Impact of Indirect Taxes on Australian Farms€¦ · Impact of Existing Indirect Taxes on the Australian Farm Sector 9 4.1 Overall Indirect Tax Burden 10 4.2 Wholesale Sales Tax 11

Impact of Indirect Taxes on Australian Farms

A report for the Rural Industries Research and Development Corporation by Geoff Carmody, Access Economics Pty Ltd

October 1998 RIRDC Publication No 98/110 RIRDC Project No AEC-1A

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© 1998 Rural Industries Research and Development Corporation. All rights reserved. ISBN 0 642 57861 3 ISSN 1440-6845 "Impact of indirect taxes on Australian farms” Publication no. 98/110 Project no. AEC-1A The views expressed and the conclusions reached in this publication are those of the author and not necessarily those of persons consulted. RIRDC shall not be responsible in any way whatsoever to any person who relies in whole or in part on the contents of this report. This publication is copyright. However, RIRDC encourages wide dissemination of its research, providing the Corporation is clearly acknowledged. For any other enquiries concerning reproduction, contact the Communications Manager on phone 02 6272 3186.

Researcher Contact Details Mr Geoff Carmody Access Economics Pty Ltd PO Box E347 Kingston ACT 2604 Phone: 02 6273 1222 Fax: 02 6273 1223

RIRDC Contact Details Rural Industries Research and Development Corporation Level 1, AMA House 42 Macquarie Street BARTON ACT 2600 PO Box 4776 KINGSTON ACT 2604 Phone: 02 6272 4539 Fax: 02 6272 5877 Email: [email protected] Website: http://www.rirdc.gov.au

Published in October 1998 Printed on environmentally friendly paper by the DPIE Copy Centre

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FOREWORD The Rural Industries Research and Development Corporation commissions a number of projects that have a cross-sectoral focus. This study on the impact of indirect taxes on the agricultural sector is one such example. This work was done by Access Economics Pty Ltd for the Corporation. Their work found that the current set of indirect taxes on agriculture results in:

• an overall indirect tax burden (net of subsidies) that is somewhat lower than the burden faced on average across all Australian industries, as far as supply used for intermediate and domestic consumption purposes is concerned;

• an overall indirect tax burden (net of subsidies) that is significantly higher than the burden faced on average across all Australian industries, as far as supply used for export purposes are concerned, with primary industry levies helping to explain this outcome;

• a lower tax burden than the all-industry average in respect of the wholesale sales tax, payroll tax, and FID/BAD taxes; and

• the farm sector as a whole faces a total petroleum product excise burden slightly lower than the all-industry average, although the diesel fuel component of that burden is close to the all-industry average.

Big changes in taxation arrangements are always centre stage in the public policy debate in this country. This project forms part of RIRDC’s Global Competitiveness R&D program, which aims to identify important impediments to the development of a globally competitive Australian agricultural sector and support research that will lead to options and strategies that will remove these impediments. Peter Core Managing Director Rural Industries Research and Development Corporation

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CONTENTS

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Executive Summary vii 1. Focus of Report 1 2. Analytical Framework & Definitions 4 3. Data Problems and Resulting Assumptions 6 4. Impact of Existing Indirect Taxes on the Australian Farm Sector 9

4.1 Overall Indirect Tax Burden 10 4.2 Wholesale Sales Tax 11 4.3 Payroll Tax 13 4.4 Financial Institutions Duties 14 4.5 Petroleum Product Excises 15 4.6 Diesel Excise 16 4.7 Summary Assessment 17

5. First-Round Net Price Impacts of Selected Indirect Tax Reform Scenarios 18

5.1 Replacing Wholesale Sales Tax With A GST 18 5.2 Replacing Payroll Tax With A GST 19 5.3 Replacing Financial Institutions Duties With A GST 20 5.4 Replacing Petroleum Product Excises With A GST 22 5.5 Replacing Diesel Excise With A GST 23 5.6 Summary Assessment 24

6. Longer-term Indirect tax Reform Impacts Allowing for Eonomy-Wide Effects 25

6.1 Replacing Wholesale Sales Tax With A GST 26 6.2 Replacing Payroll Tax With A GST 28 6.3 Replacing Financial Institutions Duties With A GST 31 6.4 Replacing Petroleum Product Excises With A GST 33 6.5 Replacing Diesel Excise With A GST 36 6.6 Summary Assessment 38

7. Concluding Observations 40 Postscript: The Coalition Government's Tax Reform Package 41 Attachment A: Data Problems And Assumed Solutions 42

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EXECUTIVE SUMMARY

This Report provides a comprehensive evaluation of the impact of indirect taxation on the farm sector, and the major industries therein, compared with the all-industry average, and assesses the immediate and longer-term effects on the farm sector of specified indirect tax reform packages. The focus is on the effects of existing and possible new indirect taxes: • on the Australian farm sector in aggregate • on each of the major industries which make up the farm sector • and on a comparison of these results with the corresponding all-industry averages. The Australian farm sector is defined as the sum of ABS input-output codes 0101 to 0107 (ie, sheep, grains, beef cattle, dairy cattle, pigs, poultry, and other agriculture). The major farm industries are defined as follows: Input-Output Code Industry Description 0101 Sheep 0102 Grains 0103 Beef Cattle 0104 Dairy Cattle 0105 Pigs 0106 Poultry 0107-part Sugar 0107-part Cotton 0107-part Remainder of 0107 Input-output data published by the Australian Bureau of Statistics (ABS) includes a breakdown of net indirect taxes and subsidies on each industry into: • commodity taxes, such as wholesale sales tax (WST) and various excise duties, and

FID/BAD, on individual inputs • tax rebates such as the diesel fuel rebate • other indirect taxes (net of subsidies) split into categories such as payroll tax and stamp

duties and local rates • and various primary industry levies. The first part of the analysis is to obtain a comprehensive quantification of the indirect tax burden on the farm sector in aggregate, as well as on the specific major industry groups. The second part of the analysis evaluates the first-round net price effects of specific indirect tax reform scenarios including the introduction of a GST. For this part of the report, the following assumptions are made:

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• wholesale sales tax, payroll tax, FID/BAD, and petroleum product excise, (and, as a sub-set of this, excise on all diesel fuel) are the most likely indirect tax candidates for reduction/removal as part of any tax reform package

• the first-round price effects of the reduction/removal of these indirect taxes are shown separately

• the GST applies to a Fightback Mk I base (health and education, welfare, charitable and religious institutions, and most exports are zero-rated; financial services, gambling and the building industry are GST-exempt - ie, input-taxed; all food and other goods and services are fully taxed)

• the GST rate is determined as a residual on the assumption of (first-round) revenue-neutral indirect tax reform

• all tax changes (up and down) are fully forward shifted to purchasers' prices • 'first-round price effect' means net price effect of tax reform, including flow-on effects

through other industries, but on the assumption of no behavioural change. The third part of the analysis evaluates the effects of indirect tax reform on the farm sector in the longer term, allowing for economy-wide effects through the use of Access Economics' computable general equilibrium (AE-CGE) model. Burden Of Existing Indirect Taxes On Agriculture In broad terms, the Australian farm sector at present: • faces an overall indirect tax burden (net of subsidies) that is somewhat lower than the

burden faced on average across all Australian industries, as far as supply used for intermediate and domestic consumption purposes is concerned

• faces an overall indirect tax burden (net of subsidies) that is significantly higher than the burden faced on average across all Australian industries, as far as supply used for export purposes are concerned, with primary industry levies helping to explain this outcome

• faces a lower tax burden than the all-industry average in respect of the wholesale sales tax, payroll tax, and FID/BAD taxes


In reviewing the magnitude of those existing indirect taxes considered to be likely candidates for abolition or reduction as part of any tax reform package, the following general conclusions can be drawn: • In terms of the absolute magnitude of cost burdens, on average agriculture is best

served by abolition of all excise on petroleum products. Payroll tax abolition appears to be the next best option: however this conclusion does not apply to farm businesses that fall below the payroll tax wages and salary threshold. Across all farm businesses, abolition of the excise duty on all diesel fuel is likely to be more universally accepted as the second best option.

• On the same basis, abolition of FID/BAD only is the least attractive option for agriculture, followed by abolition of WST.

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• In terms of the relative benefits for agriculture versus all industries on average, on average agriculture is best served by abolition of all diesel excise, because this offers a larger benefit for agriculture supply costs than for the all-industry average.

• On the same basis, abolition of WST only is the least attractive option for agriculture. First-Round Price Effects Of Selected Indirect Tax Reform Scenarios Based on changes in costs and prices as a result of indirect tax reform: • In terms of the absolute magnitude of cost burdens, on average agriculture is best

served by abolition of all excise on petroleum products. • Payroll tax abolition appears to be the next best option: however this conclusion does

not apply to farm businesses that fall below the payroll tax wages and salary threshold. Across all farm businesses, abolition of the excise duty on all diesel fuel is likely to be more universally accepted as the second best option.



• On the same basis, abolition of WST only is the least attractive option for agriculture. Longer Term Effects Of Selected Indirect tax Reform Scenarios Allowing for longer term economy-wide price and output effects, but assuming that the exchange rate does not vary, the results are as follows: • In terms of the absolute magnitude of cost burdens and supply effects, on average

agriculture is best served by abolition of all diesel fuel excise. • Abolition of the excise duty on all petroleum products is likely to be the second best

option. • On the same basis, abolition of WST only is the least attractive option for agriculture,

followed by abolition of payroll tax. • In terms of the relative benefits for agriculture versus the all-industry average, on

average agriculture is best served by abolition of all diesel excise, because this offers a broadly similar or larger benefit for agriculture price and supply to the all-industry average. Abolition of all petroleum product excises ranks a close second on this basis, with FID/BAD abolition third.

• On the same basis, abolition of payroll tax or WST only are the least attractive options for agriculture.

If the exchange rate adjusts to choke off any improvement in the balance of trade, the ranking is as follows: • In terms of the absolute magnitude of cost burdens and supply effects, on average

agriculture is best served by abolition of all diesel fuel excise. • Abolition of FID/BAD taxes is likely to be the second best option. • Abolition of all petroleum product excises is likely to be the third best option.

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• On the same basis, abolition of payroll tax only is the least attractive option for agriculture.

• In terms of the relative benefits for agriculture versus the all-industry average, on average agriculture is best served by abolition of all diesel excise, because this offers a broadly similar benefit for agriculture price and supply to the all-industry average. Abolition of FID/BAD taxes ranks second on this basis, with abolition of all petroleum product excise third.


Given that WST is the most likely candidate for abolition if a GST is to be introduced (and there are good reasons for this in order to reduce a particular tax bias against manufacturing), the indirect tax reform package would be made more attractive for agriculture if petroleum product excise, or excise on diesel, plus FID/BAD taxes, are also abolished.

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1. Focus of Report Terms of Reference This Report provides a comprehensive evaluation of the impact of indirect taxation on the farm sector, and the major industries therein, compared with the all-industry average, and assesses the immediate and longer-term effects on the farm sector of specified indirect tax reform packages. The focus is on the effects of existing and possible new indirect taxes: • on the Australian farm sector in aggregate • on each of the major industries which make up the farm sector • and on a comparison of these results with the corresponding all-industry averages. Overview of Results In broad terms, the Australian farm sector at present: • faces an overall indirect tax burden (net of subsidies) that is somewhat lower than the

burden faced on average across all Australian industries, as far as supply used for intermediate and domestic consumption purposes is concerned

• faces an overall indirect tax burden (net of subsidies) that is significantly higher than the burden faced on average across all Australian industries, as far as supply used for export purposes are concerned, with primary industry levies helping to explain this outcome

• faces a lower tax burden than the all-industry average in respect of the wholesale sales tax, payroll tax, and FID/BAD taxes


In terms of first-round net price effects of selected indirect tax reform packages involving introduction of a broad-based GST, it is therefore not surprising that, for the Australian farm sector: • In terms of the absolute magnitude of cost burdens, on average agriculture is best




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• On the same basis, abolition of WST only is the least attractive option for agriculture. As to longer-term effects of selected indirect tax reform packages involving introduction of a broad-based GST, with a fixed exchange rate the modelling results are as follows: • In terms of the absolute magnitude of cost burdens and supply effects, on average







agriculture is best served by abolition of all diesel fuel excise. • Abolition of FID/BAD taxes is likely to be the second best option. • Abolition of all petroleum product excises is likely to be the third best option. • On the same basis, abolition of payroll tax only is the least attractive option for

agriculture. • In terms of the relative benefits for agriculture versus the all-industry average, on

average agriculture is best served by abolition of all diesel excise, because this offers a broadly similar benefit for agriculture price and supply to the all-industry average. Abolition of FID/BAD taxes ranks second on this basis, with abolition of all petroleum product excise third.


Organisation of Report The remainder of the Report is organised as follows: • Section 2 sets out the analytical framework, definitions and assumptions to be used in

the following Sections. • Section 3 summarises data problems arising from the ABS input-output tables and those

attributable to the additional disaggregations of industry, product and taxation data

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required, as well as the assumptions made to overcome these problems. Attachment A reviews these data problems in more detail.

• Section 4 quantifies the existing indirect taxation burden on the Australian farm sector, as well as separating out the burdens attributable to wholesale sales tax (WST), payroll tax, financial institutions duties (FID/BAD), petroleum product excise (total, including State franchise fees or their equivalent), and excise on diesel products.

• Section 5 quantifies the first-round net price impact on the Australian farm sector of replacing each of the five indirect taxes specified in Section 4 with a broad-based GST on a revenue-neutral basis.

• Section 6 quantifies the longer term effects on the Australian farm sector of replacing each of the five indirect taxes specified in Section 4 with a broad-based GST on a revenue-neutral basis as economy-wide responses to indirect tax reform emerge.

• Some concluding comments are presented in Section 7.

