Government extends fuel tax cut for two more months despite decrease in tax revenue

A signboard at a gas station in Seoul shows fuel prices on August 21. Reporter Han Soo-bin

The government has decided to extend the fuel tax cut on gasoline and diesel, which ends this month. The decision was made in consideration of the impact of the unrest in the Middle East on domestic prices. However, the extension of the fuel tax cut is expected to exacerbate the country’s tax revenue problem as the decline in tax revenue is snowballing due to the corporate tax shock.

The Ministry of Economy and Finance announced on August 21 that it would extend the temporary reduction of the fuel tax, which is scheduled to end on August 31, for another two months until October 31.

Currently, the fuel tax on gasoline is levied at 656 won per liter, down 164 won (20 percent), by adjusting the flexible tax rate. The fuel tax for diesel is levied at 407 won per liter, down 174 won (30 percent).

The government extended the fuel tax cut to 37 percent on gasoline and diesel from July 2022, citing price stability, before reducing the cut to 25 percent on gasoline last year and extending the implementation period.

Last month, the government decided to reduce the tax cut on gasoline and diesel to the current level, which would be in effect until the end of this month.

The decision to extend the fuel tax cut was likely influenced by the uncertainty of future international oil prices due to the unrest in the Middle East. International oil prices dropped by more than 2 percent per barrel on August 19 after it was reported that Israel, which is at war with the Palestinian militant group Hamas, accepted a U.S.-proposed ceasefire mediation plan. But considering the supply and demand situation, it is likely that oil prices will rise over 80 dollars again.

The huge impact of fuel prices on domestic prices also helped extend the fuel tax cut. As a result of the reduced fuel tax cut, oil prices were 8.4 percent higher last month than a year ago. This was the highest rate of increase in 21 months since October 2022 (10.3 percent).

However, the fuel tax cut is a burden on the government, causing a decrease in tax revenues. Initially, the government predicted that transport tax revenues would increase by 4.5 trillion won (41.3 percent) from last year to 15.3 trillion won this year. This reflected the gradual normalization of the fuel tax cut.

However, until the first half of this year, only 5.3 trillion won of the transport tax was collected, leaving the progress rate at 34.9 percent compared to the forecast. Considering that the average progress rate over the past five years is 50.2 percent, this year's final performance may fall short of the original forecast.

The “tax reversibility” caused by the across-the-board fuel tax cut is also pointed out as a problem. According to an analysis by the National Assembly Budget Office, when the fuel tax was cut by 15 percent in 2018, households in the lowest income decile (bottom 10 percent) paid an average of 15,000 won less per year. On the other hand, households in the 10th income decile (top 10 percent) paid 158,000 won less, indicating that higher-income households benefited more from the fuel tax cut.

The International Monetary Fund (IMF) also suggested in its 2022 report titled “Fiscal Policy for Mitigating the Social Impact of High Energy and Food Prices” that “Expand support for low-income families by collecting fuel taxes rather than lowering them."

※This article has undergone review by a professional translator after being translated by an AI translation tool.