EXECUTIVE SUMMARY

The Environment

The Committee believes that the Government's proposed new tax system would take Australia backwards in its impact on the environment, and represents the loss of a rare opportunity to change the tax system and implement reforms that would result in greater ecological sustainability. In the face of Australia's failure to implement ecological tax reform to date, and the far-reaching implications of global ecological threats, the need for tax reform which has enhanced environmental objectives has never been greater.

Ecological tax reform has been embraced in several OECD countries but if the new tax package were to proceed, Australia would be the only country in recent times to introduce a net reduction in taxes and charges for fuel and energy.

The Committee heard compelling evidence that the proposal would deliver higher levels of pollution and waste, and act to discourage the growth of more sustainable practices, including:

a significant increase in greenhouse gas emissions;
increases in some major air pollutants, especially in urban areas, with associated health costs;
loss of market share for solar energy products and services in favour of unsustainable energy sources;
increased demand for road freight at the expense of rail freight, with significant increases in greenhouse gas emissions and other pollutants as a result;
the collapse of the gaseous fuels industry;
a general increase in business transport and a shift to diesel within that away from petrol;
increased demand for private motor vehicle use at the expense of public transport; and
an overall increase in the energy and resource intensity of the Australian economy.

Environment Australia told the Committee that the government's environmental objectives were not changed by the tax reform proposals. Environment Australia argued that the proposed new tax system would improve the robustness of economic sectors and so enhance their capacity to manage any economic adjustment in response to environmental policies. The Committee rejects this view.

There was no evidence of consultation between Environment Australia and Treasury on the subject of the tax package. The Committee found it extraordinary that proposals with such profound implications for the environment should be developed without reference to the relevant Commonwealth department, and appears to indicate how little consideration has been given to environmental concerns.

The Government's proposed tax reforms run counter to the spirit of the International Framework Convention on Climate Change and the Kyoto Protocol, and contradict the Government's own stated policies in a number of areas. The Government does not appear to have taken climate change considerations into account. The tax package sends a powerful message to the international community that Australia does not consider greenhouse issues to be of central importance to the nation's future or, for that matter, to the world's.

Reduction in Diesel Fuel Excise

The tax package would provide a substantial incentive to people to use more environmentally polluting modes of transport, the opposite direction from the one in which transport policy should be moving.

International studies clearly demonstrate that taxes on fuel should be increased in order to internalise the environmental costs produced by the transport industry and that the biggest increase ought to apply to diesel fuel because, at least in urban areas, it has the most damaging effect on human health. The tax package, by reducing the price of the one fuel that the scientific consensus suggests we should be doing most to discourage, does the opposite.

The diesel currently imported to Australia has a high level of sulphur and results in a much higher level of particle emissions than gaseous fuels. According to National Environment Protection Council estimates, 1,062 people die each year from particulate exposure. The Committee heard conservative estimates that at least 65 more people would die each year in Australia as a result of the increase in urban air pollution and traffic accidents if the GST package goes ahead as proposed. These would be predominantly young children and the elderly.

Medical evidence linking particulates from diesel engines with conditions like asthma are translating into social costs which some reports rate as high as $2 billion per year.

The Committee found the evidence presented on the health impacts of diesel fuels profoundly disturbing. There is a significant problem to be addressed in relation to the current level of diesel use, let alone the likely further impacts which would follow from a lowering of the diesel excise and the resulting disincentive to convert to other fuels.

Gaseous Fuels

There is currently a considerable incentive to change from highly taxed liquid fuels to tax-free gaseous fuels (mainly LPG but to some extent CNG). The Government acknowledges that there are compelling economic and environmental reasons to continue to support the development of the gaseous fuels industry, and it is clear that the Government's tax proposals would have a serious impact on that industry. The price differential between gaseous fuels and conventional fuels would narrow substantially, to the point where a significant part of the industry would collapse, with the loss of jobs and of a rapidly growing export industry. Support for this industry in its formative stages would result in Australia:

achieving cleaner air;
going some way towards meeting its international emission reduction commitments;
providing choice and efficiency for transport operators;
maximising the utilisation of existing energy infrastructure; and
reducing Australia's dependence on imported fuels.

