With retail oil prices soaring here, led by the recent surge in international crude prices, there are growing calls for cutting domestic fuel taxes to ease the burden on households and small businesses. Last week, the retail price for gasoline surpassed 1,700 won ($1.44) per liter on average nationwide, the highest in seven years.
It was against this backdrop that Rep. Hong Jung-min of the ruling Democratic Party of Korea raised the need for a 15 percent cut in fuel taxes during the National Assembly's inspection of government offices Friday. There is little wonder that politicians are calling for lowering taxes, given that previous governments used to cut fuel taxes when oil prices reached these levels.
Under the Traffic, Energy and Environment Tax Act, the government slaps 475 won and 340 won per liter in transport taxes on gasoline and diesel, respectively. But the law stipulates that these tax rates can be adjusted within the range of 30 percent, so currently the transport taxes imposed on gasoline and diesel are 529 won and 375 won. Fuel taxes are comprised of transport taxes plus mileage and education taxes.
Fuel taxes were lowered temporarily three times ― in 2008, 2010 and 2018 ― under the flexible rate system. In 2008, fuel taxes were cut when the gasoline price rose to 1,666 won a liter. The recent spike in crude prices is unlikely to be long-lasting, but temporary tax cuts deserve serious study, considering those hit hard by the COVID-19 pandemic.
True, cutting fuel taxes will negatively affect the country's push for carbon neutrality. Yet there's no need to worry too much because tax cuts will hardly affect consumption. The question is how much to lower fuel taxes. Now might be the opportune time to make fuel taxes flexible by linking them to crude oil prices. That will surely serve the best interest of customers by cushioning the shock and minimizing uncertainties.