Australia's Future Tax System

Consultation Paper

Section 12: Fuel, roads and transport

Overview

The efficient movement of people and goods is an important contributor to productivity and wellbeing. Improving the structure of taxes and charges related to transport can improve efficiency.

Taxes on motor vehicle fuels provide a considerable share of revenue, but contribute little to reducing the location and time specific costs of motoring. Different tax treatments of alternative fuels may also further reduce the efficiency of fuel taxes. Different types of transport are also taxed in different ways, potentially altering economic behaviour.

There may be opportunities to replace existing taxes with more targeted taxes and charges that promote the efficient use of transport networks. In particular, emerging technologies may have a role in targeting the social costs of motoring such as air pollution, greenhouse gas emissions and damage to publicly funded roads.

Consultation questions

Q12.1 How can motor vehicle related taxes and road funding arrangements be designed to improve the efficiency of transport of people and goods in Australia?

Q12.2 What should be the role, if any, of fuel taxes? What does this mean for how fuels and their uses are taxed and the rates of tax applied?

Q12.3 Do the existing tax arrangements lead people to make economically inefficient transport choices, and if so, how might they be improved?

12.1 Efficiency of motor vehicle-related taxes

Fuel tax is a major source of Australian government revenue. Liquid fuels are used widely by both households and businesses.

Under current arrangements, on-road fuel use in heavy vehicles and certain off-road uses of fuel are eligible for fuel tax credits. This reflects the principle that direct inputs to production should not be subject to general revenue-raising taxes, although not all fuel used in business is eligible for credits.

Although fuel tax is by far the largest tax on motoring, other taxes also affect the movement of people and goods in the economy.

Australian government taxes relating to motor vehicles include fringe benefits tax (Section 13.2), luxury car tax (Section 11.3) and tariffs. In addition, the States levy a range of taxes related to motor vehicles, including fees for registration, transfers and drivers' licences. As with Australian government taxes on motor vehicles, the primary impact of these taxes is to increase the cost of owning a motor vehicle, with little impact on driving behaviour. Some States also charge parking levies in city areas. As well as raising revenue, these levies may make driving to the city and parking more expensive than public transport. State taxes and levies also recover some of the cost to state governments of some public infrastructure projects and externalities.

Summary of key messages from submissions

Many submissions note that motor vehicle taxes, particularly fuel tax, are a significant part of household consumption expenditure, and the purchase and use of motor vehicles is taxed disproportionately to other forms of consumption.

Submissions say the use of motor vehicles imposes costs on society, through greenhouse gas emissions, air pollution, noise pollution, urban congestion and road trauma. Some submissions identify fuel tax as a way of addressing these problems, though many see the proposed Carbon Pollution Reduction Scheme as a better instrument to address greenhouse gas emissions.

Some submissions support extending road user charging to light vehicles. They suggest the use of targeted taxes as a method of 'demand management' for transport. Other submissions consider that in many cases fuel tax is a good proxy for taxing the social costs associated with driving.

Other submissions propose replacing registration, insurance and fuel taxes with charges that reflect road usage. This would be based on vehicle mass, distance travelled and location of vehicle use and could involve converting fixed charges to charges that depend on the marginal cost of driving, or to distance-based fees. One suggestion is to apply charges to driving in inner-city areas at certain times of day.

Some submissions argue that stamp duty on the transfer of motor vehicles, and import tariffs on cars, are obstacles to upgrading to more fuel-efficient vehicles. Others suggest the design of taxes on the purchase of motor vehicles promotes fuel-efficiency.

Many submissions also raise the fringe benefits tax treatment of motor vehicles as a major contributor to the over-use of motor vehicles.

A few submissions propose that revenue raised from pricing on specific roads should be returned to the road network according to the road from which it is collected. Arguably, this would provide a method of allocating resources for the supply of road infrastructure. According to local government submissions, this may be an effective way to fund local roads, the majority of which are owned and maintained by local government.

Submissions also argue that the provision of fuel tax credits is an inappropriate subsidy for on-road use in heavy vehicles and off-road uses. Some submissions suggest the current tax system favours the use of cars over public transport.

Taxing transport

Transport services are generally not demanded for their own sake. The demand for transport is usually derived from the demand for other goods and services. Without efficient transport networks, the exchange of goods and services that underpins a modern economy could not take place.

