Position of the Lithuanian Free Market Institute on the European Commission‘s proposal to increase the minimum rate of excise duty on commercial diesel

The European Commission has put forth a proposal to raise gradually the minimum rate of excise duty applied to commercial diesel to EUR 380 per 1,000 litres in 2014. The primary goals of this initiative, as pointed by the Commission, are to harness “tank tourism” and to reduce distortions of the common market and environmental damages.

Currently, the minimum excise duty on diesel fuel is EUR 302 per 1,000 litres. The rates of excise duties applied in the EU-15 are higher, as compared to the EU-10: they range from EUR 278 (in Luxemburg) to EUR 693 (in Great Britain). In most of the EU member states excise taxes are from EUR 300 to EUR 400 per 1,000 litres. As a result of transitional periods, nine EU member states currently apply excise duties that are lower than EUR 302. Starting from 1 May 2004, Lithuania applies a rate of EUR 245, but a transitional period has been allowed to achieve the minimum EU level: the minimum rate of excise duty will be EUR 330 per 1,000 litres starting from 2013. Following the Commission’s recent initiative, Lithuania, just like other ten member states, would be allowed a transitional period – the minimum rate of EUR 380 would be applied in 2017.

European Commission’s intentions to raise the minimum excise duty will not solve the problem of “tank tourism.” Even if this proposal was enacted, differences in prices among European Union countries would still remain quite sizeable: for instance, an excise duty of EUR 470 charged in Germany would be higher by nearly EUR 90, compared to the planned minimum level. The point at issue is that EU member states can increase excise taxes unrestrictedly – for this reason the newly emerged differences in prices will motivate hauliers to fill their tanks in the countries where fuel is cheaper. Therefore, seeking to curb the undesirable “tank tourism,” it would be more effective to set a maximum rate of excise duty on diesel rather than to raise its minimum level.

Speaking about environmental damages, it should be pointed that European Union excise policy does not hold a consistent position regarding this issue. Directive 2003/96 may well serve as an example of inconsistent taxation and tax exemptions. This directive, which sets the rules of taxation of energy products, lays down a number of exemptions when excise duties may not be applied or may be applied only partially. The directive allows the member states, in specific conditions, to independently exempt economic agents from taxes or to cut them. For example, Lithuania does not charge excise duties on diesel fuel used in the agriculture. Although such exemptions provide flexibility and opportunities to adapt to specific circumstances, at the same time they disprove the essence of tax harmonization and unveil its shortcomings.

Just as any other restriction, the proposed increase in the minimum rate of excise duty on commercial diesel would diminish the countries’ leeway. As a result, EU member states would have limited opportunities to adapt to their unique social, economic and geographic conditions. In addition, societies would be prevented from seeking lower taxes and smaller and more efficient governments. And lastly, national governments would be shielded from potential competition among their regulatory systems, which is advantageous to their residents.

The proposed solution would be unfair to, and would strike especially hard at, the new European Union member states. First and foremost, excise duties are expressed in absolute terms, that is why it is disproportionately burdensome for poor countries. In Directive 2004/74, the European Council itself acknowledged that minimal requirements for taxing energy products may entail grave economic and social consequences in the acceding countries. Second, the majority of the new member states have external borders with non-EU countries with markedly lower prices of respective goods. This situation encourages smuggling activities, which, on its part, dwarfs significantly the efficiency of excise duties. According to surveys conducted by Transparency International, border services of Eastern Europe remain exceptionally sensitive to corruption despite substantial funding and training from EU provided to secure its external border. Consequently, restricting “tank tourism” in the old EU countries would prompt “tank tourism” and illegal trade in the new member states who administer as much as 45 percent of EU’s entire external border. It is worth to note that if minimum excise duties are increased, the new European Union member states would be deprived of an important measure for catching up with richer EU countries – they would have fewer opportunities to compete by offering a more attractive tax environment.

In general, the central goal of the excise tax is to internalise the negative externalities of consumption. However, it should be emphasized that there is no credible evidence that this aim can be achieved by applying excise taxes. This is revealed by the fact that excise duties are used as a significant source of budget revenue rather than a means to compensate for negative externalities. Besides, the application of excise duties itself causes significant undesirable consequences: consumers, tempted by neighboring markets offering cheaper and low-standard fuel and other excise tax goods, opt for cheaper and low-quality substitutes; administration of excise duties is costly; differences in prices provoke smuggling and high excise duties hit the poorest members of society the hardest. Furthermore, excise duties heavily distort market information about the supply and demand as well as long-term prospects and the needs to adapt to changes in the market. At present, excise duties constitute up to 60 percent of the price (excluding VAT) paid by consumers – thus higher excise duties would aggravate further their living conditions and push up not only fuel prices but also the prices of other goods, which will have a sizeable impact on the level of inflation. According to EU Commissioner Dalia Grybauskaite, an increase of the minimum rate of excise duty on commercial diesel would cost European citizens approximately EUR 40 billion.

In conclusion, the European Commission’s proposal, if adopted, would not only inhibit the situation of the people and businesses, especially in the new EU countries, but would also serve as an inefficient tool in attaining the set goals. In addition, this decision would diminish European Union’s economic competitiveness and impede its striving for the Lisbon goals. In our opinion, it would be expedient not only to refrain from increasing the minimum rate of excise duty on diesel, but also to abolish it altogether, retaining the member states’ right to set themselves the level of excise taxes that would correspond best to their individual circumstances and needs. We believe that it is internal competition and the four freedoms – of the movement of goods, services, labour and capital, not uniform taxes, that create the common market of the European Union.