Tax cuts in jeopardy if carbon levy axed

Labour's "chewing gum" tax cuts announced in May's Budget could be axed if the carbon tax is dumped.

The move to index personal income tax thresholds to inflation in 2008, at a cost of $360 million a year, would have given people between 67c and $10 a week extra, and was met with derision.

Finance Minister Michael Cullen told National Radio yesterday: "People sneered and turned their noses up at that and we will just have to see how things play out in that respect because we haven't legislated for it yet."

He later told Parliament that when more than $300 million of revenue was given away "something else has to give".

Dr Cullen's spokeswoman later confirmed that if the carbon tax goes, the Government's priority would be to keep the Budget's corporate tax initiatives rather than the indexation plan.

The Treasury dropped a political bomb this week when its briefing paper to the new Government recommended cuts to the 33 and 39 per cent personal tax rates and the company tax rate, as well as reconsideration of the carbon tax.

In its confidence-and-supply deals with NZ First and United Future, Labour agreed to review the carbon tax, which is set to collect about $360 million a year in revenue.

The tax, which arises out of New Zealand's ratification of the Kyoto Protocol, would cost a typical household about $4 a week for electricity, petrol and other fuels.

National Party finance spokesman John Key said Dr Cullen's admission about threshold indexation was an extraordinary about-face.

United Future finance spokesman Gordon Copeland was reported by internet media service Newsroom yesterday as saying he was dumbfounded at the suggestion that the indexation could go.

United Future leader and Revenue Minister Peter Dunne said Dr Cullen had "mused" about the possibility at a meeting with him this week but Mr Copeland had been unaware of that.

Asked for his reaction to the indexation being axed, Mr Dunne said he was not even contemplating such a move at this stage.

"Any decisions about revenue implications for other programmes will be made at that point. Because of the nature of the agreement we have, we will make those jointly."

Meanwhile, Dr Cullen again ruled out acting on the Treasury's recommendations to cut personal tax rates.

But he said work was proceeding on a review of company tax.

He told National Radio that the Treasury had suggested "all the old things" to fund tax cuts, including raising the eligibility age for superannuation and making students pay more for their tertiary education.

"Those aren't the policies that we got elected on, and nobody elected Treasury."