Shrinking revenue bases in excise taxes

Making future governments’ task even more difficult is that the long-run decline in excise will continue over the next 25 years. In the absence of any changes to the vehicle fleet, fuel excise would raise around $50 billion in 2050. However, the CSIRO predicts that 97% of light passenger vehicles on Australian roads will be electric by 2050.[58]

This would result in fuel excise of effectively zero in 2050, noting that while machinery and some large vehicles may still be powered by fossil fuels, these will still receive fuel tax credits, offsetting some of the tax.

Tobacco excise is also in decline due to a long-run reduction in smoking rates. In recent years, the decline in excise volumes has been offset by large increases to the rate. This may have resulted in an increase in illicit tobacco products to avoid the tax, illustrating the trade-offs between using tax to motivate behavioural change and the motivations for non-compliance.

In addition to fuel excise declining to zero, our scenario assumes that tobacco excise remains at around $10 billion per year indefinitely. This is therefore a steady decline as a share of GDP and total tax revenue (Figure 5‑2). On this basis, by 2050 tobacco excise would be half what it would have been had it grown with GDP.

The scenario is for the share of total tax revenue from fuel and tobacco excise to fall from 6% less than a decade ago to 0.5%, a sizeable change to the tax mix. Combined, these 2 shrinking revenue bases represent $60 billion in lost revenue by 2050.

Figure 5-2: Projections for fuel and tobacco excise
Share of total tax revenue

Source: Budget papers and PBO analysis.

Governments will need to consider if they would prefer to compensate for this lost revenue through continued bracket creep, by raising taxes from other sources, by reducing spending or some combination of all 3. Should they choose to find additional funds through bracket creep, average personal income tax rates would need to be around 1.5 percentage points higher than otherwise. Under our baseline, where average personal income tax rates rise to 28.5%, the decline in excise would lead to these rates increasing beyond 30%.