Taxes related to transport, specifically the use of motor vehicles, have historically been designed to raise revenue, whether for general budget purposes or for the provision of transport infrastructure. Fuel tax, for example, is an administratively simple and relatively efficient way of raising revenue.

However, there may be opportunities to use taxes and charges to make transport networks more efficient. The Review Panel has commissioned research on the potential to replace the existing system of transport related taxes and charges with more efficient and targeted pricing systems as a way of reducing the social costs of motor vehicle use (see Chart 12.1). This is possible, in part, because of new technology.

Chart 12.1: Targeting the social costs of motor vehicle use

Chart 12.1: Targeting the social costs of motor vehicle use

  1. CPRS refers to the Australian Government's Carbon Pollution Reduction Scheme.

General revenue raising

As Chart 12.2 shows, liquid fuels provide almost all energy used in Australian road transport. Given the absence of practical alternatives, due to limitations in current technology and distribution systems, the demand for transport fuels is relatively unresponsive to price. This is one reason why fuel taxes can be applied with a relatively small efficiency cost. Moreover, transport fuels are produced and imported by only a few producers, so output is easily monitored. This makes the administration of fuel tax relatively simple.

Chart 12.2 Energy use in Australian road transport by fuel type

In petajoules (2005-06)

Chart 12.2 Energy use in Australian road transport by fuel type - In petajoules (2005-06)

Source: ABARE (2008).

However, in the long- term, behaviour changes in response to increases in fuel prices. This is because options to reduce fuel consumption increase with time, including switching modes of transport, substituting technology for travel (for example, videoconferencing and internet banking) or choosing more fuel-efficient vehicles.

To the extent that future technologies might make liquid fuels a less important energy source for transport (for example, if electricity becomes a more viable alternative), fuel tax is likely to become a less efficient way of raising revenue. This is because motorists would have an increased opportunity to avoid the tax by switching to untaxed energy sources.

Funding the cost of infrastructure

Funding roads from general tax revenue can be justified based on the 'public good' characteristics of roads. Because the cost of a motorist using a road is usually quite low, allowing free access to the road network encourages efficient short-run utilisation of the infrastructure.

In Australia, most capital expenditure on road infrastructure is funded out of general tax revenue, although in the past the Australian government has hypothecated fuel taxes to provide the States with grants for road construction and maintenance. Some submissions support this approach of using motor vehicle taxes to fund transport infrastructure, although there is no necessary link between the amount of tax collected and the required funding at a particular time.

For major projects such as bridges or highways, governments have used road tolls to finance the capital cost of the roads. However, while road tolls may lead to a better allocation of road resources — because the roads that are built are expected to cover their costs — recovering the capital cost in this way can reduce the efficiency of the network. Some potential road users, who would use it without imposing costs on others, may be deterred by the toll. This is particularly the case if tolls do not vary according to the time of day or vehicle type. As a result, there is a trade-off between using taxes to fund the long-term capital costs of infrastructure and the most efficient use of existing assets.

Heavy vehicles

Heavy road vehicles (with a gross vehicle mass exceeding 4.5 tonnes) are eligible for a partial fuel tax credit. This effectively reduces fuel tax to a road user charge intended to recover the costs of heavy vehicle damage to the transport network.

The National Transport Commission is involved in calculating the road user charge and recommends annual registration charges based on the configuration and weight of trucks, prime movers and buses.

The methodology for calculating the road user charge reflects historical average network-wide costs attributable to heavy vehicles. However, recovering costs in this way does not reflect the actual costs imposed by an individual truck on a particular route. This limits the extent to which existing road-user charging provides incentives for the efficient use of the road network. The Council of Australian Governments has committed to undertake feasibility studies into mass-distance-location charging for heavy vehicles in 2011.

Taxing to address social costs

Many submissions see motor vehicle taxes as a way of charging for the social costs of motor vehicle use. These costs include air pollution (including greenhouse gas emissions), damage to public roads, urban congestion, noise, and public health costs related to road accidents. The costs are significant. According to the Bureau of Transport and Regional Economics (2007), the avoidable cost of road congestion alone was approximately $9.4 billion in 2005.

