Should Canada join other countries and take a gas tax holiday?

If U.S. President Joe Biden is successful in his bid to pause gas taxes in the U.S., Canada will be the only G7 country not to bring in a tax cut or a subsidy to help people at the pump. But some experts say a gas tax holiday is not the answer.

Canada could soon be only G7 country without a major break or subsidy at the pumps

U.S. President Joe Biden speaks about gas prices at the White House on Wednesday in Washington. He is calling on Congress to suspend federal gasoline and diesel taxes for three months. (Evan Vucci/The Associated Press)

If U.S. President Joe Biden is successful in his bid to pause gas taxes in the U.S., Canada will be the only G7 country not to bring in a tax cut or subsidy to help deal with prices at the pump.

Biden on Wednesday called on Congress to suspend federal gasoline and diesel taxes for three months. Meanwhile, the U.K., Italy, and Germany (lower taxes), France (a consumer rebate) and Japan (a subsidy to wholesalers) have all taken similar action.

As inflation — headlined by gasoline price hikes — hits highs not seen since Billie Jean was topping the Billboard charts and Return of the Jedi was in theatres, will Canada follow suit? Should it?

So far, the answer from Ottawa is: not at this time. Natural Resources Minister Jonathan Wilkinson said earlier this week the federal government has no immediate plans to cut prices at the pump with a temporary reprieve from the federal gas tax.

Canada is instead looking to stabilize global oil prices by increasing supply, something Wilkinson said is starting to happen. He also said aid for Canadian families is, in the meantime, focused on areas Finance Minister Chrystia Freeland highlighted in a speech last week: increases to federal benefit cheques, cuts to child-care costs and upcoming increases to Old Age Security and the Canada Workers Benefit.

Conservatives have called on the Liberals for months to cut gas taxes, including lifting the GST from gasoline, temporarily suspending the carbon price, or lifting the 10 cents per litre federal excise tax.

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Not the solution, experts say

Rory Johnston, founder of the oil market data service Commodity Context, says any type of gas tax holiday would appear to help the poorest in society, who are most affected by gas prices as a percentage of their income. However, he told CBC News, that approach is the wrong tool for the job at hand.

The main reason for high gas prices is an acute supply shortage, he said; artificially reducing the price at the pump won't help. 

High prices are seen on gas pumps in Yellowknife. Gas prices have driven inflation to levels not seen since the early 1980s. (Jared Monkman/CBC)

"The prices are going to rise until you kill demand so that the market can balance," he said. "We're just draining inventories right now, left and right. So by creating a holiday for gas tax, you are essentially subsidizing further consumption at even lower prices."

Johnston says he's not sure why the Liberals haven't moved more quickly to reduce prices at the pumps but speculated the government is concerned about the narrative around the transition to cleaner energy. "Since I'm generally against the move [toward a tax holiday], I'm not disappointed," he said. 

Prof. Kevin Milligan of the Vancouver School of Economics at the University of British Columbia agrees a tax holiday is not a sound policy, given how tight oil is on the supply side. 

"When that's the case, the market producers have more power," he said; and that means a tax cut is more likely to increase producer profits than bring down consumer prices. 

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Out-of-the-box solutions

Johnston says he understands the pressures governments around the world are under to do something.

"This is a moment, I think, that calls for creative, out-of-the-box policymaking — things that we haven't necessarily tried before."

He offered three ideas:

  1. Rethink the gas tax. Create a sliding escalator tax, that drops when gas prices rise, but goes up when prices drop, removing some of the volatility from gas prices. 
  2. Offer direct cash, but only to the lower end of the income spectrum. Sending money instead of lowering taxes would make life more affordable without artificially subsidizing the price of a scarce resource, he says. But both Johnston and Milligan warned that simply writing cheques for everybody to deal with gas costs risks making inflation worse.
  3. Look into restarting some facilities, like the Come by Chance, N.L., refinery, which was shuttered early in the pandemic and is now being converted for renewable diesel. Bringing back oil production "will help reduce that refining bottleneck and to get the price we're paying at the pump back down closer to the price of overall global oil," he said.

Milligan, for his part, says the federal government has a number of areas under its control that it can and should focus on to bring inflation down — relieving bottlenecks at airports, improving supply chains and lowering tariffs on imports — which would directly lower prices for Canadians in stores.

He also stresses that the Bank of Canada must be allowed to do its job to bring down inflation.

Milligan said the challenge is that governments generally try to focus on the broad middle class during times of crisis.

"The problem is trying to find something that is not inflationary in itself that can help out the broad middle class," he said. "That's where a lot of the challenge comes in."

With files from The Canadian Press and The Associated Press