Our cars are so efficient they may force a re-think on tax collection

Ongoing engineering improvements in internal combustion motor production has resulted in a not-surprising trend — a drop in average fuel consumption. The following graph is sourced from Australian Bureau of Statistics (ABS) data and Parliamentary Budget Office (PBO) analysis.

Average fuel consumption for passenger vehicles

As can be seen, from 2001-02 to 2016-17, average fuel consumption for passenger vehicles has dropped, per 100 kilometres, from 11.4 litres to 10.6 litres. Good news environmentally of course, but there is another aspect to the trend that will have a sizeable effect on transport infrastructure funding.

The above graph is taken from a recently released PBO report titled Trends affecting the sustainability of Commonwealth taxes. Of course the PBO paper was not put together as a warning to petrol heads, but rather aims to inform policy makers charged with maintaining the health of Australia’s economy from the point of view of tax revenue.

The report (download it from here) examines the broad trends within Australia’s tax system since the turn of the new century and the risks these trends present. The PBO says the composition of Commonwealth tax receipts shifts over time as a result of changes in policy and the economic environment, as well as changes in the behaviour of individuals, companies, and other entities.

The paper shows that one of the most significant overall changes in tax receipts as a share in GDP has been a fall in fuel excise, driven initially by a previous freeze to indexation arrangements (now reversed) and ongoing improvements in fuel efficiency, as mentioned. The decline in fuel excise receipts is shown in the following graph, sourced from ATO data as well as ABS and PBO analysis.

Fuel excise receipts

As a percentage of GDP, revenue from fuel excise dropped 30%, from 1.6% to 1%, over the same time frame. Total fuel excise revenue is about 5% of total revenue, or about $18 billion a year.

The PBO states that continuing improvements in fuel efficiency are likely to contribute to an ongoing slowing of receipts from fuel excise, and that the uptake of electric vehicles (although small at present, but expected to accelerate) will add to the drain on tax revenue. (By 2036-37, the PBO estimates from Australian Energy Market Operator data, that electric vehicles will make up 19% of all light vehicles.)

The solution
The problem has been hanging over policy makers for some time, with a previous report from the Parliamentary Library, Revenue from road use, looking to address the problem, or at least present alternatives to road related revenue. Infrastructure Australia recommends reform to the whole system; that is, that all existing government road use taxes and charges be removed and replaced with “direct charging that reflects each user’s own consumption of the network, including the location, time and distance of travel, and the individual characteristics of their vehicle such as weight and environmental impact”.

This system is also recommended by Infrastructure Partnerships Australia, which says it “offers strong opportunities to rationally price access to, and usage of, the road network—providing a mechanism to fund network additions, fund maintenance and improve network performance by aligning supply and demand”.

The Parliamentary report gives some consideration on the equitable effects of reforms. “Elements of the current system tend to operate against the interests of those on lower incomes,” it says. “Fuel excise, for instance, falls more heavily on those who drive less efficient vehicles, commute further and have few alternative commuting options.”

It also states that generally lower income workers may be found to have longer commuting distances, fewer alternative means of transport and less flexible working times. “The interactions are complex, and deserve close consideration,” it concludes.



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