was easier to draw the funds from general revenue and delay maintenance if it put the road system at risk.

Given a more extensive system on a per capita basis, snow removal factors, the harsher environment and standards to meet that harsher environment, and less general revenue allocated to roads, it is not surprising that gasoline taxes are higher in Canada.

If gasoline taxes in Canada and went to pay fully for the highway systems, the price at the pump would likely increase by 50 to 100%, and come within 25% of Europe pump prices where gasoline taxes cover the full cost of highway building and maintenance. It will be interesting to watch over the next five to eight years as to what will happen to the quality of the road system in the US and Canada in an age of slashing general revenue and budgets.

As a little footnote, for the Canadian reader….the 401 between Guelph and Oshawa is the busiest highway in the world.