How Increased Taxes On Oil, Gas Will Affect Economic Recovery


Kenya may have overcome one of its worst fuel shortages in years, but the challenges facing the oil and gas sector seem to have taken another turn. Over the last few months, the oil market has been hit hard, partly due to the impact of Russia’s invasion of Ukraine and the effects of the Coronavirus outbreak.

However, the rising taxes have proven to be the leading cause of the high oil prices in the country. While taxes play a crucial role in funding key government projects, various studies have shown that high taxes can negatively affect the growth of an economy.

The Tax burden on Kenya’s Petrol

The landed cost of imported petrol (per liter) is Sh49.84. Diesel and Kerosene cost Sh46.82 and Sh42.96, respectively. At the pump, petrol retails for Sh144.62, while diesel goes for Sh125.50 and Kerosene at Sh113.44.

The Energy and Petroleum Authority defended the new prices, saying they include an 8% Value Added Tax (VAT) and levies, as stipulated by the Finance Act 2019.

Also contributing to the high fuel prices are the distribution and storage charges. This adds to the misery of motorists at the pump.

What Needs to be Done for Economic Growth?

A country must strike a balance between what they buy (government, businesses, and households) and what they sell. The economic output of a country depends on a number of factors, including the size and skills of its workforce, physical capital needed by workers, infrastructure, and technological development.

Studies have shown that high fuel taxes have a huge impact on workforce morale, investment, saving, and innovation. On the other hand, tax cuts increase deficits, affecting long-run economic growth.

So, the government needs to put the right measures in place to allow businesses to prosper, especially small and micro-medium businesses.

The Government Must Address the Current Challenges

A report by Price Waterhouse Coopers indicated a 6.1% increase in inflation in 2021. The inflation rate remains high despite the government’s move to increase fuel subsidies. This is mainly driven by the sharp increase in prices of commodities and fuel around the world.

The government’s economic recovery plan should include a tax system that takes into account the current challenges.

The United States has a Highway Trust Fund that finances all infrastructure projects. The trust fund uses money collected from fuel tax on gasoline to fund transportation projects through grants to lower levels of government.

The U.S Federal government’s current excise tax on gasoline is $0.18 per gallon, while states’ and local governments’ rate is $0.34. So, they have a total rate of $0.52, which is lower than that of other developed countries.

According to Organization for Co-operation and Economic Development (OECD), the United States has the second-lowest tax on gas, after Mexico, which has no gas tax.

High taxes have a direct impact on the cost of living.  This is because traders have to incur a high cost of production and transportation. They eventually pass on these costs to consumers.

Photo: Wikipedia Commons