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2. Analytical Framework & Definitions This project requires an input-output-based statistical framework as compiled by the Australian Bureau of Statistics (ABS), and use of that in a computable general equilibrium (CGE) model, to identify the full extent of input-taxation and effects of changes thereto. Australian Farm Sector in Aggregate The Australian farm sector is defined as the sum of ABS input-output codes 0101 to 0107 (ie, sheep, grains, beef cattle, dairy cattle, pigs, poultry, and other agriculture). The Major Farm Industries The input-output-based breakdown into the major industries is as follows: Input-Output Code Industry Description 0101 Sheep 0102 Grains 0103 Beef Cattle 0104 Dairy Cattle 0105 Pigs 0106 Poultry 0107-part Sugar 0107-part Cotton 0107-part Remainder of 0107 Impact of Commonwealth, State and Local Government Taxes & Charges The input-output data includes a breakdown of net indirect taxes and subsidies on each industry into: • commodity taxes, such as wholesale sales tax (WST) and various excise duties, and

FID/BAD, on individual inputs • subsidies, defined by ABS to include tax refunds (eg, the diesel fuel rebate) • other indirect taxes (net of subsidies) split into categories such as payroll tax and stamp

duties and local rates • and various primary industry levies. The first part of this analysis is to obtain a comprehensive quantification of the indirect tax burden on the farm sector in aggregate, as well as on the specific major industry groups, as specified above. Indirect Taxation Reform, Including Introduction of a Goods & Services Tax (GST)

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The second part of the analysis evaluates the first-round net price effects of specific indirect tax reform scenarios including the introduction of a GST. For this part of the report, the following assumptions are made: • wholesale sales tax, payroll tax, FID/BAD, and petroleum product excise, (and, as a

sub-set of this, excise on all diesel fuel) are the most likely indirect tax candidates for reduction/removal as part of any tax reform package

• the first-round price effects of the reduction/removal of these indirect taxes are shown separately

• the GST applies to a Fightback Mk I base (health and education, welfare, charitable and religious institutions, and most exports are zero-rated; financial services, gambling and the building industry are GST-exempt - ie, input-taxed; all food and other goods and services are fully taxed)

• the GST rate is determined as a residual on the assumption of (first-round) revenue-neutral indirect tax reform

• all tax changes (up and down) are fully forward shifted to purchasers' prices • 'first-round price effect' means net price effect of tax reform, including flow-on effects

through other industries, but on the assumption of no behavioural change. The third part of the analysis evaluates the effects of indirect tax reform on the farm sector in the longer term, allowing for economy-wide effects through the use of Access Economics' AE-CGE model. In this context: • 'longer term impact' means the net impact on both price and output once all the effects

on the indirect tax change have been allowed to work their way through the economy and a new 'equilibrium' position has been established.

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3. Data Problems and Resulting Assumptions Overview of the Problems Our analysis of the effects of different taxes on agriculture uses the ABS input-output tables for 1993-94, but with the 'other agriculture' industry split into 'sugar cane', 'cotton' and the 'rest of other agriculture', and 'petroleum products' separated into 'diesel' and 'other petroleum products'. ABS input-output commodity details provide values of Australian production for these sectors in 1993-94 and their sales to other industries and final demands. The data used for 'diesel' are for input-output commodity item 25100030 - gas oil or fuel oil (excluding motor spirit and kerosene - of which approximately two thirds is diesel according to the ABS input-output section. We have to generate cost structures for sugar cane, cotton, the rest of 'other agriculture', diesel, and other petroleum products ourselves. Costs for 'diesel' and 'other petroleum products' are obtained by dividing each cost item for 'petroleum products' in proportion to the values of Australian production for diesel and other petroleum products. Costs for the production of sugar cane are based on 1993-94 data for Queensland in ABARE's Australian Farm Survey Report 1997, pages 57-63. (Queensland accounted for more than 90% of Australian sugar cane production in 1993-94.) Costs for cotton production are derived from average data for the five years to 1996-97 provided by Cotton Australia. Costs of sugar cane and cotton are then subtracted from costs of 'other agriculture' to give costs for the rest of other agriculture. Taxes on diesel fuel and other petroleum products are particularly important for this exercise. The input-output data for fuel taxes and diesel fuel rebates contain internal inconsistencies and some implausible values. We examined these further by comparisons with data from other sources. We have detected the following deficiencies in the input-output data. • The diesel fuel rebate was allocated across all users of diesel fuel. However, nearly all

the rebate is in fact paid to agriculture, forestry, fishing and mining for off-road use. In response to concerns raised by Access Economics and others, ABS produced a revised allocation of the diesel fuel rebate.

• The revised ratios of excise to basic values for diesel fuel used in these industries are inconsistent with the excise rates and prices of fuels prevailing in 1993-94.

• The revised data contain much higher ratios of petrol use to diesel use than those understood to be the case in the agricultural and mining industries.

• The division between petrol excise and diesel excise in the Budget Papers suggests that about $1 billion of the $7.5 billion petrol excise in the input-output data should be transferred to diesel excise.

• The input-output data show that about half of the input of petroleum products into air transport is taxed at the same rate as petrol whereas nearly all the inputs of petroleum products into air transport are taxed at much lower rates.

• The proportion of petroleum products costs in total costs is significantly higher in the input-output data than in ABARE farm surveys.

We have adjusted the input-output data to take account of these other sources of information where we consider them to be more reliable than the input-output data.

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Many of the inconsistencies arise from the way in which the input-output data are constructed. Petroleum products are divided into several commodity items and it is assumed that a single rate of excise or subsidy applies to all sales of each item. While this may be a reasonable approximation for most commodities, it is a serious problem for petroleum products because the two major items contain products with greatly different Commonwealth excise rates that are used in quite different proportions in different industries. Commodity item 25100010 comprises petrol (average excise rate about 30 cents per litre for both leaded and unleaded petrol in 1993-94) and aviation turbine fuel (with an excise of about 2 cents per litre). Commodity item 25100030 comprises diesel fuel (with an excise of about 30 cents per litre) and fuel oil (with an excise of about 8 cents per litre). The (Assumed) Solutions In order to resolve the various inconsistencies between ABS input-output data and other sources of information, we decided to generate our own petroleum products data for agriculture, forestry, fishing and mining. We also recalculated the commodity taxes less subsidies on inputs of petroleum products into all other industries and into final demands. We assumed that the input-output table entries at basic values for inputs of petroleum products are correct except for inputs of petroleum products to agriculture, forestry, fishing and mining. We have made the changes via the following steps. (1) Calculate basic values, ctls (commodity taxes less subsidies) and markups (wholesale and transport) for 25100030 (diesel fuel and fuel oil) and other petroleum products, for each of agriculture, forestry, fishing and mining. Perhaps the firmest piece of data is the value of the diesel fuel rebate. While we have not used it as an input, we have required the total diesel fuel rebate to be close to the Australian Customs Service (ACS) value. The calculation is driven by the purchasers' price-based share of fuel costs in total costs. Other ingredients are fuel cost shares, ratios of non-rebatable diesel and petrol (litres) to rebatable diesel (litres), and ratios of excise and markups to basic values. For these items: • The purchasers' prices-based fuel cost share is derived from ABARE data by subtracting

our estimate of the rebate that is still included in the reported fuel costs. The rounded values are our educated guesses.

• The ratio of non-rebatable diesel (litres) to rebatable diesel (litres) is assumed to be less than 20%, based on industry opinion.

• The ratio of petrol (litres) to rebatable diesel (litres) is also assumed to be small, based on industry opinion. The values for sheep, grains and beef are based on rough ABARE data. The other values are our guesses.

• The diesel fuel rebates are our estimates. The sum across agriculture, including services to agriculture, is $389 million, 10% higher than the ACS value and 22% higher than the input-output value. We assume that about $30 million of the ACS mining rebate of $556 million is paid to the industry groups 'metal products' and 'railway transport'.

We assume that petrol and diesel are the only petroleum products used significantly in these industries; other petroleum products are ignored.

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(2) We estimated commodity taxes less subsidies (ctls) on other petroleum products, which is dominated by petrol, using a total of $6,532 million based on Budget Papers data. This includes all of the $133 million for other excises, although most of this should probably be allocated to 25100030. The value of $6,532 million is $915 million less than the corresponding input-output value. (3) We calculated ctls on 25100030, which is dominated by diesel, using a total of $2,160 million, which is based on Budget Papers data. This is $772 million more than the corresponding input-output value. (4) We recalculated ctls for inputs of other petroleum products to all users except agriculture, forestry, fishing and mining. It is assumed that other petroleum products are taxed at the petrol rate. The ctls for the input to air transport was divided by 9, effectively reducing the average tax rate to 4 cents per litre. Then all inputs, including the revised air transport input, but excluding agriculture, etc., were multiplied by a common factor of 1.075 so as to achieve the desired total ctls. (5) We recalculate ctls for inputs of 25100030 to all users except agriculture, forestry, fishing and mining. It is assumed that 25100030 is taxed at the diesel rate. We multiplied ctls for the input of 25100030 to 'metal products', which includes iron and steel, non-ferrous metals (including alumina) and three other metal products industries, by 0.36 to allow for the lower excise rate on the large proportion of diesel fuel in this industry. Next we multiplied the ctls for inputs of 25100030 to other manufacturing industries by 0.6 to allow for a different proportion of diesel fuel use. We assumed that the full rate applied for the services sector and final demands. Finally, we multiplied all inputs, including the revised inputs for manufacturing industries but excluding agriculture, etc., by a common factor so as to achieve the desired total ctls. A more detailed account the data problems and assumed solutions thereto is presented at Attachment A.

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4. Impact of Existing Indirect Taxes on the Australian Farm Sector

The ABS input-output framework treats the basic value of production of the particular industries that are the focus of this Report in a way that complicates assessment of the overall indirect tax burden and the effects of particular indirect tax reform scenarios. The production of, say, sheep, grains or meat is assumed to be a process that stops at the farm gate. The input-output framework allows an evaluation of all of the inputs (and taxes thereon) used directly and indirectly in farm production. In order to capture the distribution process beyond the farm gate - including road transportation, wholesale and retail margins, etc., basic values need to be transformed to values at purchasers' prices. That is, purchasers' prices-based production values are the sum of basic values, plus commodity taxes (net) plus margins (transport, wholesale & retail). For those farm products that are subject to little or no further transformation, this purchasers' prices approach provides an adequately comprehensive perspective on indirect tax burdens all the way through from the farm to the final customer. However, where further value-adding is involved - that is, where farm production is an input into food, beverage, textile, clothing and footwear industries, or into the accommodation, cafes and restaurants industries, a 'farm to plate' approach will need to evaluate indirect tax impacts on these industries as well. It follows that, if the focus is on indirect tax burdens affecting production and distribution all the way from the farm to the final customer, any assessment of indirect tax burdens must extend beyond a narrow focus on the following input-output industries: Input-Output Code Industry Description 0101 Sheep 0102 Grains 0103 Beef Cattle 0104 Dairy Cattle 0105 Pigs 0106 Poultry 0107-part 1 Sugar Cane 0107-part 2 Cotton 0107-part 3 Remainder of 0107 to look at impacts on at least the following additional industries as well (for which farm output in an important input into their production): Input-Output Code Industry Description 2101 Meat, meat products 2102 Dairy products 2103 Fruit & vegetable products 2104 Oils & fats 2105 Flour & cereal foods 2106 Bakery products 2107 Confectionery

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2108 Other food products 2109 Soft drinks, cordials, syrups 2110 Beer & malt 2111 Wine & spirits 2112 Tobacco products 2201-2206 Textiles, clothing & footwear (TCF) 5701 Accommodation, cafes & restaurants (Hospitality) Accordingly, the following sections of the Report will consider indirect tax effects on these additional industries as well. Clearly, the overall impact of indirect taxes, and changes thereto, will be an appropriately-weighted combination of the industry-specific impacts. 4.1 Overall Indirect Tax Burden Table 4.1 sets out our estimates of the overall (net) indirect tax burden on the input-output industries specified above. Table 4.1 Overall Indirect Tax Burden, 1993-94 Input-Output Tables, Expressed As A Percentage Of Purchasers' Prices Gross Of Indirect Taxes (a) Input-Output Code Supply allocated to: Intermediate Use Final consumption Exports Total supply Sheep 12.7 11.7 13.7 13.3 Grains 8.9 8.5 9.4 9.1 Beef Cattle 8.3 8.4 8.3 8.3 Dairy cattle 7.1 6.8 n.a. 7.1 Pigs 10.3 10.2 8.8 10.3 Poultry 7.7 8.2 7.8 7.8 Sugar Cane 8.5 n.a. 7.5 8.5 Cotton 7.4 n.a. n.a. 7.4 Other 6.6 7.2 6.5 6.9 All agriculture average 8.3 7.3 10.7 8.7 All industry average 9.6 12.9 7.5 9.9 Meat products 9.0 9.0 9.5 9.2 Dairy products 6.4 9.3 5.3 7.7 Flour & bakery products 8.5 9.1 8.3 8.9 Other Food/Beverages (b) 8.4 10.6 8.1 9.8 Beer&malt 6.5 29.5 7.9 27.8 Wine&spirits 32.3 29.5 7.9 28.3 Tobacco products 8.6 70.0 70.2 69.8 TCF 7.2 8.0 7.3 7.7 Hospitality 5.5 11.8 n.a. 10.5 (a) Excludes import duties and stamp duty on investment. (b) Input-output codes 2103, 2104, 2107, 2108, 2109. n.a. Allocation of supply to this use is zero in the data base.

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The main features shown in Table 4.1 are as follows: • In terms of industry averages, the agriculture industries face a somewhat lower net

indirect tax burden than the all-industry average with respect to intermediate use, final consumption and (on average) across total supply regardless of use.

• As far as exports are concerned, the average ranking is reversed. In substantial part this reflects the inclusion in the ABS definition of indirect taxes of the various primary industry research and marketing levies. Arguably, these are more in the nature of user-pays charges imposed via government legislation/regulation, for which there are private sector counterpart burdens for other industries not included in the ABS indirect tax definition.

• As far as the specific agricultural industries are concerned, the sheep and pigs industries stand out as the industries facing the highest indirect tax burdens, often with burdens exceeding the all-industry average. The dairy cattle, poultry, and cotton industries incur the lowest burdens.

• For the downstream food and beverage industries, the total indirect tax burdens tend to be still generally below the all-industry average, with the obvious exceptions of alcoholic beverages and tobacco products.

• The same conclusion applies to textiles, clothing and footwear, and accommodation, cafes and restuarants. (Incidentally, note that the ABS effectively assumes that none of the latter industry's production goes to exports. This is clearly incorrect, because spending on this industry by non-resident visitors is also classified by the ABS as part of tourism export income! The indirect tax burden on exports for this industry is likely to be close to that on Australian consumption. We understand that the ABS will be attempting to rectify this problem for the 1995-96 input-output tables. We have made some allowance for tourism exports in the GST analysis below.)