In the early 1980s, the New Zealand Government embarked on a program to introduce gas as an alternative fuel for vehicles. After reaching a level of world's best performance, the sudden removal of the price differential between gas and diesel saw a dramatic reduction in gaseous fuel use. The New Zealand Government has since reintroduced diesel tax increases.

The Committee heard evidence that government and private bus operators in Sydney, Brisbane, Perth, Adelaide and Geelong were reviewing plans to move to gas powered bus fleets as a result of the Government's proposed diesel excise reductions, because of the considerable savings to be gained from continuing to use diesel. A bus fleet of Brisbane's size, performing the same task but fuelled by CNG, would generate 28 per cent less CO2, and using LPG 30 per cent less, as well as lower emissions of dangerous particles. The costs to the environment, and to human health, of the tax package would be significant.

In heavy transport, engines, including large engines, are now available which can run either dedicated CNG, or to a high degree of CNG substitution. Vehicles which can operate with these engines have been successfully developed in very recent times. The tax package would discourage any move towards the use of these vehicles.

Road and Rail Transport

The Committee found the evidence in relation to the effect of the proposed change in diesel excise on road and rail transport unequivocal. There would be a very significant increase in road transport at the expense of rail, with serious consequences in a number of areas.

Diesel use in rail transport is at least three times more efficient per tonne kilometre than in road transport. The submissions and evidence received by the Committee suggested that the impact of the proposed new tax system is likely to foster road freight at the expense of rail, with serious consequences. The Government's proposals would:

shift ten per cent of inter-state freight from rail to road;
cause the cessation of some interstate rail services;
increase heavy vehicle traffic and increase the potential for truck-related crashes;
increase fuel usage and greenhouse gas emissions; and
increase road congestion.

Modal shift to road because of the proposed changes to diesel fuel excise would cause an additional 500 to 600 semitrailer movements per day between east coast capital cities. This would increase transport fuel use and greenhouse emissions and would increase pressure for federally funded road improvements.

Heavy road transport users pay significantly less for roads than the damage they do. For example, one fully laden B-double vehicle causes as much damage as 20,000 cars.

Commonwealth funding for roads in the last twenty years has been more than thirty times what was allocated to intercity rail capital works. Rail track access fees are many times more, per gross tonne kilometre, than the charges that heavy truck operators are asked to pay for road access.

It would seem unjustified to tax diesel fuel for rail at the road rate when so little rail fuel excise is returned to rail track upgrading. Fuel excise aside, the charges for 1,000 tonnes of freight carried between Melbourne and Sydney by road are approximately $450, consisting largely of registration fees. The charges for access to rail infrastructure to carry the same freight are approximately $5,500. Current charges for heavier vehicles are quite inadequate to meet the costs of their impact on the road.

The Committee heard persuasive evidence in relation to the introduction of a genuine mass distance charge for the road transport industry. New Zealand has such a regime of charges.

The highest level of under-recovery of road costs is from heavy articulated vehicles, which are now the major competitors for rail freight. If articulated vehicles were to bear their full costs road transport costs would have to rise and this could produce a shift from road to rail.

Rail is already seriously disadvantaged by poorly maintained infrastructure and significantly higher charges and yet as a result of its greater efficiency is still able to compete with road in some areas. This ability to compete would be seriously undermined by the addition of a further disadvantage in the form of the diesel excise reduction and the imposition of a road user charge of 18 c/L.

Public Transport

There was general agreement in evidence to the Committee that the effect of the proposed tax package would be to increase private vehicle use in urban areas at the expense of public transport. All the work that has been put in over the past 10, 15 or 20 years to move people away from the private motor car would be eroded by the Government's proposals.

Australia already has very low public transport patronage, only one third that of European cities and one of the lowest in the OECD. Concessional tax treatment of public transport is common public policy in European VAT tax regimes, some countries providing GST-free public transport.

Renewable Energy

The proposed GST and tax package would further tilt an already steeply sloping playing field against sustainable energy. The renewable energy sector would be disadvantaged by the proposed system, with prices rising by six to nine per cent compared to 4.6 per cent for coal-fired electricity. The price of solar hot water systems would rise by around four per cent relative to the prices of similar gas or electricity hot water systems.

The renewable energy sector has significant export potential. Australia currently leads the world in solar electricity development, and the industry has the potential to generate revenue in excess of $1 billion per year.