Fuel tax may be an indirect way to address some of these costs, by reducing overall demand for transport. However, the relatively unresponsive nature of fuel demand to the final price, and the inability to target particular locations and times through fuel tax, makes it ineffective in managing demand for transport. Further, it does not influence the behaviour of drivers in ways that prevent crashes, reduce congestion or lower noise. High fuel taxes also discourage motoring that imposes little or no social cost — for example, light vehicle use in rural areas.

Many of the social costs of motoring are addressed through non-tax policy tools. For example, fuel standards aim to minimise dangerous air pollution and compulsory insurance schemes give coverage for many of the personal injury costs of road accidents. Vehicle design standards also reduce pollution and noise from vehicles and set minimum safety standards.

Social and technological change means other mechanisms are emerging to address externalities associated with fuel. For example, the Carbon Pollution Reduction Scheme will apply to transport fuels and will directly target the cost of carbon emissions from motor vehicles.

Impact of technology on transport taxes and charges

Some major international cities have now adopted road pricing schemes that more accurately reflect the social cost of road travel.

For example, London, Stockholm and Singapore charge motorists a fee to enter the city centre during peak times (see Box 12.1). In New Zealand, global positioning system technology tracks the distance travelled by heavy vehicles for the purpose of direct road-user charging. However, the feasibility of applying specific technology also depends on the transport issues faced by particular cities.

In Australia, the NSW Government recently announced the introduction of time-of-day tolling on the Sydney Harbour Bridge and the Sydney Harbour Tunnel, after full electronic tolling comes into effect. This will see existing tolls of $3 fall by 50 cents for off-peak times, and rise by $1 during peak times.

Box 12.1 Congestion charging

Congestion charging in London, Stockholm and Singapore has reduced traffic, increased average speeds and decreased congestion in affected areas. Estimates suggest that the schemes in London and Stockholm have reduced traffic volumes entering the city centre by around 20 per cent, reduced traffic delays by between 30 and 50 per cent, and significantly shortened travel times.

Tolling specific roads at peak times is used as an instrument for managing demand for congested roads in Singapore and areas of the United States.

Source: Booz Allen Hamilton (2006).

Economic geography

Many taxes and charges relating to transport have geographic distribution and efficiency impacts. To the extent that many of the social costs of motoring are location‑specific (for example, noise and air pollution), these costs may be reflected in lower land prices in affected areas.

Urban road congestion affects the desirability of living in certain parts of a city, relative to others with alternative transport options (for example, walking, cycling or public transport). Selective tolling increases the monetary cost to commuters of driving to work from certain areas, although this may be balanced by shorter commuting times.

From a macroeconomic perspective some evidence suggests that the large distances between markets in countries similar to Australia may constrain potential productivity and growth. To the extent that fuel taxes increase the cost of transport to firms, the effect of distance on productivity will be exacerbated. This may partly explain the finding in the Architecture paper that fuel taxes in the geographically largest OECD nations (Canada, the United States, Australia and Mexico) are significantly lower than the European average.

Other taxes on motor vehicles

The fees charged by the States for motor vehicle registration, transfers and drivers' licences are a combination of user charges and taxes.

To the extent that they cover the administrative costs incurred by government in providing a service (for example, producing a drivers' licence or maintaining a register of motor vehicle ownership), they provide an appropriate price signal to potential vehicle owners and drivers.

However, where the amount charged is greater than cost it can distort economic decisions. Settings in the income tax law — including fringe benefits tax — also affect motor vehicle use (see Section 13.2).

Consultation question

Q12.1 How can motor vehicle related taxes and road funding arrangements be designed to improve the efficiency of transport of people and goods in Australia?

12.2 Taxation of alternative fuels

Although the primary role of all transport fuels is to provide energy, both the energy content and tax treatment of fuels varies between different types (see Chart 12.3). Tax is one factor influencing the choice between petrol, diesel or alternative fuels. For example, liquefied petroleum gas (LPG) is currently not subject to fuel tax. Biodiesel and domestically produced fuel ethanol are also effectively tax-free through separate grant programs.

Chart 12.3: Energy content and current effective tax rate per litre of fuel (2008)(a)

Chart 12.3: Energy content and current effective tax rate per litre of fuel (2008)(a)

  1. Effective tax rate includes effects of programs that make biodiesel and domestically produced fuel ethanol effectively tax-free.

Source: ABARE (2008) and Australian Treasury (2008).