While these results are of some interest, in the context of any future tax reform exercise, the more interesting questions are: • What existing indirect taxes are likely candidates for removal or abolition? • What is the burden of these taxes on the agriculture and downstream industries? The remainder of Section 4 considers these issues, on the assumption that wholesale sales tax (WST), payroll tax, financial institutions duty & bank account debits tax (FID/BAD), petroleum product excise, and, within that excise on diesel fuel, are the most likely contenders for abolition/reduction as part of any indirect tax reform package including a GST. 4.2 Wholesale Sales Tax For purposes of this Report, WST is defined to include revenue raised on behalf of the States and Territories following the High Court decision that the latters' franchise fees are illegal. This has been done in 1993-94 levels by adding to WST the revenue from those franchise fees now collected under WST (essentially on alcoholic beverages). Table 4.2 below sets out our estimates of the overall WST tax burden on the input-output industries specified above.

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The main results shown in the table are as follows: • In terms of industry averages, the agriculture industries face a lower WST burden than

the all-industry average with respect to intermediate use, final consumption, exports and therefore across total supply.

• As far as the specific agricultural industries are concerned, the pigs and poultry industries stand out as the industries facing the highest WST burdens. The dairy cattle, sugar cane and cotton industries incur the lowest burdens.

Table 4.2 WST Burden, 1993-94 Input-Output Tables, Expressed As A Percentage Of Purchasers' Prices Gross Of Indirect Taxes Input-Output Code Supply allocated to: Intermediate Use Final consumption Exports Total supply Sheep 0.7 0.6 0.7 0.7 Grains 0.8 0.9 0.8 0.8 Beef cattle 0.6 0.6 0.6 0.6 Dairy cattle 0.7 0.6 n.a. 0.7 Pigs 1.3 1.3 1.3 1.3 Poultry 1.0 1.1 1.1 1.1 Sugar cane 0.6 n.a. 0.6 0.6 Cotton 0.6 n.a. n.a. 0.6 Other 0.5 0.8 0.5 0.7 All agriculture average 0.7 0.8 0.7 0.7 All industry average 1.9 2.5 1.0 2.1 Meat products 0.8 1.0 0.8 0.9 Dairy products 1.0 2.2 1.2 1.7 Flour & bakery products 2.2 2.8 1.9 2.6 Other Food/Beverages (a) 2.0 4.4 1.6 3.5 Beer&malt 1.0 6.1 1.0 5.8 Wine&spirits 7.9 6.2 1.7 6.1 Tobacco products 1.5 1.5 1.5 1.5 TCF 1.6 1.8 1.3 1.7 Hospitality 0.7 0.7 n.a. 0.7 (a) Input-output codes 2103, 2104, 2107, 2108, 2109. n.a. Allocation of supply to this use is zero in the data base.

• For the downstream food and beverage industries, the WST burdens tend to be higher,

but still generally below the all-industry average, with the obvious exceptions of other food products (due to WST on confectionery, snack foods and soft drinks etc.), and alcoholic beverages.

• The same conclusion applies to textiles, clothing and footwear. Accommodation, cafes and restuarants are relatively lightly taxed under the WST.

4.3 Payroll Tax

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Table 4.3 below sets out our estimates of the payroll tax burden on the input-output industries specified above. The main results shown in the table are as follows: • In terms of industry averages, the agriculture industries face a lower payroll tax burden

than the all-industry average with respect to intermediate use, final consumption, exports and therefore across total supply.

• As far as the specific agricultural industries are concerned, the grains, pigs and poultry industries stand out as the industries facing the highest payroll tax burdens. The beef cattle industry incurs the lowest burdens.

• For the downstream food and beverage industries, the payroll tax burdens tend to be higher, in some cases exceeding the all-industry average.

• Textiles, clothing and footwear faces an average payroll tax burden above the all-industry average. Accommodation, cafes and restaurants are relatively more lightly taxed.

Table 4.3 Payroll Tax Burden, 1993-94 Input-Output Tables, Expressed As A Percentage Of Purchasers' Prices Gross Of Indirect Taxes Input-Output Code Supply allocated to: Intermediate Use Final consumption Exports Total supply Sheep 1.2 1.1 1.3 1.3 Grains 1.5 1.6 1.5 1.5 Beef cattle 1.1 1.1 1.1 1.1 Dairy cattle 1.3 1.2 n.a. 1.3 Pigs 1.6 1.6 1.6 1.6 Poultry 1.5 1.6 1.5 1.5 Sugar cane 1.2 n.a. 1.2 1.2 Cotton 1.2 n.a. n.a. 1.2 Other 1.0 1.5 1.1 1.2 All agriculture average 1.2 1.5 1.4 1.3 All industry average 2.0 1.6 1.8 1.8 Meat products 1.8 1.9 1.8 1.9 Dairy products 1.6 1.7 1.6 1.6 Flour & bakery products 2.3 2.3 2.3 2.3 Other Food/Beverages (a) 2.0 2.1 2.0 2.0 Beer&malt 1.7 1.6 1.7 1.6 Wine&spirits 1.8 1.7 1.8 1.7 Tobacco products 1.9 1.9 1.9 1.9 TCF 2.4 2.4 2.4 2.4 Hospitality 1.5 1.5 n.a. 1.5 (a) Input-output codes 2103, 2104, 2107, 2108, 2109. n.a. Allocation of supply to this use is zero in the data base.

4.4 Financial Institutions Duties

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Table 4.4 below sets out our estimates of the FID/BAD tax burden on the input-output industries specified above. Table 4.4 FID/BAD Tax Burden, 1993-94 Input-Output Tables, Expressed As A Percentage Of Purchasers' Prices Gross Of Indirect Taxes Input-Output Code Supply allocated to: Intermediate Use Final consumption Exports Total supply Sheep 0.3 0.3 0.3 0.3 Grains 0.4 0.4 0.4 0.4 Beef cattle 0.3 0.3 0.3 0.3 Dairy cattle 0.3 0.3 n.a. 0.3 Pigs 0.4 0.4 0.4 0.4 Poultry 0.4 0.4 0.4 0.4 Sugar cane 0.3 n.a. 0.3 0.3 Cotton 0.3 n.a. n.a. 0.3 Other 0.2 0.2 0.2 0.2 All agriculture average 0.3 0.2 0.3 0.3 All industry average 0.6 0.6 0.2 0.5 Meat products 0.3 0.3 0.3 0.3 Dairy products 0.2 0.3 0.2 0.2 Flour & bakery products 0.3 0.3 0.3 0.3 Other Food/Beverages (a) 0.3 0.3 0.3 0.3 Beer&malt 0.2 0.2 0.2 0.2 Wine&spirits 0.2 0.2 0.2 0.2 Tobacco products 1.4 1.2 1.3 1.2 TCF 0.2 0.3 0.3 0.3 Hospitality 0.2 0.2 n.a. 0.2 (a) Input-output codes 2103, 2104, 2107, 2108, 2109. n.a. Allocation of supply to this use is zero in the data base.

The main results shown in the table are as follows: • In terms of industry averages, the agriculture industries face a lower FID/BAD tax

burden than the all-industry average with respect to intermediate use, final consumption, and on average across total supply. The ranking is reversed for exports.

• As far as the specific agricultural industries are concerned, the grains, pigs and poultry industries stand out as the industries facing the highest FID/BAD tax burdens. The rest of 'other agriculture' incurs the lowest burdens.

• For the downstream food and beverage industries, the FID/BAD tax burdens tend to be in a similar range to those on agriculture, except for tobacco products, where a notably higher burden applies. We suspect that the tobacco result is (another) data anomaly.

• Textiles, clothing and footwear also face broadly similar FID/BAD tax burdens, below the all-industry average. Accommodation, cafes and restaurants are more lightly taxed.

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4.5 Petroleum Product Excises For purposes of this Report, petrol excise is defined to include revenue raised on behalf of the States and Territories following the High Court decision that the latters' franchise fees on petrol are illegal. This has been done in 1993-94 levels by adding to Commonwealth excise revenue the revenue from those franchise fees now collected under the petrol excise. Table 4.5 below sets out our estimates of the petroleum product excise burden. Table 4.5 Petroleum Product Excise Burden, 1993-94 Input-Output Tables, Expressed As A Percentage Of Purchasers' Prices Gross Of Indirect Taxes Input-Output Code Supply allocated to: Intermediate Use Final consumption Exports Total supply Sheep 1.9 2.1 1.8 1.8 Grains 2.0 2.2 1.9 2.0 Beef cattle 2.0 2.0 2.0 2.0 Dairy cattle 1.4 1.2 n.a. 1.4 Pigs 1.7 1.7 1.7 1.7 Poultry 1.1 1.3 1.3 1.2 Sugar cane 1.7 n.a. 1.7 1.7 Cotton 1.6 n.a. n.a. 1.6 Other 1.6 1.5 1.6 1.6 All agriculture average 1.7 1.6 1.8 1.7 All industry average 2.5 2.6 2.0 2.2 Meat products 1.6 1.6 1.6 1.6 Dairy products 1.2 1.2 1.2 1.2 Flour & bakery products 1.3 1.3 1.3 1.3 Other Food/Beverages (a) 1.6 1.5 1.6 1.6 Beer&malt 1.2 1.0 1.2 1.0 Wine&spirits 1.1 1.0 1.1 1.0 Tobacco products 0.9 1.0 0.9 1.0 TCF 1.0 1.2 1.0 1.1 Hospitality 0.8 0.8 n.a. 0.8 (a) Input-output codes 2103, 2104, 2107, 2108, 2109. n.a. Allocation of supply to this use is zero in the data base.

The main results shown in the table are as follows:

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• In terms of industry averages, the agriculture industries face a lower total petroleum product excise burden than the all-industry average with respect to intermediate use, final consumption, exports and across total supply.

• As far as the specific agricultural industries are concerned, the sheep, grains, and poultry beef cattle industries stand out as the industries facing the highest petroleum product excise burdens. The poultry industry incurs the lowest burdens.

• For the downstream food and beverage industries, the petroleum product excise burdens tend to be slightly lower than those on agriculture, except for tobacco products, where a notably higher burden applies.

• Textiles, clothing and footwear also face lower petroleum product excise burdens.. Accommodation, cafes and restaurants are even more lightly taxed.

4.6 Diesel Excise Table 4.6 below sets out our estimates of the diesel excise burden. The main results shown in the table are as follows: • In terms of industry averages, the agriculture industries face a lower diesel excise

burden than the all-industry average with respect to intermediate use, final consumption, exports and across total supply.

• As far as the specific agricultural industries are concerned, the sheep, grains, and poultry beef cattle industries stand out as the industries facing the highest diesel excise burdens. The poultry industry incurs the lowest burdens.

• For the downstream food and beverage industries, the diesel excise burdens tend to be slightly lower than those on agriculture, except for tobacco products, where a notably higher burden applies.

• Textiles, clothing and footwear also face lower diesel excise burdens.. Accommodation, cafes and restaurants are even more lightly taxed.

Table 4.6 Diesel Excise Burden, 1993-94 Input-Output Tables, Expressed As A Percentage Of Purchasers' Prices Gross Of Indirect Taxes Input-Output Code Supply allocated to: Intermediate Use Final consumption Exports Total supply Sheep 1.1 1.3 0.9 1.0 Grains 1.5 1.6 1.4 1.4 Beef cattle 1.2 1.2 1.2 1.2 Dairy cattle 0.9 0.7 n.a. 0.9 Pigs 1.2 1.1 1.2 1.2 Poultry 0.7 0.8 0.8 0.7 Sugar cane 0.9 n.a. 0.9 0.9 Cotton 0.8 n.a. n.a. 0.8 Other 1.0 0.8 1.0 0.9 All agriculture average 1.1 0.9 1.2 1.1 All industry average 1.4 0.5 1.1 0.9

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Meat products 1.1 0.9 1.0 1.0 Dairy products 0.8 0.8 0.8 0.8 Flour & bakery products 0.7 0.6 0.7 0.6 Other Food/Beverages (a) 1.0 0.9 1.0 0.9 Beer&malt 0.7 0.6 0.8 0.6 Wine&spirits 0.7 0.6 0.7 0.6 Tobacco products 0.5 0.5 0.5 0.5 TCF 0.5 0.5 0.5 0.5 Hospitality 0.5 0.5 n.a. 0.5 (a) Input-output codes 2103, 2104, 2107, 2108, 2109. n.a. Allocation of supply to this use is zero in the data base.

4.7 Summary Assessment In reviewing the magnitude of those existing indirect taxes considered to be likely candidates for abolition or reduction as part of any tax reform package, the following general conclusions can be drawn from Section 4 on the assumption that other things are unchanged: • In terms of the absolute magnitude of cost burdens, on average agriculture is best

served by abolition of all excise on petroleum products. Payroll tax abolition appears to be the next best option: however this conclusion does not apply to farm businesses that fall below the payroll tax wages and salary threshold. Across all farms businesses, abolition of the excise duty on all diesel fuel is likely to be more universally accepted as the second best option.



• On the same basis, abolition of WST only is the least attractive option for agriculture. Given that WST is the most likely candidate for abolition if a GST is to be introduced (and there are good reasons for this in order to reduce a particular tax bias against manufacturing), the indirect tax reform package could be made more attractive for agriculture if petroleum product excise, or at the very least excise on diesel, is also abolished.

