Eco-taxes and economic logic

The GRTU, though not against the principle inherent in an eco-tax system, is against the imposition of a new consumption tax which effectively adds another layer of taxation over and above the recent increase in VAT.

An ecological tax (or eco-tax) is a regulatory instrument that increases the cost to actors of an activity in a way related to the cost of the extra environmental damage caused by that activity. It is therefore meant to divert consumption patterns away from goods that are deemed 'bad' for the environment.

However, in case of certain items consumers cannot substitute environmentally damaging products simply because no alternative exists. Moreover, if these goods exhibit price insensitive demand, then it is bound to have a distributional regressive impact. For example, newly-wed couples cannot refrain from buying certain appliances such as refrigerators, TV and telecommunications equipment, washing machines and cookers. These measures will have income effects on various households with significant equity considerations.

There are various tax considerations that should be assessed. As they are proposed in the Bill, eco-taxes will be charged at a fixed rate and not as a proportion of the selling price. This means that should competition bring down the selling price of an eco-taxed item, then that product will still carry the same fixed charge above the underlying price. As a result, the proportion of the new eco-tax over the total selling price will be relatively higher. Consumers may prefer substituting to higher priced items knowing that they will pay relatively lower tax as part of their total cost.

Eco-taxes will be imposed on items which are already VAT-able. Therefore, it is a new layer of taxation over and above the current system. Even so, some imported items may carry an eco-tax from the originating countries, in which case products will be taxed twice. Increasing rates of taxation on some goods may affect negatively the cost structures of companies that compete in international markets. Inflationary pressures will further affect the price competitiveness of our economy.

Finally, one has to see who will shoulder the burden of this new tax. As it is being proposed in the Bill, the liability for the payment of the eco-contribution shall lie with the producer (the term 'producer' refers to both manufacturer and importer of the eco-taxed product). The eco-contribution shall be payable on a quarterly basis in arrears on submission of the return relative to the preceding quarter. It is easy to conclude that producers shall pass this burden to consumers, yet if demand for the product falls, producers still have to pay the amount due on their remaining stocks. Such measures will clearly put further pressures on tightening profit margins.

Compliance costs will be an additional burden that the producer will have to shoulder. The registration and reporting procedures that has to be adhered to by all producers will steal more time from productive activities. SME's are already laden with a myriad of responsibilities, filling forms and other procedures to comply with VAT, SSC, employment and other regulations. Failure to comply may result in criminal proceedings!

To manage the new eco-contribution system the government has to pump more money in another competent authority to carry out the functions laid down in the proposed Act. There are costs involved in creating new monitoring regimes or legal frameworks.

Ecological taxes can provide a platform for initiating a broader reform of the tax system and create political support for changes to labour and capital taxation that otherwise would not be possible. Ecological taxes are often seen as socially favourable and morally difficult to oppose and could be used as a lever to remove economic distortion in the existing tax system or to raise taxes on currently relatively under-taxed groups.

General tax cuts or even changes to the tax system may not be acceptable but in the context of ecological tax reform they may be possible. This is what a number of EU countries have done. A serious plan to implement an eco-tax reform is not evident locally but the government is simply interested in finding another source of revenue, let alone popular appeals of being environment-conscious.

It is also clear that the Maltese government did not take heed of agreed lines of action found in the European Charter for Small Enterprises. The Charter encourages governments to screen new regulations to assess their impact on small enterprises. No business impact assessment has been produced on this new taxation system that will affect importers, traders, consumers and local manufacturers.

No discussion whatsoever has taken place with the GRTU as a representative of those who will ultimately have to carry most of the compliance burden. Thus, it is clear that although the Maltese government boasts of being a strong supporter of this Charter it is putting aside both preliminary studies as well as healthy consultation. It is promoting instead a confrontational approach while rushing with quick decisions to make good for past irresponsible policies. This goes completely against the spirit of social dialogue the GRTU is used to at European level.

For such reasons, the GRTU is pressing Government to consider again such actions and not hurry with its decisions. The proposed Eco-Contribution Act has supply-side implications on national competitiveness, besides equity considerations. It is not to be construed that the GRTU is against environment-friendly policies but rather that a serious plan should be put in place to achieve a win-win situation.

The Bill as proposed is an affront to the businesses affected. Businessmen are expected to pay tax on all the stock they now have and to sell at a higher price from August onwards. The traders who have fared badly recently as total demand slumped, will be worst hit as they have the highest level of stocks. From then onwards they will have to take note of all they import as all listed goods are taxable as soon as they leave customs.

No one has any clear idea how the whole thing is going to work as nobody bothered to work out the detail.

The GRTU has given notice to Government to inform traders by Tuesday what procedures will be applied if it is seriously determined to impose this tax as from next month. If Government cannot decide by Tuesday then the GRTU is demanding that the effective date be postponed.

The GRTU is convening effected traders on Tuesday. They will decide on how to face the imposed challenge.

The Eco-Contribution Bill and other comments by the GRTU and other material on the subject of eco-taxes can be found on the GRTU Website www.grtu.org.mt.