Summary of key messages from submissions

Some industry submissions argue that fuel tax should be reduced or removed on alternative fuels. They suggest that the use of alternative fuels should be promoted because of their purported environmental benefits, and note that under the Carbon Pollution Reduction Scheme there would be some price differential between conventional and alternative fuels.

Some submissions consider that tax assistance to biofuels (ethanol and biodiesel) is desirable to encourage investment in infant industries.

Other submissions argue that exemptions and concessions to fuel tax should be minimised to achieve greater market efficiency and to target the social costs of motor vehicle use through taxes. Some contributors suggest that a fuel tax system based on energy content would be an improvement over the current system.

Raising revenue efficiently

A revenue-raising tax is efficient to the extent that it does not distort economic activity by altering production or consumption decisions. This means that efficiency of fuel tax as a revenue-raising tax is diminished to the extent that untaxed substitutes for taxed fuels are adopted.

In the short run, different fuels are imperfect substitutes for one another — different fuels work in different types of engine, and have different storage and distribution mechanisms. However, the quality and price of different fuels affect longer term decisions about vehicle purchases — and therefore the long-term fuel mix.

Influencing production and consumption

As discussed in Section 3.3, specific product taxes are sometimes used to affect the price of goods, and therefore influence consumer and producer behaviour. While this may have limited effect on overall demand for transport energy, it does influence the fuel mix. For example, a higher level of tax on leaded petrol provided incentives to consumers to switch to unleaded petrol, as part of the phasing out of leaded petrol in Australia.

The tax-free status of LPG, and a subsidy for conversion to it, has encouraged motorists to adapt their vehicles despite its lower energy content. Many taxis use LPG even though the tanks reduce the available luggage space.

Similarly, arguments in some submissions in favour of the current concessional tax treatment for biofuels (including ethanol and biodiesel) characterise the biofuels industry as an infant industry which requires a subsidy until it is fully competitive with conventional fuels.

In some cases, the demand for alternative fuels is influenced by regulation. For example, NSW requires a minimum amount of ethanol be blended into the total volume of petrol sold there. The existence of this kind of legislative mandate interacts with tax concessions for alternative fuels.

To the extent that quantity demanded depends on regulations rather than price, the role of tax concessions in influencing decisions through price becomes irrelevant. Nevertheless, producers and consumers still receive the mandated fuel effectively tax-free, at a cost to the Australian Government budget.

Another perspective is that concessional rates of fuel tax are justified on the basis of the social costs of fuel use. If different types of fuel have different social costs it could be efficient to make allowance for this in the rate of tax charged. For example, if the social cost of carbon emissions of biofuels is less than for diesel, this could be reflected by charging a lower rate of tax on low-emission fuels.

However, as discussed earlier, there may be scope for external costs to be addressed through more targeted mechanisms. In the case of carbon emissions, the Carbon Pollution Reduction Scheme may provide a price signal that reflects differences in carbon emissions. Other significant social costs of motor vehicle use also depend on the time and location of driving, not the type of fuel used.

Consultation question

Q12.2 What should be the role, if any, of fuel taxes? What does this mean for how fuels and their uses are taxed and the rates of tax applied?

12.3 Different modes of transport

To the extent different modes of transport are substitutes for one another, specific tax arrangements that apply to some modes of transport, but not others, may influence the choice of which type of transport to use.

Summary of key messages from submissions

Some submissions consider that, because aviation fuel is taxed at a rate less than fuel used in road transport, air transport receives a subsidy from the tax system. Some submissions suggest that this is environmentally damaging because aviation is more energy intensive than other forms of transport. They also suggest that this favours more wealthy Australians who can afford air travel.

Many submissions raise the concern that the system of transport taxes distorts consumer decisions between public and private transport, as well as between road, rail and air travel. Other submissions note that governments earn 'rents' from issuing a limited number of taxi licences.

Some in the aviation sector are concerned that existing funding mechanisms for aviation (through taxes and user charges) do not provide appropriate price signals to different service providers and involve cross-subsidies. However, some carriers argue that the tax system should be used to subsidise air transport to regional areas.

International carriers object to the Passenger Movement Charge (levied on outbound passengers) on the basis that it overcharges for the services actually provided to passengers, and is therefore a tax rather than a user charge.