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5. First-Round Net Price Impacts of Selected Indirect Tax Reform Scenarios

In order to confirm the findings in Section 4, Section 5 considers the likely net price effects arising from introduction of a GST (on the basis set out in Section 2 above) raising just enough revenue in the year of introduction to replace the revenue lost from abolition of each of the specific indirect taxes covered in Section 4 assuming unchanged behaviour (this assumption is varied in Section 6 below). 5.1 Replacing Wholesale Sales Tax With A GST As noted earlier, WST is defined to include revenue raised on behalf of the States and Territories following the High Court decision that the latters' franchise fees are illegal. This has been done in 1993-94 levels by adding to WST the revenue from those franchise fees now collected under WST (essentially on alcoholic beverages). Table 5.1 below sets out our estimates of the overall net price effect of replacing WST with a GST Table 5.1 Net Price Effects Of Replacing WST With A GST, 1993-94 Input-Output Tables, Expressed As A Percentage Of Purchasers' Prices Gross Of Indirect Taxes Required GST Rate = 5.03% Input-Output Code Supply allocated to: Intermediate Use Final consumption Exports Total supply Sheep -0.6 4.4 -0.6 -0.6 Grains -0.8 4.1 -0.7 -0.6 Beef cattle -0.5 4.5 -0.5 -0.5 Dairy cattle -0.6 4.4 n.a. -0.6 Pigs -1.2 3.8 -1.2 -1.1 Poultry -1.0 3.9 -1.0 0.3 Sugar cane -0.5 n.a. -0.5 -0.5 Cotton -0.5 n.a. n.a. -0.5 Other -0.5 4.2 -0.5 1.9 All agriculture average -0.6 4.2 -0.7 0.1 All industry average -1.7 0.9 -1.0 -0.9 Meat products -0.7 4.1 -0.7 1.6 Dairy products -0.9 2.7 -1.2 0.9 Flour & bakery products -2.2 2.2 -1.9 0.9 Other Food/Beverages (a) -2.0 0.5 -1.6 -0.2 Beer&malt -1.0 -1.4 -1.0 -1.3 Wine&spirits -7.9 -1.5 -1.7 -2.0 Tobacco products -1.4 3.6 -1.4 3.5 TCF -1.6 3.2 -1.3 1.5 Hospitality -0.6 4.4 n.a. 3.4 (a) Input-output codes 2103, 2104, 2107, 2108, 2109. n.a. Allocation of supply to this use is zero in the data base.

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The main results shown in the table are as follows: • Note that the relative importance of supply going to final consumption can be (roughly)

gauged from the relationship between the price effect on final consumption in Australia and the average price effect on total supply. The closer are the two effects, the higher the final consumption weighting and the lower the proportion of supply used either as inputs into other industries or for exports. For example, the sheep industry (0101) has a high intermediate use/exports use and a low final consumption use. In contrast, accommodation, cafes and restaurants (5701) has a low intermediate use and a high consumption use (and, while some of the latter should be classified as tourism exports, it may still be taxed under a GST in Australia.)

• In terms of industry averages, the agriculture industries obtain smaller net cost reductions than the all-industry average with respect to intermediate use and exports. They experience a significantly larger price increase for production going to final consumption, and on average across total supply, than the all-industry average.

• As far as the specific agricultural industries are concerned, the sheep, beef, dairy, sugar cane, cotton and 'rest of other agriculture' industries face the smallest cost reductions/largest price increases. The pig and poultry industries enjoy the largest cost reductions/smallest price increases.

• For the downstream food and beverage industries, cost reductions tend to be larger, and price increases smaller (except for meat products), but still generally less attractive than for the all-industry average, with the obvious exceptions of other food products (due to WST on confectionery, snack foods and soft drinks etc)., and alcoholic beverages. It is unlikely that any real-world GST package will allow consumer prices of alcoholic beverages to fall, however.

• Textiles, clothing and footwear face larger cost reductions, and smaller price increases than agriculture. Accommodation, cafes and restaurants face small cost reductions and large price increases to final consumers.

5.2 Replacing Payroll Tax With A GST Table 5.2 below sets out our estimates of the overall net price effect of replacing payroll tax with a GST. Note that payroll tax effects are an average across each industry. They do not allow for the different payroll tax burdens faced by small versus larger farm and other businesses. The main results shown in the table are as follows: • In terms of industry averages, the agriculture industries obtain smaller net cost

reductions than the all-industry average with respect to intermediate use and exports. They experience a larger price increase for production going to final consumption, and a smaller reduction on average across total supply, than the all-industry average.

• As far as the specific agricultural industries are concerned, the sheep, beef, and dairy industries face the smallest cost reductions/largest price increases. The grains, pig and poultry industries enjoy the largest cost reductions/smallest price increases.

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• For the downstream food and beverage industries, cost reductions tend to be larger, and price increases smaller, but still generally less attractive than for the all-industry average, with the exceptions of bakery and other food products.

• Textiles, clothing and footwear face larger cost reductions, and smaller price increases than agriculture. Accommodation, cafes and restaurants face on average similar cost reductions and price increases to final consumers to those faced on average by agriculture.

Table 5.2 Net Price Effects Of Replacing Payroll Tax With A GST, 1993-94 Input-Output Tables, Expressed As A Percentage Of Purchasers' Prices Gross Of Indirect Taxes Required GST Rate = 2.92% Input-Output Code Supply allocated to: Intermediate Use Final consumption Exports Total supply Sheep -1.2 1.8 -1.2 -1.2 Grains -1.5 1.3 -1.5 -1.4 Beef cattle -1.1 1.8 -1.1 -1.0 Dairy cattle -1.2 1.8 n.a. -1.2 Pigs -1.5 1.4 -1.5 -1.5 Poultry -1.4 1.3 -1.5 -0.7 Sugar cane -1.2 n.a. -1.2 -1.2 Cotton -1.2 n.a. n.a. -1.2 Other -1.0 1.4 -1.0 0.2 All agriculture average -1.2 1.4 -1.3 -0.8 All industry average -1.9 0.4 -1.8 -1.0 Meat products -1.8 1.0 -1.7 -0.4 Dairy products -1.5 1.2 -1.5 -0.1 Flour & bakery products -2.3 0.6 -2.3 -0.2 Other Food/Beverages (a) -2.0 0.8 -2.0 -0.1 Beer&malt -1.7 1.3 -1.7 1.1 Wine&spirits -1.7 1.2 -1.7 0.8 Tobacco products -1.8 1.0 -1.9 1.0 TCF -2.4 0.5 -2.4 -0.5 Hospitality -1.5 1.4 n.a. 0.8 (a) Input-output codes 2103, 2104, 2107, 2108, 2109. n.a. Allocation of supply to this use is zero in the data base.

5.3 Replacing FID/BAD With A GST Table 5.3 below sets out our estimates of the overall net price effect of replacing FID/BAD taxes with a GST.

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The main results shown in the table are as follows: • In terms of industry averages, the agriculture industries obtain smaller net cost

reductions than the all-industry average with respect to intermediate use. The cost reduction benefit for agricultural exports is slightly larger than for the all-industry average. They experience a larger price increase for production going to final consumption, and a smaller reduction on average across total supply, than the all-industry average.

• As far as the specific agricultural industries are concerned, the sheep, grains, beef, and dairy industries face the smallest cost reductions/largest price increases. The pig and poultry industries enjoy the largest cost reductions/smallest price increases.

Table 5.3 Net Price Effects Of Replacing FID/BAD Taxes With A GST, 1993-94 Input-Output Tables, Expressed As A Percentage Of Purchasers' Prices Gross Of Indirect Taxes Required GST Rate = 0.85% Input-Output Code Supply allocated to: Intermediate Use Final consumption Exports Total supply Sheep -0.2 0.6 -0.3 -0.2 Grains -0.3 0.5 -0.3 -0.3 Beef cattle -0.3 0.6 -0.3 -0.2 Dairy cattle 0.3 0.5 n.a. -0.3 Pigs -0.4 0.4 -0.4 -0.4 Poultry -0.4 0.5 -0.4 -0.1 Sugar cane -0.3 n.a. -0.3 -0.3 Cotton -0.3 n.a. n.a. -0.3 Other -0.2 0.6 -0.2 0.2 All agriculture average -0.3 0.6 -0.3 -0.1 All industry average -0.5 0.0 -0.2 -0.2 Meat products -0.3 0.6 -0.3 0.1 Dairy products -0.2 0.6 -0.2 0.2 Flour & bakery products -0.3 0.6 -0.3 0.3 Other Food/Beverages (a) -0.3 0.6 -0.3 0.3 Beer&malt -0.2 0.6 -0.2 0.6 Wine&spirits -0.2 0.6 -0.2 0.5 Tobacco products -1.3 -0.4 -1.3 -0.4 TCF -0.2 0.6 -0.2 0.3 Hospitality -0.2 0.6 n.a. 0.5 (a) Input-output codes 2103, 2104, 2107, 2108, 2109. n.a. Allocation of supply to this use is zero in the data base. • For the downstream food and beverage industries, cost reductions tend to be similar or

smaller, and price increases larger, but still generally less attractive than for the all-industry average, with the exceptions of bakery and other food products. The large benefits enjoyed by the tobacco industry are in our view a product of ABS data defects (see Section 4.4 above).

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• Textiles, clothing and footwear and accommodation, cafes and restaurants face smaller cost reductions than, and similar price increases to, agriculture.

5.4 Replacing Petroleum Product Excises With A GST Table 5.4 below sets out our estimates of the overall net price effect of replacing all petroleum product excises with a GST. Table 5.4 Net Price Effects Of Replacing Petroleum Product Excises With A GST, 1993-94 Input-Output Tables, Expressed As A Percentage Of Purchasers' Prices Gross Of Indirect Taxes Required GST Rate = 4.44% Input-Output Code Supply allocated to: Intermediate Use Final consumption Exports Total supply Sheep -1.8 2.3 -1.7 -1.7 Grains -2.0 2.2 -1.9 -1.8 Beef cattle -1.9 2.4 -1.9 -1.9 Dairy cattle -1.3 3.2 n.a. -1.3 Pigs -1.7 2.7 -1.7 -1.6 Poultry -1.1 3.1 -1.2 0.0 Sugar cane -1.7 n.a. -1.7 -1.7 Cotton -1.5 n.a. n.a. -1.5 Other -1.6 2.9 -1.6 0.7 All agriculture average -1.7 2.8 -1.9 -1.1 All industry average -2.4 0.4 -1.9 -1.1 Meat products -1.6 2.8 -1.6 0.6 Dairy products -1.1 3.2 -1.1 1.1 Flour & bakery products -1.3 3.1 -1.3 1.8 Other Food/Beverages (a) -1.6 2.9 -1.6 1.4 Beer&malt -1.1 3.4 -1.2 3.1 Wine&spirits -1.0 3.5 -1.1 2.8 Tobacco products -0.8 3.5 -0.8 3.5 TCF -0.9 3.3 -1.0 1.7 Hospitality -0.8 3.6 n.a. 2.7 (a) Input-output codes 2103, 2104, 2107, 2108, 2109. n.a. Allocation of supply to this use is zero in the data base. The main results shown in the table are as follows: • In terms of industry averages, the agriculture industries obtain smaller net cost

reductions than the all-industry average with respect to intermediate use. The cost reduction benefit for agricultural exports is similar to that for the all-industry average. They experience a larger price increase for production going to final consumption, and a similar reduction on average across total supply to that for the all-industry average.

• As far as the specific agricultural industries are concerned, the sheep, grains, and beef industries face the largest cost reductions/smallest price increases. The pigs, poultry,

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cotton and 'rest of other agriculture' industries face the smallest cost reductions/largest price increases.

• For the downstream food and beverage industries, cost reductions tend to be smaller, and price increases larger, but still generally less attractive than for the all-industry average.

• Textiles, clothing and footwear and accommodation, cafes and restaurants face smaller cost reductions, and larger price increases than agriculture.

5.5 Replacing Diesel Excise With A GST Table 5.5 below sets out our estimates of the overall net price effect of replacing all diesel excise with a GST. The main results shown in the table are as follows: • In terms of industry averages, the agriculture industries obtain slightly smaller net cost

reductions than the all-industry average with respect to intermediate use. The cost reduction benefit for agricultural exports is slightly larger than that for the all-industry average. They experience the same price increase for production going to final consumption, and a larger reduction on average across total supply than for the all-industry average.

• As far as the specific agricultural industries are concerned, the sheep, grains, beef and pigs industries face the largest cost reductions/smallest price increases (in the first two cases, consumption prices fall). The poultry industry faces the smallest cost reduction/largest price increase.

• For the downstream food and beverage industries, cost reductions tend to be smaller, and price increases larger, and generally less attractive than for the all-industry average.

• Textiles, clothing and footwear and accommodation, cafes and restaurants face smaller cost reductions, and larger price increases, than agriculture.

Table 5.5 Net Price Effects Of Replacing Diesel Excise With A GST, 1993-94 Input-Output Tables, Expressed As A Percentage Of Purchasers' Prices Gross Of Indirect Taxes Required GST Rate = 1.27% Input-Output Code Supply allocated to: Intermediate Use Final consumption Exports Total supply Sheep -1.0 -0.1 -0.9 -1.0 Grains -1.4 -0.3 -1.4 -1.4 Beef cattle -1.2 0.1 -1.2 -1.2 Dairy cattle -0.9 0.6 n.a. -0.9 Pigs -1.1 0.2 -1.1 -1.1 Poultry -0.6 0.5 -0.8 -0.3 Sugar cane -0.9 n.a. -0.9 -0.9 Cotton -0.8 n.a. n.a. -0.8 Other -1.0 0.4 -1.0 -0.3 All agriculture average -1.1 0.4 -1.2 -0.9 All industry average -1.4 0.4 -1.1 -0.6

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Meat products -1.0 0.4 -1.0 -0.4 Dairy products -0.8 0.5 -0.8 -0.1 Flour & bakery products -0.7 0.6 -0.7 0.3 Other Food/Beverages (a) -1.0 0.4 -0.9 0.0 Beer&malt -0.7 0.7 -0.7 0.6 Wine&spirits -0.6 0.7 -0.7 0.5 Tobacco products -0.5 0.8 -0.5 0.8 TCF -0.5 0.8 -0.5 0.3 Hospitality -0.5 0.8 n.a. 0.6 (a) Input-output codes 2103, 2104, 2107, 2108, 2109. n.a. Allocation of supply to this use is zero in the data base.

5.6 Summary Assessment Section 5 confirms the message obtained from Section 4 above: • In terms of the absolute magnitude of cost burdens, on average agriculture is best





• On the same basis, abolition of WST only is the least attractive option for agriculture. Given that WST is the most likely candidate for abolition if a GST is to be introduced (and there are good reasons for this in order to reduce a particular tax bias against manufacturing), the indirect tax reform package could be made more attractive for agriculture if petroleum product excise, or at the very least excise on diesel, is also abolished.

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6. Longer-term Indirect Tax Reform Impacts Allowing for Economy-Wide Effects

The analysis in the preceding Section shows net price effects of a number of indirect tax reform scenarios assuming no change in behaviour in response to those price changes. While this is of interest in determining the initial impact of indirect tax reform scenarios, over time the initial price effects will induce, and be modified by, demand and supply reactions to these price effects. To obtain some feel for the longer term, or steady state, effects of the five specific indirect tax reform scenarios, the Access Economics computable general equilibrium model (AE-CGE) has been used to model the effects of reactions to indirect tax reform. It is worth noting at the outset some of the key assumptions used in this model: • The supply of labour for the economy as a whole is assumed to be fixed. • Saving rates adjust to finance whatever level of investment is required to ensure the

level of capital needed for production (which is assumed to be based on fixed input-output coefficients for each industry).

