As Big as the Gasoline Tax Surcharge Is, There’s a Much Bigger Tax (and Spend) Issue in Play

Two important bills have been passed by the House of Representatives and are now in the hands of the House of Councilors: the tax bill that, among other things, extends the gasoline tax surcharges for another ten years to 2018 March 31 (passed by the HR and sent to the HC on February 29); and the bill that extends the minimum level for the dedication of the gasoline tax revenues to road development and maintenance for the same period (passed by the HR and sent to the HC on March 13). The extension of the two measures is a logical consequence of the new ten-year Road Development and Maintenance Plan, which covers the same period.

Prime Minister Fukuda proposed – with subsequent quasi-official endorsement from the LDP and Kōmeitō leadership － to shorten the Road Plan to five years and more likely than not shrink its annual size based on new traffic demand estimates, and turn the road-dedicated funds (gasoline tax revenue) over to general purpose funds starting in 2009. He indicated, as an initial bid at least, to maintain the surcharge rate at its current level(25.1 yen per liter on gasoline), citing such reasons as global warming, international comparison of tax rates, and fiscal necessities. He intends to address that matter as part of a thoroughgoing tax reform. (This is extremely important. Please keep that in mind.)

Note that once you shorten and shrink the Road Plan, the surcharge (and, theoretically, even the base tax rate) must also be shortened and shrunk proportionately － unless the tax is delinked from its original purpose of developing and maintaining roads. By ceding the gasoline tax revenue to general purpose funds as part of a long-promised tax reform, the Fukuda proposal opens the door to keeping the gasoline tax at its current level indefinitely by subsuming the surcharge into the permanent tax rate. Within the LDP, this invokes the support of the fiscal hawks (people like Kaoru Yosano and Sadakazu Tanigaki), who want to take major steps to balance the budget but want to limit as much as possible what looks like an inevitable consumption tax hike; and the reformists (Junichirō Koizumi first and foremost), who want to complete unfinished business in the Koizumi reform (charitably describable as incomplete with regard to vested interests in the road money).

There is the predictable talk in the tabloids of the collapse of the Fukuda Cabinet as early as next month as the result of the battle between the reformists and the road tribe. I don’t see that happening. True, the bill currently in the hands of the HC extending the revenue dedication for another ten years － it is supposed to be eliminated in FY2009 － doesn’t make sense. However, the DPJ is holding out for an immediate discontinuation of the dedication, so it is unlikely to cooperate in amending the current bill now languishing in the HC to accommodate a one-year extension, and it doesn’t make sense for reformists to split the party and join hands with the DPJ just so the mandatory dedication can be discontinued a year earlier (while the actual budgetary allocation for this fiscal remains intact)*. It’s not impossible, but certainly improbable. Besides, on that specific issue, they can always split the party to far greater political effect if the LDP majority ultimately winds up rejecting the Fukuda proposal to end the dedication. That slightly more plausible but still highly unlikely event cannot happen until much later, in the lead-up to the throw-down with the DPJ over tax reform that begins in earnest in the fall.

The most serious potential for a reformist/roadist conflict lies in the debate over the substance of the Road Plan. The Plan will be by far the most important determinant of the eventual allocation of the revenue from the general purpose funds to road development and maintenance. There are two issues here: the length of the plan, and its size.

The five-year truncation will not be an issue, once the LDP and New Kōmeitō and the Cabinet take the necessary measures at the beginning of this workweek to bring the full authority of the ruling coalition and the administration to the Fukuda proposal. The New Kōmeitō is almost as well-disciplined as the Communist Party. In the LDP, the measure should have no trouble going through the Research Commission on the Tax System headed by fiscal hawk Shūji Tsushima and the Policy Research Council headed by the like-minded Sadakazu Tanigaki. The usually rubber stamp General Council gives the final authorization, but it is currently chaired by Toshihiro Nikai, who, together with Makoto Koga, head of Election Strategy Headquarters, are the two hetmen of the road tribe. However, the two kings of the roads gave their consent at the Wednesday meeting, so they will not give Mr. Fukuda any trouble here.

It is the determination of the amount that will give the Fukuda administration headaches. The fiscal hawks will make common cause with the reformists in battling the road tribe under the close scrutiny of the media and the opposition playing to an already mistrustful public. I expect that the coalition will come up with a new Plan, and agree to apportion the gasoline tax revenue accordingly. I have no idea what the public perception of the ultimate coalition package will be like. What I can be sure of is that the opposition’s response will driven largely by the public’s response, which in turn will largely molded by how it is received and depicted in the media.

But note that this is only part of the picture. At the same time, the ruling coalition must come up with a “thoroughgoing tax reform” package that places the gasoline taxes and the surcharge in proper context. The relationship is not trivial, by the way; the surcharge by itself is the rough equivalent of one percentage point of the consumption tax, currently at 5%.

A comprehensive tax package will have far greater political implications as an issue than the gasoline tax revenue. Fiscal policy perspectives cut across party lines, while the DPJ will also face a public reckoning of the fiscal consequences of the various promises that it has made under Mr. Ozawa’s leadership. This process will commence in full this fall and must be completed in substance by the end of the calendar year. Moreover, the ruling coalition must schedule possibly months of intensive negotiations with the opposition even if, or particularly if, it intends to exercise the HR supermajority override in the end. There will undoubtedly be major surprises as the process unfolds. The road money is a significant part of this process, but just that: only a part.

As a final note, it is important to remember that at least some of this can indeed happen under a different Prime Minister. Last Wednesday’s Diet faceoff with Ichirō Ozawa has been widely panned by the media and even some serious LDP politicians such as Tarō Asō and Kaoru Yosano, two men the media are playing up as pretenders to the Prime Minister’s seat. Although I only read an excerpted summary in the Sankei, in what I read, Mr. Fukuda came across as oddly querulous and plaintive, like an aging lover spurned in a 19th Century romance novel (or so one imagines). More seriously, this morning on Sunday Project, Mr. Yasano leveled strong criticism at the Prime Minister’s Office. Although it was an implicit indictment of Nobutaka Machimura, the Chief Cabinet Secretary who replaced him and perhaps the Administrative Deputy Chief Cabinet Secretary as well, the hint of leadership failure at an even higher level was also hard to miss.

I do not yet think that a premature departure is more likely than not. A Prime Minister has substantial staying power if he is willing to use the full arsenal of weapons available to him, Remember, Prime Minister Abe stayed on even after the disastrous 2007 HC election defeat and only left when his health finally failed him. Still, compared to fiscal reform that requires a consumption tax hike, the gasoline tax surcharge is almost a gimmie. Prime Minister Fukuda will not be able to get away with forcing his will on a divided coalition the way he did with his proposal on the road money. He will need every bit of help from the reformists and fiscal hawks to survive. He will also have to draw in likeminded Diet members from the opposition, mainly in the DPJ. One thing for sure: the tax package will make or break the Fukuda administration.