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High taxes on oil, gas dim economic recovery outlook

tax

The public debate on the oil crisis in Kenya might have calmed at least for now, but there are still uncertainties as far as a sufficient supply of oil and gas is concerned. In fact, in some regions, especially western Kenya, the shortage is still imminent.

The past few months have been characterised by a shortage of fuel, high prices of cooking gas and inflated prices of commodities partly due to the effects of the Russian-Ukrainian war and the aftermath of the Covid-19 pandemic, but so much to do with high taxation and levies imposed on various items in the past two budgets.

The World Bank posits that taxation is a key development priority that enables governments to finance investments in human capital, infrastructure and the provision of essential services to its citizens.

However, various research studies indicate that high taxation can slow down the rate at which economies grow.

According to Energy and Petroleum Authority, the landed cost of a litre of petrol is Sh49.84, Sh46.82 for diesel and Sh42.96 for kerosene. However, the retail petrol price is going for Sh144. 62, diesel (Sh125. 50) and kerosene (Sh113. 44) in Nairobi.

These prices are inclusive of eight percent value-added tax, excise duty, Road Maintenance Levy, Petroleum Development Levy, Petroleum Regulation Levy, Anti-Adulteration Levy, Merchant Shipping Levy and Import Declaration Fees introduced by the Finance Act 2019.

In addition, consumers also pay for the distribution and storage charges, which include pipeline and road transportation from Mombasa, losses at depots, and pipeline and delivery costs. This is exorbitant.

The aggregate amount of economic activities in a country is measured as a balance between what households, firms and governments want to buy vis-a-vis what they want to sell.

The overall national output wholly depends on the size and skills of the human resource, the amount and quality of machines, roads, buildings, vehicles, computers, and other physical capital that workers use and the quality of knowledge and ideas our learning institutions dispense at a given period.

Research indicates that high marginal tax rates can discourage work, saving, investment and innovation, while specific tax preferences can affect the allocation of economic resources. Consequently, tax cuts can also slow long-run economic growth by increasing deficits

Therefore, policymakers must strike a delicate balance to put in place fiscal measures that provide a conducive environment for the growth of businesses, especially the micro-medium and small enterprises.

A report by Price Waterhouse Coopers says Kenya recorded a 6.1 percent increase in inflation in 2021 due to the increase in the cost of food and fuel.

Despite increased fuel subsidies from the government, inflation is still high at six percent driven by the increase in commodity prices and rising global oil prices as well as the forecasted depreciation of the shilling against major currencies.

The design of tax systems must be coherent to address the current challenges that the countries face and to encourage economic recovery.

According to congressional research service, the U.S. federal government funds infrastructure projects through the highway trust fund. This trust fund receives revenue mainly from the excise tax on gasoline and uses the revenue to pay for transportation projects through grants to state and local governments.

Currently, the federal government levies a $0.184 per gallon tax on gasoline. In addition, state and local governments levy an average gas tax per gallon of about $0.34.

This is an average combined rate of about $0.52 a gallon as of 2019, down slightly from $0.56 a gallon in 2017 and close to the amount levied in 2015. The U.S. combined gas tax rate is lower than rates in other industrialized countries.

Data from the Organisation for Co-operation and Economic Development (OECD) indicate that the U.S.’s gas tax is the second-lowest (Mexico is the only country without a gas tax) and has a rate 25 percent lower than that of the next highest country, Canada, which has a rate of $0.74 a gallon.

Increase in taxes on petroleum and oil products can directly be linked to the current increase in the cost of living as traders pass on high production and transport bills to consumers. Households who have lower incomes are estimated to be hit harder by many of the current trends than higher-income.

Otieno Panya Lecturer and Researcher Jomo Kenyatta University