• Allocation of industry output between domestic use and exported use is assumed to be substitutable, but not perfectly so.

• Final demand for industry production is assumed to be (inversely) own-price-sensitive. • Broadly speaking, the public sector is assumed to remain in balance: that is,

government final consumption expenditures plus transfers are assumed to be more or less matched by the sum of total net indirect taxes plus total income taxes. (In the model runs, some imbalance is permitted, because the GST rates in the five scenarios have been set at the levels reported in Section 5, while income tax rates and total government expenditure has been assumed to be fixed. This approach was taken because - rightly or wrongly - it is assumed that policy makers would set GST rates to hit revenue-neutrality in year one, rather than in the long term.)

Two approaches have been taken to the balance of trade closure assumption: • The first extreme assumption is that the exchange rate remains fixed, allowing the trade

balance to vary. • The second assumption is that the exchange rate varies so as to leave the trade balance

fixed. In reality, the likely exchange rate outcome will fall between these two extremes. In any case, using both approaches gives a feel for the separate effects of the exchange rate reaction to the indirect tax reform scenarios. The AE-CGE model provides a long-term 'snapshot' of how the economy might change in response to the five indirect tax reform scenarios, concentrating on resource allocation effects. It does not cover the effects of overall growth in the supply of inputs to production, notably in the case of labour, and the dynamic benefits that would flow from more efficient allocation of that growth.

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In that sense, the model understates benefits and probably overstates losses to particular industries. As noted at the start of Section 4 above, in order to capture the distribution process beyond the farm gate - including road transportation, wholesale and retail margins, etc., basic values need to be transformed to values at purchasers' prices. That is, purchasers' prices-based production values are the sum of basic values, plus commodity taxes (net) plus margins (transport, wholesale & retail). For this report, this approach has been carried through from the input-output framework to the AE-CGE model as well 6.1 Replacing Wholesale Sales Tax With A GST Table 6.1A below shows the long-term effects on prices and output arising from replacement of the WST with a GST, assuming that the exchange rate remains fixed. Table 6.1B shows the price/output effects on the assumption that the exchange rate adjusts to leave the balance of trade unchanged. The main results in the fixed exchange rate scenario are as follows: • In general, prices of output used as intermediate inputs falls, as do export prices, while

prices of supply used for final consumption increase. • On average, agriculture records smaller reductions in input and export prices than the

all-industry average, and faces a larger increase in prices for final consumption in Australia. As far as 'downstream' food and other products are concerned, the indirect price benefits for agriculture are larger, notably in relation to inputs used in producing items formally subject to WST (some dairy products, some beverages, and snack foods).

• Production allocated to meeting final consumption generally declines as prices rise, while supply allocated to exports increases.

• On average, agriculture records larger reductions in production allocated to domestic consumption than the all-industry average, and a smaller increase in exports, although the results for individual industries vary substantially depending upon assumed demand elasticities. As far as 'downstream' food and other products are concerned, the indirect output effects for agriculture are larger, notably in relation to inputs used in producing items formally subject to WST (some dairy products, some beverages, and snack foods).

• There is a significant strengthening (move into surplus) in Australia's trade balance. • Some of the specific industry responses shown in the table seem implausibly large (eg,

in relation to dairy cattle allocated to final consumption). The effects are the net result of a complex of own- and cross-price elasticity effects, as well as income effects that are not easily disentangled.

• In general, we have less confidence in the specific numbers reported for individual agricultural (and other) industries than in the aggregates for agriculture and for the all-industry average.

• Overall, the estimated effects seem plausible: to the extent that agriculture is less exposed to WST than the economy as a whole, it enjoys smaller price-reducing benefits, and smaller increases in exports, than the economy as a whole.

• Finally, it should be noted that the large price reductions, and increases in final consumption, for beer and wine products are unlikely to happen. As noted earlier in

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this report, offsetting increases in other taxes are likely to be included in any tax reform package so as to leave alcoholic beverage prices on average at least more or less unchanged.

Table 6.1A Replacing WST With A GST, AE-CGE Model. Long-Term Price And Output Effects (Purchasers' Prices Per Cent Change). Required GST Rate = 5.03%. Fixed Exchange Rate. Input-Output Code Supply allocated to: Intermediate Use Final consumption Exports Price Output Price Output Price Output Sheep -1.4 -3.5 3.6 -4.8 -0.2 0.4 Grains -0.8 0.4 4.0 -1.6 -0.5 4.0 Beef cattle -0.5 -2.0 4.5 -2.4 -0.2 1.5 Dairy cattle -0.6 -2.7 4.5 -9.8 n.a. n.a. Pigs -1.1 -2.0 3.9 -3.6 -0.5 4.5 Poultry -1.0 -2.1 3.9 -0.7 -0.5 3.9 Sugar cane -0.5 0.6 n.a. n.a. -0.3 2.7 Cotton -0.6 0.6 n.a. n.a. n.a. n.a. Other -0.4 -1.1 4.2 -2.0 -0.3 2.2 All agriculture average -0.7 -1.5 4.2 -1.9 -0.4 2.3 All industry average -1.0 0.7 1.2 -0.8 -0.6 3.1 Meat products -1.0 -3.0 3.9 -5.8 -0.4 1.9 Dairy products -1.1 -2.5 2.6 -5.9 -0.7 3.4 Flour & bakery products -2.1 -3.0 2.2 -4.4 -1.1 5.8 Other Food/Beverages (a) -1.8 -1.0 0.6 -1.5 -1.1 5.8 Beer&malt -1.0 4.0 -4.4 4.9 -1.0 5.3 Wine&spirits -7.0 2.4 -5.1 7.1 -1.6 8.4 Tobacco products -1.3 -5.8 3.7 -6.3 -0.7 3.4 TCF -1.1 -3.0 3.4 -12.4 0.2 -0.8 Hospitality -0.2 0.2 4.4 -7.3 n.a. n.a. (a) Input-output codes 2103, 2104, 2107, 2108, 2109. n.a. Allocation of supply to this use is zero in the data base.

Under the flexible exchange rate scenario: • The $A appreciates sufficiently to choke off any change in the balance of trade. • Overall, price reductions/increases in $A terms are larger/smaller, and quantity

responses (up or down) are correspondingly smaller as well. • Broadly speaking, the relative position of agriculture versus the economy as a whole is

similar: while agriculture enjoys increased export volumes, the economy as a whole records a larger increase in exports, and agriculture faces a larger reduction in supply allocated to final consumption within Australia.

• Again there is considerable variation within agriculture and the 'downstream' industries agriculture supplies. We have less confidence in the individual industry results than in the broad aggregates.

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Table 6.1B Replacing WST With A GST, AE-CGE Model. Long-Term Price And Output Effects (Purchasers' Prices Per Cent Change). Required GST Rate = 5.03%. Flexible Exchange Rate(b). Input-Output Code Supply allocated to: Intermediate Use Final consumption Exports Price Output Price Output Price Output Sheep -1.8 -4.1 3.2 -3.2 -0.7 -0.5 Grains -1.1 0.9 3.7 -1.1 -1.1 1.4 Beef cattle -1.0 -2.2 4.0 -1.9 -0.8 -0.8 Dairy cattle -1.0 -2.0 4.0 -7.6 n.a. n.a. Pigs -1.5 -2.2 3.4 -2.2 -1.2 2.0 Poultry -1.4 -2.3 3.4 -0.4 -1.1 1.6 Sugar cane -1.0 0.8 n.a. n.a. -1.0 0.9 Cotton -1.1 -0.6 n.a. n.a. n.a. n.a. Other -0.9 -0.6 3.7 -1.4 -0.9 -0.2 All agriculture average -1.1 -1.4 3.7 -1.3 -0.9 0.4 All industry average -1.5 0.7 0.8 -0.1 -1.2 1.6 Meat products -1.3 -2.9 3.5 -4.5 -0.9 0.1 Dairy products -1.5 -1.9 2.2 -4.0 -1.3 2.0 Flour & bakery products -2.5 -2.4 1.8 -2.9 -1.7 4.3 Other Food/Beverages (a) -2.3 -0.7 0.1 -0.5 -1.7 4.1 Beer&malt -1.4 5.4 -4.8 6.9 -1.7 4.0 Wine&spirits -7.5 2.8 -5.6 9.7 -2.3 7.2 Tobacco products -1.8 -4.3 3.2 -4.7 -1.3 2.2 TCF -1.8 -3.6 2.8 -12.4 -0.4 -2.1 Hospitality -0.6 0.2 4.0 -6.6 n.a. n.a. (a) Input-output codes 2103, 2104, 2107, 2108, 2109. (b) Prices expressed in $A. Because the $A appreciates by 0.9% in this scenario, where the $A price for exports falls by less than this,

higher export prices ensue when expressed in foreign currencies, leading to reduced export volumes. Note all figures are rounded. n.a. Allocation of supply to this use is zero in the data base.

6.2 Replacing Payroll Tax With A GST Table 6.2A below shows the long-term effects on prices and output arising from replacement of payroll tax with a GST, assuming that the exchange rate remains fixed. Table 6.2B shows the price/output effects on the assumption that the exchange rate adjusts to leave the balance of trade unchanged. The main results in the fixed exchange rate scenario are as follows:

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Table 6.2A Replacing Payroll Tax With A GST, AE-CGE Model. Long-Term Price And Output Effects (Purchasers' Prices Per Cent Change). Required GST Rate = 2.92%. Fixed Exchange Rate. Input-Output Code Supply allocated to: Intermediate Use Final consumption Exports Price Output Price Output Price Output Sheep -0.2 0.8 2.8 -4.6 -0.3 0.6 Grains -0.6 -1.6 2.3 -1.2 -0.3 2.0 Beef cattle -0.1 -0.7 2.8 -2.0 -0.0 0.2 Dairy cattle -0.2 -2.5 2.8 -8.3 n.a. n.a. Pigs -0.5 -0.7 2.5 -3.9 -0.2 1.7 Poultry -0.5 -0.7 2.3 -0.5 -0.3 2.3 Sugar cane -0.5 0.4 n.a. n.a. -0.2 1.9 Cotton -0.7 1.0 n.a. n.a. n.a. n.a. Other 0.0 -2.2 2.4 -1.5 0.0 -0.2 All agriculture average -0.3 -1.1 2.4 -1.4 -0.2 1.2 All industry average -0.6 0.0 1.5 -1.5 -0.6 2.8 Meat products -0.9 -2.0 1.9 -3.4 -0.5 2.4 Dairy products -0.8 -2.3 2.0 -4.7 -0.3 1.7 Flour & bakery products -1.2 -2.6 1.6 -3.5 -0.7 3.6 Other Food/Beverages (a) -1.0 -1.2 1.8 -2.3 -0.7 3.8 Beer&malt -0.9 -2.8 1.8 -4.2 -0.5 2.7 Wine&spirits -0.4 -0.5 1.9 -5.1 -0.5 2.5 Tobacco products -0.9 -3.6 1.9 -3.9 -0.5 2.6 TCF -0.7 1.1 1.9 -0.9 -0.8 3.2 Hospitality 0.0 -0.2 2.7 -6.2 n.a. n.a. (a) Input-output codes 2103, 2104, 2107, 2108, 2109. n.a. Allocation of supply to this use is zero in the data base.

• In general, prices of output used as intermediate inputs falls, as do export prices, while

prices of supply used for final consumption increase. • On average, agriculture records smaller reductions in input and export prices than the

all-industry average, and faces a larger increase in prices for final consumption in Australia. However, as far as 'downstream' food and other products are concerned, the indirect price benefits are closer to those for the all-industry average.


• On average, agriculture records similar reductions in production allocated to domestic consumption to the all-industry average, but a smaller increase in exports, although the results for individual industries vary substantially depending upon assumed demand elasticities. As far as 'downstream' food and other products are concerned, the indirect output effects for agriculture are often closer to, or even larger than, the all-industry average.

• There is a significant strengthening (move into surplus) in Australia's trade balance. • Some of the specific industry responses shown in the table seem implausibly large (eg,

again in relation to dairy cattle allocated to final consumption). The effects are the net

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result of a complex of own- and cross-price elasticity effects, as well as income effects that are not easily disentangled.

• In general, we have less confidence in the specific numbers reported for individual agricultural (and other) industries than in the aggregates for agriculture and for the all-industry average.

• Overall, the estimated effects seem plausible: to the extent that agriculture is less exposed to payroll tax than the economy as a whole, it enjoys smaller price-reductions, and smaller increases in exports, than the economy as a whole. However, as we move downstream in the production process, benefits approach the all-industries average.

Table 6.2B Replacing Payroll Tax With A GST, AE-CGE Model. Long-Term Price And Output Effects (Purchasers' Prices Per Cent Change). Required GST Rate = 2.92%. Flexible Exchange Rate(b). Input-Output Code Supply allocated to: Intermediate Use Final consumption Exports Price Output Price Output Price Output Sheep -1.1 -0.5 1.9 -1.0 -1.4 -1.5 Grains -1.2 -0.4 1.5 -0.1 -1.6 -4.2 Beef cattle -1.2 -1.1 1.7 -0.7 -1.5 -5.2 Dairy cattle -1.3 -0.8 1.7 -3.1 n.a. n.a. Pigs -1.5 -1.1 1.4 -0.5 -1.7 -3.9 Poultry -1.5 -1.2 1.2 0.1 -1.8 -3.2 Sugar cane -1.6 0.0 n.a. n.a. -1.9 -2.4 Cotton -1.9 -1.7 n.a. n.a. n.a. n.a. Other -1.1 -1.1 1.4 -0.1 -1.4 -5.8 All agriculture average -1.3 -0.9 1.4 -0.1 -1.5 -3.3 All industry average -1.7 -0.2 0.4 0.2 -2.0 -0.7 Meat products -1.7 -1.6 1.0 -0.1 -1.8 -1.9 Dairy products -1.7 -1.0 1.0 -0.2 -1.9 -1.6 Flour & bakery products -2.2 -1.1 0.6 0.3 -2.2 0.1 Other Food/Beverages (a) -2.2 -0.6 0.7 0.2 -2.2 0.0 Beer&malt -1.9 0.1 0.8 0.1 -2.1 -0.4 Wine&spirits -1.6 0.2 0.7 0.3 -2.1 -0.4 Tobacco products -2.1 0.2 0.7 0.2 -2.1 -0.3 TCF -2.2 -0.1 0.6 -0.1 -2.2 -0.3 Hospitality -0.9 -0.2 1.7 -4.4 n.a. n.a. (a) Input-output codes 2103, 2104, 2107, 2108, 2109. (b) Prices expressed in $A. Because the $A appreciates by 2.2% in this scenario, where the $A price for exports falls by less than this,


Under the flexible exchange rate scenario:

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• The $A appreciates sufficiently to choke off any change in the balance of trade. The required appreciation in this case is much larger than for the WST scenario: in foreign currency terms, export prices rise and export volumes therefore decline.

