Sunday, 23 September 2012

UK Transport Minister says motoring taxes will be replaced by road pricing

Should the UK government replace road tax with road pricing?

Should fuel tax be replaced by road pricing as well?

Well one UK Minister thinks road pricing is inevitable.

Both the Mail on Sunday and the Sunday Express are reporting that Parliamentary Under-Secretary for Transport (a junior Ministerial role), Norman Baker, has said that road tax (officially called vehicle excise duty - essentially an annual tax associated with vehicle ownership) will be replaced with a distance based road pricing system, and fuel tax will also need to be significantly reduced, because existing taxes are unsustainable.

Whilst it is not policy at present, he is the first Minister of the current UK government to say that such a change is inevitable, and he cites evidence from the Office of Budget Responsibility to say revenues from existing motoring taxes will be halved by 2030.  This point was made earlier this year by a comprehensive report from the Institute of Fiscal Studies for the RAC Foundation which I wrote about.

The problem quite simply is that revenue from fuel taxes is being eroded by increased vehicle fuel efficiency and new vehicle fuel technologies, and revenue from vehicle excise duty eroded by people buying vehicles in the cleanest engine categories (which pay less), along with flat rates of vehicle ownership.  While fuel tax could be continually increased, this is becoming politically untenable and will start to have serious equity implications as it will hit those who cannot afford the newest most fuel efficient vehicles the most.


-  Vehicle excise duty would be scrapped and fuel duty cut, with distance charging replacing them based on a "black box" inside vehicles;
-  Motorway trips would "cost more", those on short local trips would "be the winners" (but it is unclear why);
-  The cost to the average motorist would not be higher.


-  "Every government of every colour will get there, whatever parties say now";
-  "We have to recognise that for the future the car is the friend of the environmentalist. We’ve moved very successfully towards the rollout of electric vehicles and a change to what cars are."

It's worth noting that he is not the lead Minister and that he from the Liberal Democrats, the junior coalition partner in the current government (which is having its annual conference this weekend).  So this statement has to be seen in context.  It is an idea being floated that more senior Ministers can refute if need be.

The reactions so far have been from two interest groups.  The Automobile Association head of roads policy, Paul Watters, said to the Sunday Express that "our members tell us they do not trust Governments on road pricing and assurances about such systems being ‘revenue neutral’.  No one ever believes it.”

That indeed, is the problem.

The other comment was from Stephen Joseph, the chief executive of the Campaign for Better Transport (a pro-public transport lobby group), who said in the Sunday Express that it was "hugely significant" and "I think the only way it would work is if people are given a choice between paying road charges or paying fuel duty".

I suspect he is right.

Comment

Good on Baker for floating this, although I predict much of the public discourse on this will be the absolute disbelief that governments can be trusted to lower existing taxes, and concern once again about what the money collected is spent on, and worries about privacy (in part generated by years of false reporting about the technology by some newspapers).   Given the Liberal Democrats had a policy at the last election of drastically cutting spending on roads in favour of public transport and being particularly enthusiastic about policies to reduce climate change, some will see this as a trojan horse to tax motorists more.

A shift from ownership taxes (vehicle excise duty - commonly referred to as "road tax") to distance based charging would be a positive step, in reducing the costs of ownership and meaning those who drive the most would pay the most.  It would have a modest effect of making all motorists consider the costs of each trip, although if it was a flat charge it would certainly encourage them to take the shortest route by distance, although that may not be the best route.   It would take some variation of charges by type of road to avoid that, although it is peculiar for Baker to seem to suggest motorway trips would cost more - when on a per mile basis they should be the cheapest, if it is just about recovering infrastructure costs.

That being the key point.  What is the purpose of motoring taxes?  If it is about recovering what is spent on the infrastructure (or better yet the long run cost of capital), then motorways should be cheapest, on average because although they are expensive to build, the cost per vehicle mile given volumes of traffic is comparatively low.  If it is also about managing demand, then there should be a component of peak charging, which is related to roads that get congested.  If it is also about reducing negative environmental externalities, then there could be a component for that, or if fuel duty is retained it can be said to partly reflect that.

