Parties Agree on Gasoline Tax Cut within This Year

The major six parties in the Diet – the Liberal Democratic Party (LDP), Japan Innovation Party (JIP), the Constitutional Democratic Party of Japan (CDPJ), the Democratic Party for the People (DPP), Komeito, and Japan Communist Party (JCP) -- agreed on abolishing provisional gasoline tax rate by the end of 2025. It marked the first comprehensive policy agreement beyond the aisle after Sanae Takaichi administration started on October 24th. However, those parties have not found relevant fiscal resource for the tax cut.

The provisional tax rate was introduced in 1974 to build or maintain roads. 25.1 yen per litter has been imposed on gasoline, and 17.1 yen on diesel oil. Elimination of provisional gasoline tax rate was first proposed by DPP last year and DPP reached an agreement with the LDP and Komeito to abolish it last December. But it has not been implemented, because they could not find a fiscal resource. After the defeat in Upper House election in July 2025, the LDP decided to accept a request from the opposition parties for the abolishment.

 

Although the LDP sought to extend the provisional tax rate until next February, the opposition parties firmly demanded it within this year to support the households. LDP finally accept the elimination. The tax rate for diesel oil will also be abolished in April 1st.

 

According to the agreement, the tax rate will be eventually reduced from this November and disappear by the year end. The government will compensate for the reduction of sales of retailers with subsidy. It is expected that price of regular gasoline will decline from 170 yen per litter to 155 yen.

 

The deal symbolized weakness of LDP minority government. The LDP could dismiss a bill for gasoline tax cut in the ordinary session of the Diet earlier this year. However, the opposition parties submitted a new bill to abolish the provisional rate within the year after LDP lost its majority in the Upper House, in addition to the Lower House. Newly elected Prime Minister Sanae Takaichi had to accept the request.

 

As six parties reached a deal, four parties – LDP, JIP, DPP and Komeito – agreed on establishing a regular discussion body for policies, leaving behind other two: CDPJ and JCP. It is argued that those four parties cannot get along with the rest of two, because they are far distant over some basic policies such as constitutional amendment. The deal on gasoline tax may draw a new line among major parties.

 

Regardless the framework of parties, no party has not proposed viable budget for the tax cut. It is calculated that the gasoline tax cut will cause 1 trillion yen of shortage in revenue and tax cut for diesel oil will need 500 billion yen. It affects not only national government but local governments. The opposition parties hopes that the revenue should be compensated by major corporations. It is discussed reform of some tax system. Whether the LDP can find a resource in annual discussion for tax system in December may be a test for survival of Takaichi administration.

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