New government to decide fuel excise duty future in spring

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A Circle K fueling station in Tallinn. Source: Siim Lõvi/ERR

In the spring of last year, the government opted to make large temporary cuts in fuel excise duties through to 2022, in order to stimulate the economy during the early stages of the coronavirus pandemic. The incoming Reform-Center government's state budget discussions in spring will decide the future fate of the excise situation.

The Reform Party and Center Party announced after their first day of negotiations aimed at forming a new government that the two parties have agreed to a "tax peace", which would apply equally to direct and indirect taxes, and will help preserve jobs and the viability of many businesses which had been in good shape prior to the crisis. In addition, the parties' representatives said they will not make any major changes when it comes to taxes.

Although the government-to-be does not plan on raising taxes, the pre-crisis excise duty levels of diesel, natural gas and electricity are set to make a return in May of 2022, as things stand.

After cutting excise duties, the price of diesel dropped to €0.99 per liter. In mid-summer, after a price drop worldwide also resulting from a slump in world oil prices, diesel prices went down to €0.929 per liter. Before the cut, the price of diesel in Tallinn had been €1.199.

Falling excise duties means falling government receipts

While the reduction of excise duties has brought haulage companies to fuel up in Estonia - whereas they might have done the same in Latvia or Lithuania before the cut - excise receipts to the state budget have fallen. For example, the state received €45.5 million in fuel excise duty in November of 2019, but that sum was down more than €5 million in 2020 - to €40.3 million.

The sector, however, sees the excise duty cut as a positive, and according to the market participants, business could go on the same way, given Estonia's excise levels were lower than those of neighboring countries.

Reform MP Aivar Sõerd said the topic will be discussed when a new state budget is negotiated, as a new economic forecast which will also consider the recession in late-2020 will be prepared by then. This means that the topic of taxes will be discussed in late-March and early-April.

"Estonia's recession last year turned out to be very mild. A lot milder than what was forecast in fall. Estonia's recession was in fact one of the weakest in all of Europe," Sõerd said.

Sõerd: Tax revenues still did better than forecast

Tax revenue was also better than expected last year. "This positive trend of tax receipts will carry over to this year. The forecast is a little better than the currently-valid autumn prediction. It changes the entire background, and it will be easier to come back to the taxes topic," Sõerd told ERR.

Sõerd added that it would be reasonable for the current coalition to take their time when discussing tax matters, as decisions cannot easily be made before a new economic forecast is in hand any way. "I would venture to predict that the picture will change, by a lot," Sõerd went on.

He noted that it is always important to get feedback from those participating in the market, and a balancing point is important when speaking on fuel excises. "With excise duties, you have to look at what neighboring countries are doing, Latvia is drawing up their budgetary strategy as well. We must consider what our neighbors' excise politics is," Sõerd said.

"I do not want a repeat of what happened with our alcohol excise duties," Sõerd noted (these were cut on beers, ciders and spirits in summer 2019, sparking a short-lived excise duties war between Estonia and it southern neighbor - ed.).

On May 1, 2020, Estonia temporarily reduced the excise rate of diesel fuels from €493 per 1,000 liters to €372 per 1,000 liters. In addition to the rate on diesel fuels, other related rates fell, such as the excise duty on special purpose diesel.

Excise duties on light and heavy fuels also saw a reduction. The excise duty rate on natural gas was reduced to the level it had been in 2017, and electricity excise duties were dropped to the minimum rate allowed by the EU - €1 per megawatt-hour.

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Editor: Kristjan Kallaste

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