Tuesday, 12 February 2013

Vehicle taxation reform with little measurable benefit

Once again, news media in the UK have been reporting on the ongoing discussions within government to reform motoring taxes in the context of wider reforms of the highways sector. Yet, once again they are reporting on proposals that will deliver virtually nothing in terms of the two key objectives of road user charging - that being more revenue, and better management of traffic demand (one can also argue that it is about better resource allocation as well).

The Daily Mail reports on what it calls a £150 a year "motorway charge", being the idea for a vignette for light vehicles for access to the motorway network only.  The idea actually being considered is to cut vehicle excise duty (commonly called road tax) by about the same amount, although the report doesn't make that as clear as it could, as virtually all comments on the website are the predictable "damned if I am paying more.. how dare they" outrage, which anyone reading the article in a cursory way would understandably feel.

Once again, communication of anything to do with motoring taxes is damnably difficult, a factor the government should bear in mind before doing anything that creates more heat than actual gains in policy.

Yet it isn't about raising more money, because it couldn't do so, or at least not by sufficient amounts to get policy makers excited.  A bit of rejigging of vehicle excise duty might see some low emission vehicles paying the vignette (given the vehicle excise duty they pay now is less than that amount).  It may be easier to sustain inflation adjustment of a vignette than the current vehicle excise duty, but that's about it.

Another article, from an insurance company claims that charges would vary by weight and emissions ratings, which is exactly what vehicle excise duty does now, in part because it tries to reflect the greater wear and tear that heavier trucks impose upon the road network. 

The impression may be that the story is a deliberate "leak" to test public opinion.  If so, it is hardly likely to be given a positive response, in part because nobody could believe that the reason for doing such a reform is legitimate.

What is the UK government wanting to do?

The key outcome sought is to generate more investment in improving roads, most particularly the English strategic road network (Scotland, Wales and Northern Ireland are outside the scope of this, and there has been little said of local roads, although they are in a far more needy state than the motorway network).

The interest is in getting private companies to invest in capital improvements, but given that they wont be allowed to toll these roads (except for a handful of cases where new capacity is provided and it is technically feasible to toll), there needs to be another source of revenue.

What options are there?

Given that tolling existing capacity has effectively been ruled out, there are two ways to ensure a revenue stream for private investors.

The first one is for any new private equity investor to be offered a concession which involves contractual payments, similar to the Private Finance Initiative (PFI) schemes that already exist in the UK highways sector (e.g. for the M25 and M40).   However, as this typically is used for case by case projects, it is not seen as being flexible enough to cover companies literally taking over parts of the network for extended periods.

The second one is to take part of existing motoring taxes and effectively change its status so that it becomes a dedicated stream of revenue from motorists.  That in itself could be achieved in two ways.  The simplest way would be legal hypothecation, so that a set amount of the tax collected or proportion is placed into a legally defined roads fund, that would be allocated for the privately managed roads.  International best practice in doing this would mean a separate funding board be set up, which would manage the fund and be legally required to spend the proceeds on bids for funding.  

However, the UK public service has long been suspicious of hypothecation, for fear that it changes the status of taxes into user fees, and means that it would be a precedent for new hypothecated taxes, even though  evidence from developed countries with hypothecation does not seem to support this though (I come from New Zealand which has successfully managed a transition to a fully hypothecated land transport fund, which the World Bank has long considered to be international best practice).

So the alternative is to split an existing tax, making part of it a fee that can be accessed by the new private investors in the roads.  The Vehicle Excise Duty would remain, at a lower rate, but the new "access fee" would be voluntary (in that it was only paid for using the motorways), and could be regionalised. 

Will this raise any more money?

No.  Unless the private investors are given the right to set the charges of the fee, and presumably would have control over a road or set of roads to justify it (and enforce payment of the fee for those roads).  This seems unlikely, unless the government reforms charges so some pay more.  

Will splitting Vehicle Excise Duty deliver behavioural change that will improve outcomes?

No.  It is a tax on ownership, not road usage, and whether it is redefined as an access charge for motorways or not, the most that might happen is that a little traffic may redistribute from the motorways to local roads, by those who choose not to pay the "access charge".  It wont be charging for congestion (although it would be possible to introduce Brian Wadsworth's proposal regardless of such a change), and it wont result in motorists thinking twice about the costs of a trip.

So why do it?

Well it appears to be a compromise between the traditional antipathy to hypothecation and actually undertaking serious reform.  Vehicle excise duty is at best a tax that recovers some of the fixed costs of the road network, and provides modest incentives to own low emission vehicles, but little else.  There is little good reason to impose a vignette for cars without the presence of large numbers of visiting non-national cars (which there are not).   Meanwhile, the proverbial elephant in the room is fuel duty.  Treasury and some politicians see this as a tax, and want to blank out any linkage of it to usage of the roads.  This is disingenuous, as the revenue generated would simply not exist if the roads were not being used.  Beyond part of it potentially being justified as an environmental tax (albeit to be used as general revenue), it is difficult to not see it as a tax on using the roads (especially given the varying exemptions and different categories of fuel and taxation levels available for different uses of fuel).

Calling it an "access charge" implies that it could transform into a usage based charge into the future, which is true, but it is not as if this makes it that much easier.

What should be done?

If this is just about providing a secure source of revenue for private investors, in the absence of tolls, it would be simpler to avoid changing anything for motorists and just hypothecate Vehicle Excise Duty (and the forthcoming HGV vignette) in its entirety and use it to set up an independent roads fund that would "buy" road "services" on long term contracts to public and private providers of roads.  That would also include bids from the devolved transport bureaucracies in Wales, Scotland and Northern Ireland, and local authorities.  Now the total revenue from Vehicle Excise Duty and the HGV vignette is less than what is spent on roads by central government through various outputs, but it would be enough to guarantee funding for private investment in the strategic road network.  I'd also argue that a small portion of fuel duty should also be hypothecated, because it is a form of user charge, and it provides at least some of the revenue for a roads fund based on usage (which would grow in the event of growth in traffic).

Then any investors in roads could be allowed to contract out of the fund, by charging motorists directly and then offering them full refunds in the fuel duty component and a partial refund in vehicle excise duty.

Until fuel duty is confronted, this whole area cannot be reformed in a way that is satisfactory to motorists, because you cannot hide from the point that motorists know fuel tax is high and so they link that to paying to use the roads.  Meanwhile, unless you are going to reform road charging to increase revenue or improve the efficiency of the system through behaviour change, I do not know why you would bother.

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