It would be disappointing if time of day was not included in any charge.

In fact a version of this proposal was floated by Brian Wadsworth, Director of the Road Ahead Group,  in a report published by the RAC Foundation.  He proposed that a "discount" system be introduced that would mean that those who do not drive on congested roads at congested times get a refund during the year, with the presence on the network determined by an On Board Unit measuring the time or distance a vehicle spends on congested roads.   I see considerable merit in the idea, but it would not be revenue neutral and is really only useful as a stepping stone towards full charging.

A simpler approach of just charging for distance, at a flat rate, which only varies by vehicle size (and perhaps emissions class) would be similar to that about to be piloted in Oregon, and identical to how diesel cars are charged in New Zealand. 

Yet while it is not technically difficult, it will be politically impossible unless it became just an option, so motorists could choose to pay the annual vehicle excise duty (and bear in mind the cleanest vehicles pay nothing) or pay by distance.  Until people can see that they wont pay vehicle excise duty when they pay for distance, it wont be trusted.  There would be more trust if the system could also partially refund fuel excise duty, at that point people would see they are paying less for fuel every time they fill up their vehicles. 

However, let's not pretend that this wont cost money.  There is a considerable cost in developing any system to replace vehicle excise duty, and moreso to replace fuel duty, but this needs to be seen in the context of the long run economic benefits of changing behaviour and in having a sustainable source of revenue from vehicles.  These are not points that will have widespread political acceptance, at least for now.  What might get acceptance is offering people the option to pay far less for fuel and nothing to own a car, in exchange for paying per mile.

There are a few tricks though.

One is going to be Treasury accepting that, for a while, this will cost more money than doing nothing.  A new system to charge vehicles for road use will cost more than fuel tax or a tax on the annual re-registration of a vehicle.

Secondly there will need to be compulsion at some point.  Two obvious options are to raise existing taxes so much that it incentivises the shift, or by requiring all newly registered vehicles to be on the new system.

Finally, the greatest gains of such a system are not in revenue protection, but in congestion reduction.  That means charging by time of day and location, to some extent.  Brave is the politician willing to push this too early, but weak is the politician unwilling to recognise that this is what will transform highways management in the country.

EU law limits what can be done, for now.

One point that he would need to get around is EU law, which given he is from the Liberal Democrats, a party that embraces the UK having a closer relationship with the EU, is a little ironic.  You see EU law sets minimum vehicle excise duty rates for vehicles over 12 tonnes, so for heavy vehicles not much more can be done, given the introduction of the vignette scheme in 2015.   In essence, the vignette would need to be replaced with distance charging (which, if it is to be done with cars would make sense with trucks). 

Also important is that EU law also sets a floor for fuel duty, which for unleaded petroleum is equal to about £0.29 per litre, so any system that refunds fuel duty can only do so down to that limit.

However, there is a lot of scope within all of that to move, with fuel excise in the UK almost £0.30 a litre higher than that limit.

Conclusion

This should be the start of a long debate about how roads are charged for in the UK and how to reform the system, but to do it will require the rebuilding of trust with motorists and to do that there will need to be some movement on linking what is paid in motoring taxes to what is spent on roads.  

There will also need to be transparency about existing taxes and the objectives of taxing motorists.  Until this can be established, and the current opaque relationship between vehicle excise duty, fuel excise duty and expenditure on highways is clarified, there will continue to be difficulties in developing a clear vision to reform a series of taxes that themselves have been disconnected to the use of the road network and expenditure on it.

For I suspect that motorists will be far more embracing of paying for road use by distance if they saw that what they paid reflected a fair share of the costs of maintaining and developing the roads, and that the roads themselves were maintained to a minimal standard.

Right now it would be very difficult to convince anyone that this is what happens.

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