The Committee found evidence in relation to the impact of the tax proposals on the renewable energy sector compelling. The industry is not only of major importance in reducing Australia's greenhouse gas emissions but also has the potential to generate significant export revenue.

Recycled Oil

The Committee was disturbed by the evidence it received in relation to waste oil and believes that there are profound implications for the environment if the tax package is implemented as proposed. There would be a massive increase in the volume of waste oil to be disposed of.

The Committee believes that consideration should be given to regarding waste oil as a retrievable energy source, the processing of which should attract appropriate government support.

The reduction in diesel fuel excise would bankrupt this industry and completely undermine the positive environmental impacts of the industry. Approximately 540 million litres of new oil was sold in 1996, of which about 149 million litres, or 28 per cent, was collected for recycling. The evidence also raised serious questions as to what is being done with the 390 million litres of waste oil that is currently not being recycled. Oil that is not recycled appropriately will find its way into the soil, the water table and eventually waterways, damaging terrestrial and marine vegetation and wildlife.

The Arts

The Committee believes that the Government's proposed new tax system would expose the arts and cultural industries to significant damage if the proposals were implemented unchanged. This could see losses of over $70 million across the sector in the first year, along with long term damage to the sector's artistic diversity, employment, training, morale, financial strength and creative vitality.

The arts currently face difficult circumstances. Individual artists suffer very low incomes, the performing arts face a sharply tighter market, and non-profit arts organisations face a difficult transition from a system in which they have enjoyed extensive tax exemptions. The recently announced Inquiry into the Major Performing Arts, to be chaired by Dr Helen Nugent, is an indication of the concern felt within the Government about the health of the performing arts, which an Australia Council study found had experienced a loss of $12 million in the past four years.

The arts have major significance for Australia's economy, cultural life and international image. The arts alone comprise more than $1 billion in gross value of output, and if cultural industries are more broadly defined the figure increases to $10 billion or more. Eighty per cent of Australians attend a cultural activity each year, and seven per cent of Australians earn some income from arts work. The arts and culture sector also provides a platform for the growth and prosperity of other industries such as publishing, education and arts training, advertising, tourism, film, media and information technology.

The Committee shares the concern of many witnesses about the lack of consultation between the Government and the arts community during the design phase of the new tax system. This lack of consultation has resulted in distortions in the draft legislation, arguably undermines the Government's more general cultural policy objectives, and exposes the sector to a very damaging impact which could have been avoided.

The Committee identified a range of concerns about the impact of the new tax system on the arts. They included:

the tax-exempt status of grants;
the impact on corporate sponsorship;
the impact on costs, including compliance and administrative costs;
the impact on prices and demand, and thus on the viability of artists and companies;
the operations of non-profit arts and cultural organisations; and
the dilemmas faced by artists in considering whether or not to register for GST purposes.
The Committee found that the design of the new tax system, and the draft legislation, fail adequately to take into account the unique nature of many arts businesses and the very different impact they would suffer in relation to other areas of the economy. These differences include:
the role of grants in sustaining artists and companies, particularly during the development of creative work;
the role sponsorships play in revenues;
the reliance on ticket sales and the relative inelasticity of prices;
the need to make investments well ahead of hoped-for revenues;
the fixed nature of investment costs regardless of later sales; and
the very low, even loss-making incomes of individual writers and artists who nonetheless continue to practice, but are vulnerable to cost increases as a result.

Costs

Rather than receiving benefits from the removal of indirect taxes, particularly wholesale sales taxes (WST), many artists and arts organisations would be disadvantaged by the new system. Given that many arts organisations currently enjoy WST exemptions, they would find that if they were not registered for GST purposes they would pay ten per cent more on their business purchases; however, if they chose to register, they could have those costs rebated but would have to charge GST on their services. The Committee heard extensive evidence which suggested that arts prices are highly inelastic and that any increase would lead to significant falls in sales.

Compliance costs would also increase significantly. The small size of arts businesses, unfamiliarity with sales tax accounting and a focus on production rather than administration means that many artists and arts organisations would be poorly prepared for the transition to the GST-based system. Serious questions were also raised about the adequacy of the Government's measures to ease this burden. Arts organisations would be prevented by the legislation from forming GST-groups to pool resources, while the Committee heard significant doubts as to whether the $500 million set aside for small to medium sized businesses would be enough.

