Abstract
This paper assesses the economic effects of a hypothetical fuel levy imposed by South African provinces. The welfare effects of increasing the fuel levy by 10 per cent are negative but very small. Similarly, the marginal excess burdens for efficiency and equity (poverty) are quite low, suggesting much smaller impacts of the intervention on both economic activity and equity. Furthermore, a fiscal policy reform that raises fuel levy by 10 per cent is progressive as it has stronger negative effects on higher income households than the lower income households. A potential source of instability for the macroeconomy and total government revenue is the negative effect on economic activity induced by the fuel levy increase. The remedies suggested are that policymakers should make tax room elsewhere in the intergovernmental fiscal system to accommodate the fuel levy increase.
Highlights
Revenues from own sources constitute a small percentage of total revenue in each of South Africa’s nine provinces
The first approach is the one proposed by the Financial and Fiscal Commission (FFC) in its 1997 submission whereby provinces levy a surcharge on the personal income tax base
The data used is benchmarked to the year 2000 and the results suggest that a provincial fuel levy does not have a dramatic effect on the economy
Summary
Revenues from own sources constitute a small percentage of total revenue in each of South Africa’s nine provinces. According to Section 228(1) of the Constitution, a provincial legislature may impose taxes, levies and duties other than income tax, value-added tax, general sales tax, rates on property or customs duties. The first approach is the one proposed by the Financial and Fiscal Commission (FFC) in its 1997 submission whereby provinces levy a surcharge on the personal income tax base. The effect of a fuel levy increase on the economy and welfare of households in South Africa. This issue has been given high policy relevance within the country’s intergovernmental fiscal circles since the Western Cape government’s proposal to levy such a fuel tax surcharge was approved by the Minister of Finance in August 2006. The last section draws out policy implications and concludes the paper by highlighting pertinent areas for future research
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