The current ad-hoc taxes applied to motorists don't reflect the costs driving has on society. Is there a more efficient road tax?
As proposed by the Henry Review of taxation reform, an approximate revenue neutral reform package to replace the current set of ad hoc taxes with explicit charges for road use, congestion and pollution would better drive greater productivity in the use of motor vehicles for business and recreation uses. Also, with improvements in energy fuel efficiency and an increasing share of electric vehicles in the future, the current fuel tax will collect less revenue in the future while demands for government investment in road infrastructure and maintenance are bound to increase.
As we look toward the upcoming election, one question is, how do we tax users of motor vehicles in a way that is fair and reasonably efficient? One component of taxation reform for a more productive future Australia would be to overhaul how motor vehicles are taxed.
Current taxes on motor vehicles
Currently, everyone who owns and operates a motor vehicle indirectly pays several taxes for the privilege. These include a fuel tax for on-road use (approximately $0.40 per litre), vehicle registration, stamp duty when buying and selling, levies on insurance, licence fees and parking fees in cities around the country. The current taxes are primarily set to collect general government revenue. In aggregate, they collect about the same revenue as the commonwealth, state and local governments collectively spend on investment in roads and their maintenance.
These taxes add to the user cost for owners and operators of motor vehicles, and they crudely indicate to owners and operators the costs of government provided road infrastructure and associated services, including policing and provision of emergency services.
On the other hand, the current taxes are blunt instruments for reflecting to individual owners and operators the wide range of different costs imposed on society by their vehicle use. In addition to the private costs of vehicle purchase, maintenance and operation, society costs of vehicle use include damage caused to the government funded and provided roads, congestion at peak times in the cities and pollution, including smog and greenhouse gas emissions.
Desirable reform as proposed by the Henry Review and many others involves replacing the current ad hoc taxes with explicit charges for road use, congestion and pollution. The reform package could be designed so as to collect about the same revenue and with limited changes in the distribution of the tax burden.
Investment in roads and highways and their maintenance are an expensive endeavour for the governments. Road user damage varies with the weight per axle and the road type. These road costs are not highly correlated with the fuel used and the current fuel excise tax.
A carefully targeted road-use tax set with reference to the vehicle type and weight, road type and location, and distance travelled would more effectively charge those who are causing the most damage and driving the most kilometres.
Because such a user charge based on marginal cost would not cover all the overhead costs of road construction and maintenance, there remains a strong argument for maintaining an annual registration fee to cover most of the overhead costs.
Congestion in and around Australia’s capital cities is continuing to rise. Road congestion is set to cost Australia over $20 billion a year by 2020. Importantly, road congestion is a market failure: one vehicle entering a road in peak hour adds to the delays and associated costs not just for themselves, but also for all other peak hour users and the individual ignores the spill over or external costs. A congestion tax seeks to internalise the external costs of congestion.
With the nation’s population growing, the introduction of congestion charges levied on people driving during peak hours is an obvious next step in the mission to maintain the liveability of our big cities. Benefits of the congestion tax include the revenue windfall to replace some of the current ad hoc taxes, a signal to road users of the higher social cost of travel in peak time versus in off-peak times or by public transport, and in exchange for the congestion tax a faster trip and more reliable travel time. The congestion tax also provides better information on the value to society of further investment in higher capacity freeways.
The combustion of fossil fuels by motor vehicles is responsible for roughly 20 per cent of Australia’s greenhouse gas emissions. Drivers should be taxed for the damage they are causing the environment in terms of emissions and air pollution so they have a clear understanding through explicit taxing that their driving does have negative environmental consequences.
Policy intervention to reduce greenhouse gas emissions caused by motor vehicles should be just a component of a comprehensive economy-wide strategy to reduce emissions. In the context of fossil fuels used by motor vehicles, and the transport sector more generally, a likely policy component would be a lower fuel excise rate than now, but with the lower rate applied to a comprehensive base which includes all off-road and on-road uses.
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