Replacing Fuel Tax A Government Quandary – CleanTechnica

Sign up for daily news updates from CleanTechnica on email. Or follow us on Google News!

---

Governments provide services for their people. These services are funded in part by taxes. Election promises of more services and less taxes are ludicrous. So, as the proportion of electric cars on the roads rise, what will fill the funding gap left by the loss of petrol and diesel tax? Admittedly, we are looking decades into the future, as at least half the new cars being purchased today, globally, will still be on the roads in 20 years. However, it is still an issue that governments need to address. Then the next big tax issue: the continuing loss of income tax as robots replace the human workers in every sector.

Globally, all governments rely on petrochemical fuels, as both an export income earner and/or a taxable commodity. This reliance varies; see the chart on page 18 here. It appears that the top government reliance occurs in Israel, Switzerland, and the UK. Take the UK for example: “They [fuel taxes] represent a significant source of revenue for government. In 2023–24, we expect fuel duties to raise £24.7 billion. That would represent 2.2 per cent of all receipts and is equivalent to £850 per household and 0.9 per cent of national income.” Note that 20% Value Added Tax (VAT) is applied on this also. A tax on a tax.

Meanwhile, in Israel, “tax on fuel is $US 1.35 USD per litre which includes direct fuel tax and VAT. This totals to 78% of total pump price.”

In Australia (12th from the bottom of the chart), fuel tax has been a nice little income earner since the states federated in 1901. The tax was sold to the Australian voter as a means of financing road infrastructure. Not many voters had petrol vehicles in 1901, and so the tax was an easy sell. Since 1992, the link between petrol tax and road funding has been severed and the fossil fuel tax revenue goes into the government coffers to be spent as general revenue. It appears that road funding is approximately 30% of the revenue provided by the fuel tax.

Australia has complex tax arrangements regarding the use of fuel in off-road situations (mines and farms). Fossil fuel users in off-road situations get a refund of the tax. If there is no longer a direct link between road infrastructure and fuel tax, one could argue that duty should be paid on all fossil fuels, not just those used on the roads — an argument that would not succeed against Australia’s well-funded farm and mining lobby groups. It is highly likely the current complex tax situation will continue and it will be the average household user of fuel who will pay the major share of the tax, 70% of which does not go for road maintenance.

The federal government is at pains to point out that “Australia has a relatively low fuel tax rate compared with most other OECD countries.” However, like the UK VAT, 10% GST (Goods and Services Tax) is charged on petrol and diesel in Australia. GST is also charged on electricity — but the return to government from charging and electric cars would be much lower the return on fuel tax, as the cost of electricity is much lower and electric powertrains are much more efficient. Fuel is also taxable under the GST, with the GST charged on the excise inclusive in the price of the fuel. GST is collected by the federal government and then passed back to the states. Once again, this is a tax on a tax! Let’s milk the cow twice!

The latest figures indicate that in the tax year 2020/2021, $AU 11.5 billion was collected from fuel tax. Although this is only about 3% of the federal budget, it is still a decent chunk of cash.

The budget explainer predicts: “Fuel excise has declined as a proportion of Australian Government revenue over the last 40 years under pressure from increasing fuel efficiency and higher fuel prices (as well as the rise and fall of Australian crude oil production in the 1970s and 1980s). Revenue is expected to recover to pre-pandemic levels over the next few years following the end of the temporary 6-month halving of excise rates. Beyond that, it is likely that excise will continue to be eroded by factors such more fuel-efficient vehicles and increasing take up of electric vehicles (on and off public roads).”

How will governments make up the revenue loss as the world transitions to electric vehicles? One possibility is a road user charge (RUC). This was tried in Victoria, Australia, and ended up in the High Court. The measure was defeated by a coalition, involving the federal government on the grounds that it was a tax which could only be imposed by the federal government. We, electric vehicle drivers, await the next move, which will probably be the Feds’ version of an RUC. I did some back of envelope calculations and estimated that the Victorian RUC would not be onerous, especially compared to the current levels of fossil fuel tax. I would be happy to pay it.

New Zealand has introduced an RUC and commentators believe it is disincentivising the take-up of electric vehicles. It appears to be a complex system based on distance travelled and vehicle weight. The details can be found here. You don’t have to pay the RUC if your vehicle is powered by petrol, as the petrol price includes a tax, but you do if it is an EV or diesel vehicle. As time progresses, other governments may use this data to assess their own RUCs.

Adding to governments’ funding considerations is the progress in robotics. A question was posed in the mainstream media news as I watched last night: Should businesses that employ robots pay a larger amount of tax to compensate for the loss to government of personal income tax? Many factories — in particular those that make electric cars (all cars actually) are highly automated and there is quite the discussion online about equitable wealth redistribution as a result of labour force change. I like this quote from the Brooking Institute:

“By reallocating wealth generated from the use of robots and AI, the robot tax aims to fund essential public services and initiatives—ranging from supporting elder care and social welfare to education and retraining—thereby addressing disparities and ensuring that the benefits of the AI revolution are shared across the entire spectrum of society.”

How does government fund its services when sources of funding, like fossil fuel tax, are in decline? I would suggest that there is time to work out an equitable solution, particularly in the case of electric vehicles and AI. Time to have a thoughtful conversation as we move into the bright, automated electric future.