Ligi says diesel tax cut would barely lower prices

Finance Minister Jürgen Ligi says cutting diesel excise to the European Union minimum would reduce fuel costs for businesses by only about five cents per litre, ERR reported. He said a supply shortage cannot reasonably be addressed by stimulating demand.

Five transport and supply-chain organisations sent the Finance Ministry a joint appeal in late September, asking the government to temporarily reduce fuel taxes to ease the impact of the energy crisis. They called for diesel excise to be cut for at least three months to the EU minimum of 330 euros per 1,000 litres. The current rate is 428 euros.

Ligi said fuel prices have risen this year mainly because of supply problems linked to the conflict in the Strait of Hormuz. Global market prices have increased more than the maximum possible excise cut, so the state cannot fully offset the rise, he said.

Excise rates have not changed this year, as a planned fuel-tax increase on May 1 was cancelled. For individuals, the rise in fuel prices has instead included a 14-cent increase in value-added tax, Ligi said. He estimated that VAT accounts for one fifth of the price rise, with global market prices accounting for the remaining 80 percent.

Cutting diesel excise to the requested level would theoretically lower the retail price by up to 12.2 cents per litre, including 24 percent VAT. For businesses that can deduct input VAT, the maximum theoretical reduction would be 9.28 cents per litre. Ligi cautioned that a tax cut may not be fully passed on to customers. In Latvia, where diesel excise has been at the EU minimum since October, 53 percent of the potential reduction has reached retail prices. Applying that experience to Estonia, the cut would save businesses about five cents per litre. Even if competition between fuel stations passed on most of the reduction, the impact would be only six to eight cents per litre, he said.

The maximum possible cut to petrol excise would reduce the price by up to 23.2 cents per litre, or 28.8 cents including VAT, according to Ligi.

Diesel cost an average of 2.05 euros per litre in Estonia during the first two weeks of October, compared with 2.10 euros in Latvia. In September, the averages were 2.08 euros in Estonia and 2.11 euros in Latvia. Ligi said historical data suggest the price difference between the countries is likely to remain close to zero. That would not necessarily shift Estonian vehicles’ refuelling to Latvia, but could remove a clear preference for transit trucks, he said.

The estimated impact of losing Estonia’s price advantage on state tax revenue is a reduction of 300,000 euros per month. Restoring the advantage would cost the state several times more than the revenue impact of losing it, Ligi said.