Urmas Reinsalu: VAT on electricity, gas and heating needs to be lowered

Urmas Reinsalu.
Urmas Reinsalu. Source: Siim Lõvi /ERR

The government is set to gain hundreds of millions in taxes from energy price advance, while benefits to offset the effects will likely be worth a few dozen million. People are sent queuing for benefits, while the state budget is looking at additional revenue. The best solution would be to lower the VAT rate, Isamaa MP and former foreign minister Urmas Reinsalu writes.

The Reform Party and Center Party finally decided to offer a solution for recent energy price advance. Unfortunately, proposed fixes are rather cosmetic and fail to do enough to help homeowners and entrepreneurs.

The government's proposal is to compensate people for the power transmission fee, while the measure would only be for six months, and the transmission fee component is not tied to the price of electricity. This would only bring consumers marginal saving if prices were to continue climbing. The government has also said that people living below the relative poverty line and having trouble paying for gas, heating or power can apply for additional subsistence benefits.

The state is looking at VAT revenue of €412 million from forecast price hikes or an extra €150 million from home consumers next year. Another €40 million extra will be collected in the form of CO2 quota proceeds.

The government's transmission fee compensation plan would only amount to a price cut of €25 million for households, with maximum €30 million earmarked for benefits.

In summary: considering additional tax revenue and sale of CO2 quota proceeds pursuant to the price hike, the government is looking to take in hundreds of millions from consumers but only give back a few dozen. People are sent queuing for subsistence benefits at a time when the state budget is looking at a lot of new revenue.

However, there is a clear alternative for the government's decision. Together with Arvi Hamburg, Sven Sester and Priidu Pärna we have proposed lowering the VAT rate on electricity, gas and heating from 20 percent to 9 percent. This would allow private consumers and enterprises to save a lot of money and weather the energy price shock.

The latter saw Estonia's inflation rise to 6.6 percent or highest in the EU in September. The coming months will likely add more fuel to the fire. Prices have grown for all sources of energy: the average market price of power in 2021 (January 1 to October 10, 2021) has grown 2.3 times since the same period last year (€31.24 per MWh in 2020 vs €69.61 per MWh in 2021).

The gas price hike will automatically reach consumers in the natural gas district heating system whose costs will grow respectively. Property owners with local gas heating will bear the brunt of the price advance as their expenses are forecast to triple.

The price shock is further amplified by the state's tax policy. The price hikes will be subject to the standard 20 percent VAT rate, with the state also making money from the emissions trading system.

Consumption volumes come to approximately five TWh for gas, eight TWh for electricity and 5.3 TWh for district heating in quantities sold. Recent prices have amounted to VAT receipt of €260 million. If input prices double, VAT receipt will follow.

Lowering the VAT rate from 20 percent to 9 percent would cut consumers' costs by 11 percent. VAT receipt in the state budget has been forecast based on pre-price hike outlook.

Therefore, realizing the proposal at hand would be largely cost-neutral in the conditions of double price advance, leaving consumers with a minimum of €220 million. The proposal also has the support, at least verbally, of EU Energy Commissioner Kadri Simson and was supported by the Center Party this week (last week – ed.).

The energy price shock is a problem not just for least fortunate people, but for all of Estonia. People should not be sent queuing for social benefits so they could pay for basic necessities. Therefore, solutions need to be sought for all consumers. The honest thing to do is leave additional tax revenue the price advance would bring with consumers. Our proposal would also slow down inflation by at least 1 percent.


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Editor: Marcus Turovski

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