Revenues

Revenues would also be affected by the Government's proposals. The arts market is highly price sensitive and would suffer falls in sales at least equal to the rate of GST. The Committee was presented with overseas evidence of such falls in book sales, while Econtech modelling commissioned by the Australia Council predicted sales falls across the arts and cultural sector of between ten and twelve per cent.

This would produce a nine per cent contraction ($26 million) in music and theatre production, eight per cent ($24 million) in performing arts revenues, and four per cent (12 million) in creative arts. This could see losses in the performing arts alone of over $50 million and the failure of up to eight major companies, with the loss of hundreds of jobs.

The input taxation of financial services could also endanger a significant revenue stream for many arts companies. While a third of the $65 million in corporate sponsorship to the arts comes from this sector, finance companies might not be able to claim it as a business expense in the way that other corporations could. There are fears that this would reduce available sponsorship by ten per cent.

The Total Impact

This combination of the cost and revenue pressures of the Government's proposals would have a highly detrimental effect on the arts as a whole, and particularly on the performing arts. Non-profit arts organisations would be particularly hard hit, as they would face the unpalatable alternatives of either an increase in compliance and input costs, or a reduced level of service and accessibility to their clients. It is to be expected that individual artists, already on a median gross income of $20,000 per annum, would also be disadvantaged by the changes.

The Committee is concerned about the potential impact of the new tax system on the arts, and particularly on individual artists. Of particular note here are the demonstrated price sensitivities in the sector, the highly discretionary and mobile nature of entertainment spending, and the very low reserves of many companies.

The price increases predicted for the arts, of 7.4 per cent, are almost four times the estimated CPI increase, and are greater than those expected for competing areas of entertainment expenditure and other discretionary consumer goods. Increases on this scale far exceed the provisions of the proposed compensation measures (which are based on the lower CPI figure) and would create further access barriers to the arts for low income consumers and artists.

The very parlous nature of artists' incomes, the fragile state of the performing arts, the very tight markets for arts production, and the inability of the arts to benefit from major changes such as the abolition of WST, mean that the overall impact of the proposed tax reform would be far more damaging than might otherwise have been the case.

Communications Industries and Services

Communications is one of the fastest growing sectors of the world economy and employs growing numbers of Australians. Access to telecommunications services and other forms of information are also regarded as basic needs, a fact recognised in the Community Service Obligations of the Telecommunications Act 1997.

Telecommunications Prices

The Committee shares the concerns of some witnesses that residential telecommunications consumers could be disadvantaged by the new tax system. The Committee feels that the Treasury's estimate of an increase in telecommunications prices of 4.7 per cent is unreliable, given the complex packaging of services in this sector. In residential markets, still largely protected from competition, cost falls may not be passed on to consumers.

The Government's undertaking that the cost of the basic service would be restrained by price caps could be undermined by the bundling of elements within the basic service. This would allow Telstra to resist passing on reductions in cost in areas such as local calls and line rental by reducing prices in other areas, such as STD. The Committee also believes that the Australian Competition and Consumer Commission would have difficulty enforcing the passing on of reductions in cost to consumers on other services, given its problems forcing Telstra to reveal its network costs and the ACCC's vast new responsibilities to monitor the whole economy for profiteering.

The Committee supports further consideration of the appeals of witnesses for the Government to force the further unbundling of the basic service and to require Telstra to reduce local call costs, and to extend prescription health exemptions to telecommunications equipment needed by people with disabilities.

Community Broadcasting

The Committee believes that the proposed tax package should be modified to mitigate a negative impact on the community broadcasting sector, which involves 15,000 people in some 300 community radio and television stations. Evidence to the Committee suggested that the extra cost burden of the new tax system could be 3.5 per cent of income, while the impact on revenues could be as high as ten per cent.

The major problems here are that the new tax system confuses the final output of community broadcasting – information available free to the community – with the revenue stream which funds that freely provided public good. This results in a view that the taxation of revenues such as sponsorships, subscription fees and tied donations can be carried out at no detriment to the broadcasting service. However, as such revenues are largely derived from individuals, input tax credits would not be available. Community broadcasters would also suffer the same registration dilemmas faced by many arts organisations. A GST exemption would cost the budget $2.5 million.