More Koreans demand tax cut, while policymakers see little benefit
Sky-high oil prices are reigniting debate over a fuel tax break, pushing policymakers toward a tricky decision in a crucial election year.
With petrol prices across the country setting new records by the day, low-income earners and professional drivers are increasingly blaming their hardships on taxes, which account for more than half of what they pay at the pump.
The government, however, appears to be walking a tightrope between two essential goals ― enlivening voter sentiment and shoring up its balance sheet.
Even though rocketing oil prices pose a threat to the central bank’s 3.2 percent inflation target for this year, policymakers remain reluctant to lower the fuel tax in light of shriveling tax revenues and a 2008 precedent of failure.
“A tax cut would be good for consumers but bad for the government,” said Lee Dal-seok, chief of energy policy research at the Korea Energy Economics Institute, referring to its impact on public coffers.
“It’s a tough decision because sound national finance is one key policy objective, as is reining in energy use.”
Last week, the average retail price hit an all-time high of 2,017.6 won ($1.80) a liter, setting a second record in just a week, according to the Korean National Oil Corp.
Since breaching the 1,900 won mark a year ago, prices have steadily increased as unrest around the Middle East foments fears of supply disruptions, and demand continues to grow from emerging economies.
The nationwide average has shot up about 50 won per liter since a Jan. 6 turnaround, stretching its rising streak to 48 days. At many stations in Seoul, prices top 2,300 won.
The prices reflect a number of surcharges ― 529 won in transportation tax, 137.54 won in mileage tax and 79.35 won in education tax.
Before shipping to gas stations, refiners set rates by figuring in transport fees and exchange rates, as well as swings in the Singapore spot market. On top of that are a 10 percent value-added tax and vendors’ profit margins.
The central government raked in 18.4 trillion won in fuel tax in 2010, according to the Ministry of Strategy and Finance.
A price signboard at a Seoul gas station shows the gasoline price per liter sitting at 2,323 won. (Yonhap News)
“We already pay lots of taxes. The government should curb the rate for rank-and-file citizens to a realistic level and focus on its crackdown on high-income tax dodgers,” a user named Moon Seong-won posted on the website of the Korea Taxpayers Association.
On Tuesday, the civic group launched a campaign to collect a million signatures online. Nearly 13,000 have signed up as of Sunday afternoon.
“I make a living using lots of gas every day but it’s just too harsh at this point. A 15 percent to 20 percent cut will be absolutely helpful,” a user named Lee Kyung-ho wrote.
As the debate heats up, gas price concerns are creeping up the political agenda. Rumor has it that a permanent tax break will be the centerpiece of campaign pledges of both the ruling and opposition camps for the crucial April general election.
Backing defiant voters, Rep. Park Joo-sun of the Democratic United Party last month urged President Lee Myung-bak to enact a 10 percent break in transportation tax, which is not subject to parliamentary approval. The other two ― the mileage tax and the education tax ― are pegged to the transportation tax.
“A protracted upward trend in oil prices dampens industrial production, exports and domestic consumption,” Park said. “Sticking solely to boosting tax revenues may damage the national economy.”
Responding to mounting pressure, Finance Minister Bahk Jae-wan said he would draw up a contingency plan that envisages a five-shift scheme for vehicles and a reduction in fuel tax.
But Bahk said he will “consider” whether to enforce the cut only when crude exceeds $130 a barrel for five straight days.
“In that case, it will be desirable to put in place income-based differentials to maximize its impact rather than roll out an across-the-board cut,” he told reporters on Feb. 29.
Bahk’s remarks epitomize a lesson from 2008. Shortly after taking office, Lee embarked on a 10 percent discount in fuel tax for nearly 10 months starting March 2008 as oil prices surged.
Nonetheless, Korea’s benchmark Dubai crude touched $140 a barrel in the run-up to the collapse of Lehman Brothers, sending pump prices to 1,950 won per liter in July from 1,600 won in April that year.
Despite a subsequent revenue loss of 1.4 trillion won, his administration took flak from the populace who said the policy offered greater incentives to the rich, whose fuel expenses are often paid for by their employers.
“The government is right to take a cautious approach because tax breaks would be a last resort,” said Kim Hwa-nyeon, a research fellow at Samsung Economic Research Institute in Seoul.
“There are a multitude of risks but no one really knows where oil prices are heading. Policymakers should establish standards and get ready, and quickly implement the cut if the prices go over the line.”
In its worst case scenario, the state-run KEEI predicts Dubai crude could jump to $180 a barrel, or average at $135 for the whole of 2012.
According to SERI, if crude hits $150, fuel and electricity costs here could soar 36.5 percent and 13.6 percent each on an annual basis.
However, Lee Kwang-woo, a researcher at LG Economic Research Institute, forecasts the latest oil shock will not last long.
“The prevailing anxiety over supply interruptions, which is driving the uphill trend, will likely have a limited impact on oil prices, as supply conditions are in fact quite okay internationally,” Lee said, citing Libya’s rising oil production and higher U.S. crude inventories.
“Still, given its high vulnerability to any eventuality, Korea should secure substitute sources of imports in the short term and diversify the pool, boost self-sufficiency and stint on oil consumption in the long term.”
Lim Sang-soo and Park Ji-hye, researchers at the Korea Institute of Local Finance, argue that high taxes on petrol are inescapable in an economy that imports almost all of its oil needs.
“Slashing the fuel tax is at odds with the government’s green growth strategy,” they said in a recent report.
“High-income earners in general drive big cars that emit more greenhouse gases, and we’ve found that they tend to use a lot more gas after a tax break.”
As an alternative, they suggest opening more self-serves and expanding a fuel tax refund program to cover cars with an engine size of 1,600 cubic centimeters or smaller in addition to the currently eligible city cars.
In efforts to shake off its heavy dependence on imports and hedge price swings, the government has been investing in renewable energy and overseas mining.
The so-called discount gas stations are the brainchild of former Economy Minister Choi Joong-kyung, who sought to help cut household energy bills and dismantle a market oligopoly by four major refiners.
Introduced last year, the self-serve stations offer prices up to 100 won per liter cheaper than existing vendors by sourcing petrol from two state-run resources firms with paper-thin margins.
Korea is the world’s fifth-biggest crude buyer. Dubai spot prices inched up $0.33 a barrel to $123.62 in Singapore on Friday.
By Shin Hyon-hee (firstname.lastname@example.org