• Overall, price reductions/increases in $A terms are larger/smaller, and quantity responses (up or down) are correspondingly smaller as well.

• Broadly speaking, the relative position of agriculture versus the economy as a whole is similar: agriculture faces a larger reduction in export volumes than the economy as a whole, and agriculture faces a larger reduction in supply allocated to final consumption within Australia.


6.3 Replacing Financial Institutions Duties With A GST Table 6.3A below shows the long-term effects on prices and output arising from replacement of FID/BAD taxes with a GST, assuming that the exchange rate remains fixed. Table 6.3B shows the price/output effects on the assumption that the exchange rate adjusts to leave the balance of trade unchanged. The main results in the fixed exchange rate scenario are as follows: • In general, prices of output used as intermediate inputs falls, as do export prices, while

prices of supply used for final consumption increase. • On average, agriculture records slightly smaller reductions in input prices but similar

export prices reductions to the all-industry average, and faces a slightly larger increase in prices for final consumption in Australia. As far as 'downstream' food and other products are concerned, the indirect price benefits are similar to those for agriculture. (The tobacco industry result is an anomaly which, as we noted earlier in this report seems to reflect a problem with the input-output data.)


• On average, agriculture records a slightly larger reduction in production allocated to domestic consumption than the all-industry average, but also a larger increase in exports, although the results for individual industries vary substantially depending upon assumed demand elasticities. As far as 'downstream' food and other products are concerned, the indirect output effects for agriculture are often closer to the all-industry average. (The tobacco industry result is an anomaly which, as we noted earlier in this report seems to reflect a problem with the input-output data.)

• There is a strengthening (move into surplus) in Australia's trade balance.

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Table 6.3A Replacing FID/BAD Taxes With A GST, AE-CGE Model. Long-Term Price And Output Effects (Purchasers' Prices Per Cent Change). Required GST Rate = 0.85%. Fixed Exchange Rate. Input-Output Code Supply allocated to: Intermediate Use Final consumption Exports Price Output Price Output Price Output Sheep -0.4 0.1 0.5 -0.6 -0.2 0.5 Grains -0.5 -0.3 0.4 -0.1 -0.3 2.1 Beef cattle -0.3 -0.2 0.5 -0.3 -0.2 1.3 Dairy cattle -0.4 -0.5 0.5 -0.8 n.a. n.a. Pigs -0.4 -0.2 0.4 -0.1 -0.2 2.0 Poultry -0.4 -0.3 0.4 -0.1 -0.2 1.8 Sugar cane -0.3 -0.1 n.a. n.a. -0.2 1.4 Cotton -0.3 0.6 n.a. n.a. n.a. n.a. Other -0.2 -1.7 0.6 -0.2 -0.1 0.8 All agriculture average -0.3 -0.4 0.6 -0.2 -0.2 1.3 All industry average -0.5 0.1 0.0 0.1 -0.2 0.8 Meat products -0.4 -2.3 0.5 -0.5 -0.2 1.0 Dairy products -0.3 -0.9 0.5 -0.8 -0.2 0.8 Flour & bakery products -0.3 -1.8 0.5 -0.7 -0.2 0.9 Other Food/Beverages (a) -0.3 -0.8 0.5 -0.4 -0.2 1.1 Beer&malt -0.3 -0.1 0.5 -0.8 -0.2 0.9 Wine&spirits -0.1 2.9 0.6 -1.0 -0.2 1.0 Tobacco products -1.3 0.3 -0.1 0.1 -0.9 4.9 TCF -0.1 -0.1 0.6 -0.2 -0.2 0.6 Hospitality -0.2 0.3 0.6 -7.4 n.a. n.a. (a) Input-output codes 2103, 2104, 2107, 2108, 2109. n.a. Allocation of supply to this use is zero in the data base.

Under the flexible exchange rate scenario: • The $A appreciates slightly to choke off any change in the balance of trade. The

required appreciation in this case is small. • Overall, price reductions/increases in $A terms are larger/smaller, and quantity


similar: agriculture enjoys a larger increase in export volumes than the economy as a whole (for which export volumes fall), but agriculture faces a smaller increase in supply allocated to final consumption within Australia than the all-industry average.

• The combination of increased prices for supply allocated to domestic consumption and increases in supply allocated to domestic consumption in particular industries under this scenario reflects economy-wide income effects allowing both the nominal and real values of consumption demand to rise, working against individual price effects discouraging consumption.

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Table 6.3B Replacing FID/BAD Taxes With A GST, AE-CGE Model. Long-Term Price And Output Effects (Purchasers' Prices Per Cent Change). Required GST Rate = 0.85%. Flexible Exchange Rate(b). Input-Output Code Supply allocated to: Intermediate Use Final consumption Exports Price Output Price Output Price Output Sheep -0.6 -0.2 0.3 0.3 -0.5 0.0 Grains -0.7 0.0 0.2 0.1 -0.6 0.6 Beef cattle -0.5 -0.3 0.3 0.0 -0.5 0.0 Dairy cattle -0.6 -0.1 0.2 0.5 n.a. n.a. Pigs -0.7 -0.3 0.2 0.7 -0.6 0.6 Poultry -0.7 -0.4 0.2 0.1 -0.6 0.5 Sugar cane -0.6 0.0 n.a. n.a. -0.6 0.4 Cotton -0.6 -0.1 n.a. n.a. n.a. n.a. Other -0.4 -1.4 0.3 0.1 -0.4 -0.6 All agriculture average -0.6 -0.4 0.3 0.1 -0.6 0.2 All industry average -0.7 0.1 -0.2 0.5 -0.5 -0.1 Meat products -0.6 -2.2 0.3 0.2 -0.5 0.0 Dairy products -0.5 -0.6 0.3 0.3 -0.5 0.0 Flour & bakery products -0.5 -1.5 0.3 0.2 -0.5 0.0 Other Food/Beverages (a) -0.6 -0.6 0.3 0.2 -0.6 0.2 Beer&malt -0.5 0.6 0.3 0.2 -0.6 0.1 Wine&spirits -0.4 3.1 0.3 0.3 -0.6 0.3 Tobacco products -1.6 1.2 -0.4 1.1 -1.3 4.2 TCF -0.5 -0.4 0.3 0.0 -0.5 -0.1 Hospitality -0.4 0.3 0.4 -7.0 n.a. n.a. (a) Input-output codes 2103, 2104, 2107, 2108, 2109. (b) Prices expressed in $A. Because the $A appreciates by 0.53% in this scenario, where the $A price for exports falls by less than this,


6.4 Replacing Petroleum Product Excises With A GST Table 6.4A below shows the long-term effects on prices and output arising from replacement of all petroleum product excises with a GST, assuming that the exchange rate remains fixed. Table 6.4B shows the price/output effects on the assumption that the exchange rate adjusts to leave the balance of trade unchanged. The main results in the fixed exchange rate scenario are as follows: • In general, prices of output used as intermediate inputs falls, as do export prices, while

prices of supply used for final consumption increase.

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• On average, agriculture records similar reductions in input prices and export prices to the all-industry average, but faces a larger increase in prices for final consumption in Australia.


• On average, agriculture records a slightly smaller reduction in production allocated to domestic consumption than the all-industry average, and also a slightly smaller increase in exports, although the results for individual industries vary substantially depending upon assumed demand elasticities. As far as 'downstream' food and other products are concerned, the indirect output effects for agriculture are often somewhat smaller than the all-agriculture average.

• There is a significant strengthening (move into surplus) in Australia's trade balance. Table 6.4A Replacing Petroleum Product Excises With A GST, AE-CGE Model. Long-Term Price And Output Effects (Purchasers' Prices Per Cent Change). Required GST Rate = 4.44%. Fixed Exchange Rate. Input-Output Code Supply allocated to: Intermediate Use Final consumption Exports Price Output Price Output Price Output Sheep -1.9 0.1 2.1 -2.9 -1.1 2.3 Grains -2.1 -1.5 2.1 -0.9 -1.1 9.0 Beef cattle -1.6 0.1 2.8 -0.4 -0.9 7.4 Dairy cattle -0.9 -2.7 3.8 -8.6 n.a. n.a. Pigs -1.2 0.1 3.3 -3.5 -0.6 5.2 Poultry -0.7 0.0 3.5 -0.8 -0.5 3.7 Sugar cane -1.4 -0.5 n.a. n.a. -0.8 6.4 Cotton -1.3 2.6 n.a. n.a. n.a. n.a. Other -1.1 -2.1 3.3 -1.4 -0.7 5.8 All agriculture average -1.4 -0.9 3.3 -1.3 -1.0 6.0 All industry average -1.4 0.9 1.1 -1.5 -1.0 7.8 Meat products -1.4 -2.1 3.1 -3.3 -0.8 4.1 Dairy products -0.8 -2.4 3.6 -5.1 -0.3 1.7 Flour & bakery products -0.8 -2.8 3.5 -4.2 -0.4 2.1 Other Food/Beverages (a) -1.1 -1.2 3.4 -2.4 -0.8 4.0 Beer&malt -0.8 -2.9 3.5 -4.7 -0.4 2.0 Wine&spirits 0.0 -0.7 3.7 -5.9 -0.2 1.1 Tobacco products -0.2 0.0 3.9 -1.0 -0.2 0.8 TCF -0.2 0.0 3.9 -1.0 -0.2 0.8 Hospitality 0.2 0.6 4.3 -6.5 n.a. n.a. (a) Input-output codes 2103, 2104, 2107, 2108, 2109. n.a. Allocation of supply to this use is zero in the data base.

Under the flexible exchange rate scenario: • The $A appreciates substantially to choke off any change in the balance of trade.

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• Overall, price reductions/increases in $A terms are larger/smaller, and quantity responses (up or down) are correspondingly smaller as well.

• Broadly speaking, the relative position of agriculture versus the economy as a whole is shifts against agriculture: agriculture records no increase in export volumes while the economy as a whole still records higher export volumes, and agriculture faces a smaller increase in supply allocated to final consumption within Australia than the all-industry average.



Table 6.4B Replacing Petroleum Product Excises With A GST, AE-CGE Model. Long-Term Price And Output Effects (Purchasers' Prices Per Cent Change). Required GST Rate = 4.44%. Flexible Exchange Rate(b). Input-Output Code Supply allocated to: Intermediate Use Final consumption Exports Price Output Price Output Price Output Sheep -3.0 -1.4 1.0 1.8 -2.5 -0.4 Grains -2.9 0.1 1.2 0.5 -2.8 0.7 Beef cattle -2.8 -0.5 1.5 1.3 -2.8 0.2 Dairy cattle -2.2 -0.5 2.4 -0.5 n.a. n.a. Pigs -2.5 -0.5 2.0 0.8 -2.5 -1.9 Poultry -1.9 -0.6 2.2 0.0 -2.3 -3.2 Sugar cane -2.9 0.0 n.a. n.a. -2.8 0.8 Cotton -2.9 -0.8 n.a. n.a. n.a. n.a. Other -2.4 -0.7 1.9 0.3 -2.5 -1.5 All agriculture average -2.6 -0.5 1.9 0.3 -2.7 0.0 All industry average -2.8 0.6 -0.3 0.7 -2.9 3.2 Meat products -2.4 -1.6 2.0 0.8 -2.5 -1.2 Dairy products -2.0 -0.7 2.3 0.6 -2.3 -2.3 Flour & bakery products -2.1 -1.0 2.2 0.6 -2.3 -2.2 Other Food/Beverages (a) -2.5 -0.4 1.9 0.7 -2.6 -0.8 Beer&malt -2.0 0.6 2.2 0.8 -2.4 -1.8 Wine&spirits -1.5 0.3 2.2 0.9 -2.2 -2.4 Tobacco products -1.8 0.2 2.4 0.4 -2.1 -3.3 TCF -2.1 -1.5 2.2 0.0 -2.0 -2.7 Hospitality -1.0 0.6 3.1 -4.3 n.a. n.a. (a) Input-output codes 2103, 2104, 2107, 2108, 2109. (b) Prices expressed in $A. Because the $A appreciates by 2.80% in this scenario, where the $A price for exports falls by less than this,


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6.5 Replacing Diesel Excise With A GST Table 6.5A below shows the long-term effects on prices and output arising from replacement of all diesel fuel excise with a GST, assuming that the exchange rate remains fixed. Table 6.5B shows the price/output effects on the assumption that the exchange rate adjusts to leave the balance of trade unchanged. The main results in the fixed exchange rate scenario are as follows: • In general, prices of output used as intermediate inputs falls, as do export prices, while

prices of supply used for final consumption increase. • On average, agriculture records a similar reduction in input prices and a slightly larger

export price reduction than the all-industry average, and faces a similar increase in prices for final consumption in Australia.


• On average, agriculture records a slightly smaller reduction in production allocated to domestic consumption than the all-industry average, and a larger increase in exports, although the results for individual industries vary substantially depending upon assumed demand elasticities. As far as 'downstream' food and other products are concerned, the indirect output effects for agriculture are often somewhat smaller than the all-agriculture average.

