[Reporter’s Notebook] Who Really Benefited from the Fuel Tax Cut?

[Image source=Yonhap News]

[Asia Economy Reporter Oh Hyung-gil] Signs indicate that oil prices will rise again starting next month. This is because the government plans to normalize the fuel tax, which had been lowered for over a year, following the recent stabilization of international oil prices. This raises the question of whether consumers should rush to gas stations before the increase.

The government initially planned to maintain the fuel tax reduction until the end of this year but has decided to extend it by four more months. The fuel tax on diesel and LPG will maintain the historically largest reduction rate of 37%, but the reduction on gasoline will decrease to 25% starting next year.

Last November, the fuel tax was reduced to stabilize prices and ease the burden on low-income households. Although it was stated as a temporary measure, the tax rate has been lowered for over a year, which has further increased distrust. Consumers, who felt the policy was ineffective because prices did not drop as much as the tax cut, criticized refiners, petroleum distributors, and gas stations alike. This debate recurs every time the fuel tax is reduced.

During the fuel tax reduction period, an unprecedented price inversion between diesel and gasoline occurred. Although diesel is a fuel for low-income groups, its price became higher than gasoline, increasing the burden on self-employed and transportation workers. This eventually led to the nationwide logistics crisis and the Cargo Solidarity strike. This happened because the tax reduction on gasoline was larger than that on diesel.

Lowering the fuel tax to respond to high oil prices is an easy option but causes various side effects. Fundamental improvement measures need to be considered. Given that geopolitical crises, including the US-China conflict, can erupt at any time, there is no guarantee that high oil prices will not recur, nor can the effectiveness of such measures be confidently assured.

The limitations of fuel tax reductions are clear. Citizens without vehicles cannot directly feel the benefits. Also, the larger the engine displacement and the more fuel used, the greater the tax savings. In other words, it is not an effective policy.

On the other hand, national tax revenue decreases, which may lead to budget cuts in welfare and other areas. From the beginning of this year to October, revenue from transportation, energy, and environmental taxes, including fuel tax, was 9.4 trillion won, a 34.1% decrease compared to the previous year.

As society aims for carbon neutrality, the need for social consensus on fossil fuel use is emerging. It is time to start reconsidering whether lowering the fuel tax is the right response to high oil prices. Measures such as providing transportation subsidies or vouchers to vulnerable groups to enhance policy effectiveness, or establishing institutional mechanisms to ensure that fuel tax reductions are clearly reflected in consumer prices, could also be considered as improvements.

This content was produced with the assistance of AI translation services.