The shipping sector argues that Australia's tax system affects the Australian industry's domestic and international competitiveness. They advocate replacing the company tax for Australian shipping with a 'tonnage tax', and reforming the application of income tax to Australian seafarers. There is also concern that the tax treatment of fuel used for shipping favours foreign over domestic shipping in the Australian coastal market.

Aviation

Aviation gasoline and turbine fuel used for domestic trips are both subject to excise, although at a much lower rate per litre than automotive fuels. Here the policy rationale is to recover costs for funding the Civil Aviation Safety Authority, rather than for general revenue-raising.

The absence of taxation for general revenue purposes may reflect the principle that general revenue raising taxes cause least economic distortion when they are applied to consumer goods, rather than commodities that are predominantly used as business inputs.

Funding particular expenditure programs through an excise is an indirect way of recovering costs for the services they provide, in an administratively simple way. The impact of the excise may depend, in part, on the extent to which the cost of providing a service to a particular flight is directly correlated to the excisable fuel used on that trip. As with land based road user charging, there may be more direct methods for charging for services to aviation than through fuel excise.

Choices between transport types

Applying tax in some situations, but not others, can influence behaviour. The extent to which this diminishes efficiency depends on the degree to which different modes of transport are substitutes for one another. For example, imposing tax on fuel used for domestic air travel, but not international air travel, might bias against domestic journeys. Similarly, the choice between taking a journey by car or aeroplane might be influenced by the higher relative taxes on motor fuel compared to aviation fuel. The choice between a short trip in a car and using public transport will likewise be influenced by the taxes and subsidies that apply to each mode.

Many states raise tax revenue by restricting the number of taxi licences they issue. This cost is ultimately passed to users of taxis in the form of higher fares and more time spent waiting. This affects consumer decisions. For example, if taxis were more readily available and less expensive, individuals might rely more on taxis and less on private motor vehicles. There may be equity concerns. Individuals who are unable to drive private vehicles or access public transport may be reliant on taxis.

Consultation question

Q12.3 Do the existing tax arrangements lead people to make economically inefficient transport choices, and if so, how might they be improved?

12.4 Other issues

Interaction between fuel excise and GST

The Review Panel has been asked to consider the interaction of GST with the taxation of fuel.

The GST is charged at a uniform rate based on the market price of goods and services, including petrol. To the extent that any tax, fee or charge on business is passed to consumers in the price of a good, the imposition of the GST gives rise to 'tax on tax' for consumers. Business users can generally claim an input tax credit for GST paid. Removing the excise component of petrol prices from the GST would reduce GST revenue paid to the States.

Summary of key messages from submissions

Some submissions argue that because petroleum is a limited resource and fuel use has environmental impacts, reducing the price of fuel by cutting the GST would be counterproductive to long-term policy objectives.

Some submissions propose that fuel excise be automatically indexed to CPI so that the tax portion of fuel prices does not fall over time. Others consider that the 'tax on tax' or 'double taxation' is unfair, and that the GST or fuel excise should be removed.

The GST and other taxes

As noted in Section 3.3, the GST is a broad-based consumption tax covering roughly three quarters of household consumption expenditure. The key advantage of broad‑based taxation is that the rate of tax has little influence on consumer choices between different taxable goods. In addition, a uniform rate of tax simplifies compliance by business, as they can apply the same tax treatment to most of their sales.

To the extent that any tax, fee or charge paid by business (including company tax, payroll tax, land tax, fuel excise, customs duties and other taxes) might be passed on to consumers in the GST inclusive price, there is a 'tax on tax' issue. In most cases these taxes are not apparent to consumers.

Where the GST applies to goods that are subject to excise, this effect is more obvious to consumers. Fuel tax is charged on a volumetric basis at a fixed rate of 38.143 cents per litre. The legal incidence falls on manufacturers and importers of fuel. Fuel excise is typically incorporated into the price of the fuel sold to service stations. Service stations then pass it to consumers in the pump price, on which they also charge GST. Consequently, approximately 3.8 cents GST per litre of fuel is attributable to excise.

Compensation for this 'tax on tax' effect was provided at the time the GST was introduced. Petrol excise was reduced by 6.7 cents per litre when the GST was introduced in July 2000. Fuel excise was further reduced by 1.5 cents per litre in March 2001. Since then, the excise rate has not been indexed to inflation. This means that the real excise rate has fallen over time.