• There is a significant strengthening (move into surplus) in Australia's trade balance. Table 6.5A Replacing Diesel Fuel Excise With A GST, AE-CGE Model. Long-Term Price And Output Effects (Purchasers' Prices Per Cent Change). Required GST Rate = 1.27%. Fixed Exchange Rate. Input-Output Code Supply allocated to: Intermediate Use Final consumption Exports Price Output Price Output Price Output Sheep -1.1 0.3 -0.2 -1.4 -0.7 1.3 Grains -1.7 -0.5 -0.5 -0.3 -0.9 7.5 Beef cattle -1.0 0.6 0.2 0.0 -0.6 5.1 Dairy cattle -0.6 -1.0 0.8 -4.8 n.a. n.a. Pigs -0.9 0.6 0.5 -1.3 -0.5 4.1 Poultry -0.4 0.5 0.7 -0.4 -0.3 2.8 Sugar cane -0.8 0.0 n.a. n.a. -0.4 3.7 Cotton -0.8 2.0 n.a. n.a. n.a. n.a. Other -0.8 -0.8 0.6 -0.7 -0.5 4.3 All agriculture average -1.0 -0.1 0.6 -0.7 -0.8 4.7 All industry average -1.0 0.6 0.7 -0.9 -0.6 4.3 Meat products -1.0 -0.6 0.5 -1.6 -0.6 3.1 Dairy products -0.6 -0.9 0.7 -2.5 -0.4 1.8 Flour & bakery products -0.4 -1.3 0.9 -2.3 -0.2 1.0 Other Food/Beverages (a) -0.7 -0.4 0.7 -1.2 -0.5 2.6 Beer&malt -0.5 -1.4 0.6 -2.3 -0.3 1.8

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Wine&spirits -0.2 -0.3 0.9 -3.1 -0.2 1.1 Tobacco products -0.2 -2.5 1.1 -2.6 0.0 0.2 TCF -0.1 0.0 1.1 -0.6 -0.1 0.4 Hospitality 0.0 0.3 1.2 -2.5 n.a. n.a. (a) Input-output codes 2103, 2104, 2107, 2108, 2109. n.a. Allocation of supply to this use is zero in the data base.

Under the flexible exchange rate scenario: • The $A appreciates significantly to choke off any change in the balance of trade. • Overall, price reductions/increases in $A terms are larger/smaller, and quantity


shifts slightly against agriculture: agriculture records a slightly smaller increase in export volumes than the economy as a whole, and agriculture faces a slightly smaller increase in supply allocated to final consumption within Australia than the all-industry average.



Table 6.5B Replacing Diesel Fuel Excise With A GST, AE-CGE Model. Long-Term Price And Output Effects (Purchasers' Prices Per Cent Change). Required GST Rate = 1.27%. Flexible Exchange Rate(b). Input-Output Code Supply allocated to: Intermediate Use Final consumption Exports Price Output Price Output Price Output Sheep -1.7 -0.6 -0.8 1.2 -1.4 -0.2 Grains -2.1 0.4 -1.0 0.5 -1.9 2.8 Beef cattle -1.7 0.2 -0.5 0.9 -1.6 1.0 Dairy cattle -1.4 0.2 0.1 -1.1 n.a. n.a. Pigs -1.6 0.2 -0.2 1.1 -1.5 0.0 Poultry -1.1 0.2 0.0 0.0 -1.4 -1.1 Sugar cane -1.6 0.2 n.a. n.a. -1.6 0.5 Cotton -1.6 0.0 n.a. n.a. n.a. n.a. Other -1.6 0.0 -0.1 0.2 -1.5 0.2 All agriculture average -1.7 0.1 -0.2 0.2 -1.7 1.3 All industry average -1.8 0.4 -0.1 0.3 -1.6 1.8 Meat products -1.5 -0.4 -0.1 0.7 -1.5 0.1 Dairy products -1.3 0.1 0.0 0.7 -1.4 -0.5

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Flour & bakery products -1.1 -0.2 0.2 0.3 -1.2 -1.4 Other Food/Beverages (a) -1.5 0.1 -0.1 0.5 -1.5 0.0 Beer&malt -1.2 0.6 -0.1 0.8 -1.4 -0.4 Wine&spirits -1.1 0.2 0.1 0.7 -1.3 -0.9 Tobacco products -1.1 0.2 0.3 0.3 -1.2 -1.8 TCF -1.2 -0.8 0.2 -0.1 -1.1 -1.6 Hospitality -0.6 0.3 0.5 -1.1 n.a. n.a. (a) Input-output codes 2103, 2104, 2107, 2108, 2109. (b) Prices expressed in $A. Because the $A appreciates by 1.54% in this scenario, where the $A price for exports falls by less than this,


6.6 Summary Assessment Allowing for longer term economy-wide price and output effects, but assuming that the exchange rate does not vary, the ranking obtained from Section 5 varies somewhat: • In terms of the absolute magnitude of cost burdens and supply effects, on average







agriculture is best served by abolition of all diesel fuel excise. • Abolition of FID/BAD taxes is likely to be the second best option. • Abolition of all petroleum product excises is likely to be the third best option. • On the same basis, abolition of payroll tax only is the least attractive option for

agriculture. • In terms of the relative benefits for agriculture versus the all-industry average, on

average agriculture is best served by abolition of all diesel excise, because this offers a broadly similar benefit for agriculture price and supply to the all-industry average. Abolition of FID/BAD taxes ranks second on this basis, with abolition of all petroleum product excise third.


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Given that WST is the most likely candidate for abolition if a GST is to be introduced (and there are good reasons for this in order to reduce a particular tax bias against manufacturing), the indirect tax reform package would be made more attractive for agriculture if petroleum product excise, or excise on diesel, plus FID/BAD taxes, are also abolished.

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7. Concluding Observations The results presented in this report in general are consistent with what one would expect given knowledge of the existing indirect tax burden faced, directly and indirectly, by agriculture. If tax reform entails replacing indirect taxes that fall relatively lightly on the farm sector with a GST, it is likely that the benefits from that change will go more to other industries than to agriculture. But if tax reform entails replacing indirect taxes that fall more heavily on the farm sector with a GST, it is likely that the benefits from that change will be shared more evenly between agriculture and other industries. Consistent with these guidelines, agriculture gains more, both absolutely and relative to other industries, from abolition of petroleum product excise or excise on diesel, particularly when allowance is made for 'downstream' cost/price effects in the distribution chain. It gains less than other industries from abolition of WST. In the longer term, the magnitude of gains from the various indirect tax reform scenarios assessed in this report - and not just to agriculture - will depend heavily upon how the exchange rate adjusts. If export cost reductions induce a large improvement in the balance of trade, that, in turn, is likely to induce some appreciation in the value of the $A which, in turn, will cut back some of the increase in production that would otherwise occur.

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Postscript

Following the release of the Coalition Government's tax reform package on 13 August 1998, Access Economics reviewed its likely effects on the farm sector using its input-output database and the AE-CGE model. These results were compared with the detailed industry cost- and price effects reported in the Government's tax reform package and based on Treasury's PRISMOD.i In broad terms, the cost and price effects we obtained were similar. After discussing the detailed approach used by the Taxation Task Force with Ken Henry of Treasury, we believe that the PRISMOD results are sound. They are based on the same tax incidence assumption as our own modelling. They are probably superior in that the allocation of existing and proposed indirect taxation burdens has been undertaken by Treasury, and Australian Taxation Office staff, and is almost certainly superior to the published input-output tables and, by virtue of the resources allocated to the task, superior to our own efforts at correcting some of the more glaring errors (eg, in relation to diesel excise burdens - see Attachment A). In addition, the precise treatment of the diesel excise reductions is not simply a matter of reducing diesel excise rates, even just for business use. Rather allocation between road and rail use, and other uses, is needed. There are other complications associated with the proposed tax treatment of tobacco, as well as the proposed introduction of a luxury car tax, and the precise allocation of the various State/Territory stamp duties that are proposed for abolition. Given that our broad results are similar to those estimated using PRISMOD, and in view of Treasury's superior access to detailed data (including the allocation of indirect tax burdens down to the 1200 commodity level of disaggregation), we conclude that the results published in the Government's tax reform documentation are probably as good as can be obtained given the data available. These include a detailed breakdown of the farm sector. As to longer term price/output effects, again these will be influenced significantly by what happens in response to price changes, including changes to the exchange rate (although, on that score, international developments now building seem likely to dominate). As the Government puts it in its tax reform document:

'... it is considered very unlikely that exporters would receive lower world prices for their products simply because their costs fall as a result of tax reform. Instead, the assumption is that lower costs for exporters will be reflected in a moderately stronger exchange rate over time.' (page 161)

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Attachment A

Data Problems And Assumed Solutions

Costs For Sugar Cane And Cotton ABS input-output data represent agriculture as seven separate industries, each producing a single product. The ABARE Farm Surveys present average receipts and average expenditures per farm for various agricultural sectors. They include sales and costs for production of some commodities which are outside the main industry. The difficulties with using ABARE data to generate input-output data are: • multi-product production in the ABARE data • different cost classifications which make it difficult to map ABARE data into input-

output categories • ABARE values are expressed in purchasers' prices (ie, basic value + commodity taxes

less subsidies + transport and trade markups), whereas we need input-output data expressed in basic values. We converted purchasers' prices to basic values using the ratios of basic values, taxes and markups to purchasers' prices which are contained in the input-output data.

• ABARE costs include costs of selling, eg transport to saleyard or silo, whereas input-output data calculates margins only on inputs and excludes margins on outputs. Input-output costs on outputs stop at the farm gate; the buyer is shown as paying for the rest.

• Because ABARE data are assembled at the farm level rather than the industry level, they contain allowances for sharefarming arrangements on both incomes and expenses.

• Input-output data are for 1993-94 but ABARE data are not always available for 1993-94. This is not a major problem because cost shares do not vary much from year to year, providing poor years such as 1994-95 are avoided.

We have derived cost shares for each of the input-output industries and all the ABARE industries used in the annual farm surveys, as well as sugar cane and cotton. Because of the differences between the cost categories used by ABARE and in the input-output data, direct comparisons can be made for only some cost items, such as fuel, fertilisers, other chemicals, wages+gross operating surplus (GOS - including imputed wages, profits and depreciation). The split between wages and GOS is complicated because imputed wages may be treated as wages in some cases. The cost shares for cotton are based on data provided by Cotton Australia. They are averages over the five years to 1996-97 and exclude dry-land cotton. The Cotton Australia cost shares agree well with the ABARE cost shares. When the cost shares are converted to values by multiplying by the values of Australian production for sugar cane and cotton, and then subtracted from other agriculture, a few residual values for 'the rest of other agriculture' are negative. We set these to plausible positive values without making compensating adjustments elsewhere.

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Comparison of ABARE and input-output cost shares reveals differences in some cost shares. Where there are significant differences, such as for fuel costs, we have used the ABARE data. But it is necessary to convert such data into input-output form because that is the framework underlying our analysis. Data for all the other industries is in the input-output format, and our price analysis is based on the concept of basic values that underlies the input-output tables. Furthermore, the annual ABARE farm surveys do not cover poultry, pigs and other agriculture. Petroleum Products Costs To Agriculture For the purposes of this analysis we have attempted to separate petroleum products into diesel and other, in recognition of the importance of the diesel fuel rebate and the need to assess the effects of abolishing excise on diesel only as one reform scenarios. We have approximated diesel by input-output commodity item 25100030, of which about two thirds is diesel. Costs of petroleum products, separated into diesel and other, and allowing for fuel excises, fuel franchise fees and diesel fuel rebates, are important pieces of data for this exercise. In order to get the story right for agriculture we have to get it at least approximately right for other sectors as well. Table 1 compares ABARE estimates of petroleum products shares of total costs with those in the 1993-94 input-output tables. Table 1 Petroleum products cost shares Original

Input-output Original

Input-output ABARE ABARE ABARE

revised Basic values

1993-94 Purchasers

prices Purchasers

prices before rebate

Year p denotes

preliminary

Purchasers prices after

rebate see Table 6

% % % % Sheep 3.5 6.2 5.6 1995-96p 3.8 Grains 4.9 9.7 5.4 1995-96p 3.8 Beef cattle 4.0 7.4 5.1 1995-96p 3.4 Dairy cattle 2.3 4.1 1.9 1995-96p 1.3 Pigs 2.8 4.9 1.0 Poultry 1.8 2.5 1.0 Other agriculture 2.6 5.0 1.5 All agriculture

3.4

6.4

All broadacre 5.5 1995-96p Mixed livestock-crops

6.2 1995-96p

Sheep-beef 4.7 1995-96p Sugar cane 5.4 1993-94 4.5 Cotton 5.2 1996-97p 4.0

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The input-output fuel cost shares are calculated as the ratio of 'petroleum products' inputs to the value of 'Australian production', using the original input-output data. Assuming that wholesale and transport markups add to about one third of the basic value, there is still an appreciable amount of net tax even though there is no net tax on diesel fuel used off-road. We do not have sufficient information to construct fuel cost shares, at purchasers' prices, using the revised input-output data, but they will be lower than those shown in Table 1 because of the effect of the increased allocation of the diesel fuel rebate to these industries. The ABARE fuel cost shares are calculated as the ratio of 'fuel, oil and grease' to 'total costs plus GOS' which is a concept similar to Australian production. The ABARE costs include freight and marketing costs that are not included in the input-output measures. Accordingly, to enable better comparison with input-output shares, we have reduced ABARE total receipts by 3%. Comparisons between cost shares (at purchasers' prices) based on original input-output data and ABARE data are complicated by the ABARE fuel cost referring to the value before subtraction of the diesel fuel rebate. (The diesel fuel rebate is included in ABARE data for 'other receipts', although ABARE finds that the response to the rebate question is typically only 80% of the amount expected. Some rebate may be netted out from fuel costs, some may not be claimed, and some of the difference may be due to differences in timing between paying the excise and receiving a rebate under conditions of increasing excise rates.) The ABARE cost shares, after receipt of the rebate, will be lower than those shown in Table 1. If it is assumed that the markup is one third of the basic value, and that the excise is 1.2 times the basic value and that all fuel used is diesel, then the value after rebate is about half of the tabulated ABARE value and the basic value is about 0.4 of the tabulated ABARE value. Even with relaxation of these assumptions the ABARE fuel cost shares, at basic values, are lower than the input-output fuel cost shares. The final column of Table 1 shows the cost shares, at purchasers' prices, that we have derived from the ABARE data and used in our analysis. Fuel Excises To understand our problems it is necessary to understand how ABS constructs each row of the input-output table. It divides petroleum products into seven commodity items and then calculates taxes and subsidies for each by assuming that the total can be allocated along the row in proportion to the basic values, ie, the same rate of tax or subsidy applies along the row. While this may be a reasonable approximation for most commodities, it creates serious problems for petroleum products because some of the items contain products with greatly different Commonwealth excise rates that are used in quite different proportions in different industries. This is the case for two major items. Commodity item 25100010 comprises unleaded petrol (average excise 29.5 cents per litre in 1993-94), leaded petrol (29.9) and aviation turbine fuel (0). Commodity item 25100030 comprises diesel (29.5), fuel oil (7.9) and heating oil (7.9). These excise rates are averages derived from data in Budget Paper No. 1 for 1993-94 and 1994-95. The Industry Commission (IC) provides slightly higher values for February 1994 (see Industry Commission, Petroleum Products, Report No. 40, 5 July 1994, p.254). It should be noted that commodity taxes include state fuel franchise fees.

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These are typically of the order of 7 cents per litre, except for Queensland where they are zero. The weighted average of the state values (see IC, page 254) is about 6.5 cents per litre. Table 2 Refining petroleum production volumes and estimated excises, 1993-94 Million litres Excise rate

cents/litre Excise

$m 25100010 Automotive gasoline 17,727 29.5 5,229 Aviation turbine fuel 4320 0 0 25100020 Kerosene 7.9 25100030 Fuel oil 2,263 7.9 179 Automotive diesel oil 11,063 29.5 3,264 Industrial & marine diesel oil 95 7.9 8 25100040 Bitumen 662 Total 9,178 Source: ABS 8368.0 (production).

In Table 2 these excise rates are applied to production volumes to generate estimates of excise revenue. The total excise revenue and its components agree fairly well with the Budget Paper figure presented after Table 4 below. In the case of 25100010, we assume that all the aviation turbine fuel is used by the air transport industry. Hence, based on the assumption that total excise is unchanged, use of the average excise rate for 25100010 grossly overstates the fuel tax on air transport, and understates the taxes on all other industries. Based on litres of fuel (see Table 2), the tax on 25100010 in industries other than air transport should be about 24% higher than it is in the current input-output data. However, the input-output data are not consistent with the Table 2 data for aviation turbine fuel, which are in turn based on ABARE data. The input-output data suggest a more realistic overall increase of about 5%. In the case of 25100030, taxes on those industries that use mostly diesel fuel (and little fuel oil or heating oil) are understated, while taxes on many other industries must be overstated. In addition, diesel fuel used for off-road use in agriculture receives a full rebate of excise paid while for mining the rebate is about 91 per cent. Our analysis requires a separation of the purchasers' price, ie' the pump price, of petrol and diesel fuel into basic value, markups (for wholesale & retail and transport separately) and fuel taxes (Commonwealth excise and state fuel franchise fees). We require averages across Australia for 1993-94. Apart from the variations in all these components over time, markups and franchise fees vary considerably across states and regions. There was little difference between tax rates on petrol and diesel in 1993-94; we assume that they were equal. The input-output data indicate that the ratio of wholesale and retail markups to basic value for petroleum products was 0.34 for all industries but only 0.23 for agriculture;

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we assume 0.25. The input-output data indicate a ratio of road transport margins to basic value across all industries of 0.05. We have used a transport to basic value ratio of 0.10 for agriculture and mining to allow for the greater transport costs to country and remote areas. The Industry Commission (p.256) gives the ratio of taxes to basic values and markups as 1.08 for NSW. Using a tax of 36 cents per litre and a markup to basic value ratio of 0.35 gives a basic value price of 24.69 cents per litre. We have chosen to use a basic value price of 24 cents per litre for both petrol and diesel. This gives Basic value (bv) 24 c/litre Markup (= 0.35 bv) 8.4 c/litre Tax (= 1.5 bv) 36 c/litre (excise 29.5, fuel franchise fee 6.5) Purchasers' price 68.4 c/litre Diesel fuel rebate In response to queries by Access Economics and others, ABS revised its allocation of subsidies (ie, diesel fuel rebates) for 25100030. The basic value use of petroleum products by each industry is unchanged. Net commodity taxes on agriculture, forestry, fishing and mining are set to zero, which implies that all 25100030 used in these industries is off-road diesel. Rebates totalling $1,014m balance taxes of $1,014m. The total net commodity tax ($1,388 million) is then allocated across industries in proportion to basic values. Total taxes (gross) are thus $2,402 million. The total diesel fuel rebate and its allocation across broad sectors are in reasonable agreement with Australian Customs Service (ACS) data for 1993-94, although input-output (IO) data has larger rebates to forestry and fishing and a lower rebate to agriculture. Table 3 Diesel fuel rebates ACS rebate

$m ACS rate

c/lIO rebate

$m IO BV

$m Rebate/BV

Agriculture 355.0 28.3 318.9 471.9 0.676 Forestry 29.7 28.8 49.5 73.2 0.676 Fishing 76.7 28.4 89.3 132.2 0.676 Mining 560.5 26.3 556.1 240.3 2.314 Residential 14.0 Other 2.8 0.4 Total 1,038.6 27.1 1,014.3 However, the process by which ABS corrected the allocation of diesel fuel rebates across industries created some problems and inconsistencies, as shown by the ratios of rebate to basic value (BV) in the last column in Table 3. These values should be considered against a diesel fuel basic value price of about 24 cents per litre and a Commonwealth excise rate of about 30 cents per litre, corresponding to a rebate to basic value ratio of about 1.2. The agricultural and mining industries inform us that the proportions of diesel fuel which do not qualify for the rebate are small, say less than 20%. On this basis, the tabulated ratio of 2.314 for mining is impossibly high and the tabulated ratios of 0.676 for agriculture, forestry and

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fishing are too low. Even if our assumptions were wrong all the ratios should be approximately equal. Based on the ratio of rebate to basic value, the diesel fuel rebate of $318.9 million for agriculture corresponds to a basic value of about $318.9/1.2 or $266 million for off-road use of diesel fuel. This is much less than the $471.9 million in the input-output table. Similarly, the diesel fuel rebate of $556.1 million for mining corresponds to a basic value of ($556.1/0.91)/1.2 or $427 million for off-road use of diesel fuel. The total use of diesel would be greater if only some diesel were used off road. The input-output data contains only $363 million for all petroleum products used in mining. In examining why mining has a much higher ratio of rebate to basic value than agriculture, we found that 'mining' has different meanings for ABS and ACS. Some of the rebate to 'mining operations', as classified by ACS, is to railway transport of minerals and to mineral processing within the industry that ABS classifies as 'basic non-ferrous metals etc'. Table 4 Summary of input-output data for petroleum products, $m Diesel

25100030 Other petroleum

products Petroleum

products Diesel share

Basic value ($m) 3459 8425 11884 0.291 Fuel commodity taxes (gross) 2402 7447 9849 0.244 Subsidies 1014 0 1014 1.000 Net tax 1388 7447 8835 0.157 Gross tax/BV 0.694 0.884 0.830 Table 4 summarises the totals for the petroleum products entries in the 1993-94 input-output table. It is based on the revised data for diesel and the original data for the totals. Budget Paper No. 1 for 1994-95 (page 4.24) contains the following revised 1993-94 estimates for excise duty on petroleum products. Motor spirit 5,245 Diesel 3199 Other 133 Total 8,578 These values are gross of rebates. They are estimates because the budget was presented in May 1994, before the end of 1993-94, but the ratios of motor spirit (ie, petrol) to diesel are consistent with adjoining years. Addition of state fuel franchise fees at 6.5/29.5 or 22% of the excise increases taxes on motor spirit to $6,399 million. After subtracting diesel fuel rebates of $1,039 million, net taxes on diesel are $2,160 million plus 22% for state franchise fees, giving a total of $2,635 million. Total net taxes are thus $6,399 million plus $2,635 million plus $133 million, ie, $8,692 million. This is close to the input-output value of $8,835 million shown in Table 4 above. We find that net taxes on diesel are about $2,160 million whereas the input-output data show them to be $1,388 million, or a little less if scaled to agree with the total of $8,692 million.

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This suggests that $772 million of taxes on 'other petroleum products', which includes petrol, should be transferred to 25100030, which includes diesel fuel. This transfer should be increased by the amount of the other excises ($133 million) that applies to fuel oil, which is probably most of it. In summary, the input-output net taxes on 25100030 should be increased by nearly $1 billion and the net taxes on 25100010 reduced by a corresponding amount. ABARE estimates of fuel use by industry ABARE has estimated fuel use by industry. Values for the components of 25100030 are summarised in Table 5. Table 5 ABARE estimates of annual energy use by industry, petajoules, 1993-94 Heating

oil Automotive

diesel oil Fuel

oil Total

Excise c/litre 7.9 29.5 7.9 Agriculture, forestry,fishing

0.06 52.45 52.51

Mining 41.82 1.52 43.34 Metal products 2.86 29.54 32.40 Other mfg 0.06 3.31 5.35 8.72 Transport 242.16 32.61 274.77 Other 4.67 71.42 5.02 81.11 Total 4.79 414.02 74.04 492.85 Source: Shane Bush, Jane Harris and Luan Ho Trieu, ABARE research report 97.2, Australian energy consumption and production, historical trends and projection to 2009-10.

Assuming that basic value prices per unit of energy are the same for all three fuels, these data suggest that diesel accounts for about 84% of basic value sales in 25100030 (compare ABS rough estimate of two thirds). Given that the energy content of diesel is 38.6 MJ/litre, 414 PJ corresponds to 10,725 Ml which is close to the ABS Cat. No. 8368.0 value of 11,063 Ml. Note that agriculture and mining usage of 25100030 is almost entirely diesel. Agriculture, forestry and fishing accounts for 10.7% of total 25100030 use, and mining accounts for 8.8 %. Table 5 above shows that ABARE finds that only a small amount of diesel is used in the metal products industry, ie, mineral processing. This suggests that only a small proportion of the ACS diesel fuel rebate for mining should be allocated to use by the metal products industry. The (Assumed) Solutions In order to resolve the various inconsistencies between ABS input-output data and other sources of information, we decided to generate our own petroleum products data for agriculture, forestry, fishing and mining. We also recalculated the commodity taxes less subsidies on inputs of petroleum products into all other industries and into final demands. We assumed that the input-output table entries at basic values for inputs of petroleum products are correct except for inputs of petroleum products to agriculture, forestry, fishing and mining.

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We have made the changes via the following steps. (1) Calculate basic values, ctls (commodity taxes less subsidies) and markups (wholesale and transport) for 25100030 (diesel fuel and fuel oil) and other petroleum products, for each of agriculture, forestry, fishing and mining. Perhaps the firmest piece of data is the value of the diesel fuel rebate. While we have not used it as an input, we have required the total diesel fuel rebate to be close to the Australian Customs Service (ACS) value. The calculation is driven by the purchasers' price-based share of fuel costs in total costs. Other ingredients are fuel cost shares, ratios of non-rebatable diesel and petrol (litres) to rebatable diesel (litres), and ratios of excise and markups to basic values. For these items: • The purchasers' prices-based fuel cost share is derived from ABARE data by subtracting

our estimate of the rebate that is still included in the reported fuel costs. The rounded values are our educated guesses.

• The ratio of non-rebatable diesel (litres) to rebatable diesel (litres) - dieseln/dieselr - is assumed to be less than 20%, based on industry opinion.

• The ratio of petrol (litres) to rebatable diesel (litres) - petrol/dieselr - is also assumed to be small, based on industry opinion. The values for sheep, grains and beef are based on rough ABARE data. The other values are our guesses.

• The diesel fuel rebates are our estimates. The sum across agriculture, including services to agriculture, is $389 million, 10% higher than the ACS value and 22% higher than the input-output value. We assume that about $30 million of the ACS mining rebate of $556 million is paid to the industry groups 'metal products' and 'railway transport'.

Table 6 summarises the assumed values. Table 6 Assumptions underlying the fuel data calculations for primary industries Fuel cost

share pp Excise/

bv Markup/

bv Dieseln/

dieselr Petrol/ dieselr

Rebate $m

Aust prodn $m

Sheep 0.0378 1.500 0.35 0.15 0.25 64 2810 Grains 0.0375 1.500 0.35 0.15 0.08 122 4340 Beef 0.0344 1.500 0.35 0.15 0.25 84 4041 Dairy 0.0126 1.500 0.35 0.15 0.20 20 2448 Pigs 0.0100 1.500 0.35 0.15 0.20 4 598 Poultry 0.0100 1.500 0.35 0.15 0.20 7 1118 Sugarcane 0.0448 1.500 0.35 0.15 0.20 27 943 Cotton 0.0396 1.500 0.35 0.15 0.20 16 642 Other ag 0.0150 1.500 0.35 0.15 0.50 32 4609 Services to agriculture

0.0100 1.500 0.35 0.15 0.20 13 1988

Forestry & fishing

0.0392 1.500 0.35 0.15 0.20 89 3570

Mining 0.0208 1.365 0.35 0.05 0.10 531 32864 We assume that petrol and diesel are the only petroleum products used significantly in these industries; other petroleum products are ignored.

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(2) We estimated commodity taxes less subsidies (ctls) on other petroleum products, which is dominated by petrol, using a total of $6,532 million based on Budget Papers data. This includes all of the $133 million for other excises, although most of this should probably be allocated to 25100030. The value of $6,532 million is $915 million less than the corresponding input-output value. (3) We calculated ctls on 25100030, which is dominated by diesel, using a total of $2,160 million, which is based on Budget Papers data. This is $772 million more than the corresponding input-output value. (4) We recalculated ctls for inputs of other petroleum products to all users except agriculture, forestry, fishing and mining. It is assumed that other petroleum products are taxed at the petrol rate. The ctls for the input to air transport was divided by 9, effectively reducing the average tax rate to 4 cents per litre. Then all inputs, including the revised air transport input, but excluding agriculture, etc., were multiplied by a common factor of 1.075 so as to achieve the desired total ctls. (5) We recalculate ctls for inputs of 25100030 to all users except agriculture, forestry, fishing and mining. It is assumed that 25100030 is taxed at the diesel rate. We multiplied ctls for the input of 25100030 to 'metal products', which includes iron and steel, non-ferrous metals (including alumina) and three other metal products industries, by 0.36 to allow for the lower excise rate on the large proportion of diesel fuel in this industry. Next we multiplied the ctls for inputs of 25100030 to other manufacturing industries by 0.6 to allow for a different proportion of diesel fuel use. We assumed that the full rate applied for the services sector and final demands. Finally, we multiplied all inputs, including the revised inputs for manufacturing industries but excluding agriculture, etc., by a common factor so as to achieve the desired total ctls. i See Tax Reform: not a new tax a new tax system the Howard Government's Plan for a New Tax System,

Chapter 5, especially pages 155-161 and the detailed tables at pages 165-172.

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