Wednesday, 22 January 2014

Germany's car vignette: the problem is making it tax neutral for Germans

Nearly a year ago I wrote that Germany is considering introducing a vignette system for private cars using its motorways, primarily as a way of raising money from foreign motorists.

Now EurActiv reports that the newly agreed "grand" coalition government in Germany, between the centre-right CDU/CSU of Angela Merkel and the centre-left SPD, includes agreement to proceed with such a system.

For those unfamiliar with the vignette systems of Europe, the concept is relatively simple.  It involves prepaying for access to a highway network (typically all or most of the motorways of the country), and the pre-purchase can cover set periods that can range from 1 day to 1 year, with most systems offering three products (something between 4 and 10 days, another for 1 or 2 months and another for a year).   Traditionally, vignette systems have required vehicles to display a sticker on the windscreen proving payment has been made, but more recently systems in Hungary and Romania are electronic.  All that is needed is for the relevant authority to have a record of payment associated with a number plate, so that those without vignettes can be targeted and stopped by Police.

The decision to introduce vignettes for cars is driven by politics, as German motorists know only too well that if they drive into three of the countries that border Germany they face vignettes (Switzerland, Austria and the Czech Republic, with a fourth coming with Belgium), whilst in France they will pay tolls on the extensive tolled motorway network.  Beyond that, other countries in eastern Europe have vignettes, whilst those in southern Europe have extensive toll roads.   Whilst motorists from many countries drive through Germany, with the perception that they don't pay.

German autobahn network

Doesn't Germany already charge foreign vehicles?

Now it is well known that for trucks 12 tonnes and over, there is the LKW-Maut distance based truck tolling system, which recovers infrastructure costs from those vehicles.  For cars there is nothing (beyond a handful of toll roads), except of course, fuel taxation.  Whilst it is possible to drive across Germany without buying fuel, it is far less likely than driving across Slovenia.  However, it is commonplace in Europe to treat the taxation of motor fuels as not being in any way a tax on road transport, even though it is, in effect, so. The preference is to treat this as just another tax (even though it is levied exclusively on one source of energy, used primarily for one purpose).  

In Germany, petrol is taxed (as of July 2013) at up to €0.6698 per litre (less for lower sulphur content) and diesel at  €0.4857 per litre, none of which is hypothecated for transport spending.   Of course, the amount of fuel tax paid when using German roads will be dependent not only on the amount of driving on German roads, but how much a motorists fill their fuel tanks before and after a trip, making fuel tax a poor proxy for payment for road use (although it certainly is a tax collected because of road use).

Avoiding discrimination

The EU Treaty makes it clear that EU Member States should not discriminate against citizens from other EU Member States.  That means that any vignette in Germany must apply to cars registered in Germany as well as other countries.  Of course, on the face of it, that means an increase in taxation for Germans, which is not exactly what politicians are seeking.   So proposals so far have included the concept of a "discount" for German motorists.

Now the issue becomes rather subtle here, as EurActiv reports Siim Kallas, "the EU commissioner for transportation, has rejected new plans for tax rebates in Germany" in that German motorists cannot be exempt from the vignette nor can they get a rebate for it.

Yet other forms of taxation would appear to be able to be reduced.  Motor Vehicle Tax (a tax on ownership) could be reduced proportionately, so that most Germans do not pay more in tax.  Yet with one politician saying that he wants to raise something like  €800 million rather than  €100 million a year from the vignette, it seems unlikely that this could be possible, alongside reducing other taxes.   The Green Party seems to support introducing a vignette, but without any cut in other taxes (matching its antipathy towards private motoring).

What should Germany do?

If a vignette was introduced, similar to Austria, the key issue remains as to how to deal with other taxes.
Austrian car vignette

The obvious tax that could be lowered is Motor Vehicle Tax, although fuel tax could also be lowered, that will reduce revenue from foreigners buying fuel in Germany as well (though there are some sound reasons for reforming fuel tax which I will not go into here).

That tax now varies between €2 per 100cc for a low emission petrol car (so €40 for a 2 litre car) and €37.58 per 100cc for a diesel car (€751.60!).   So the problem is that Motor Vehicle Tax for low emission vehicles is low, so a vignette akin to Austria's current annual rate of €82.70 would mean Motor Vehicle Tax for small low emission cars would be zero, and they would all be worse off than they are now.  Those with higher emissions would be neutral as to what they pay.  That doesn't exactly seem consistent with a policy to encourage ownership of lower emission vehicles.

Whilst it has been suggested than the vignette could be based on emissions, this is technically a difficult way to differentiate between vehicle classes, unless the discount is offered on factors easily distinguishable (e.g. all hybrids or pure electric vehicles).   

The fundamental problem is quickly identifying the emissions classes of foreign registered cars.  Whilst the Euro engine rating system is well known (and came into effect for vehicles manufactured from 1993), the real issue is ensuring that vehicle owners accurately classify their vehicles when they apply for a vignette.

A vignette purchase typically involves going online or going into a shop and prepurchasing a vignette for a set period of time.  If a highly discounted category were available (let's say €40 for a year), then a foreign vehicle owner could simply claim to have such a vehicle, buy a vignette and face a very low chance of that fraud ever being caught.

There is no pan-European motor vehicle registration plate database, nor is there ready access to the databases of different EU Member States and even if there were there is not consistency amongst the data collected by governments of vehicle types or engine rating.  In other words, the only way to be sure of the Euro engine rating of a car in Europe would be to inspect it visually to confirm its make, model and year.  

It's difficult to see how helpful that is, when it is likely the vignette will be linked electronically to a vehicle's number plate and be bought by means that are highly unlikely to ever facilitate an inspection of the vehicle. Note that no other European country has introduced low-emission vignettes, in part for this very reason.

One answer would be to have a standard vignette price, but allow for road users to apply for a discounted low emission vignette if proof can be given as to the vehicle's make, model, year and engine rating.   Yet that too could face accusations of discrimination, if German motorists are automatically able to buy the discounted vignette (because their own national motor vehicle registry is deemed sufficient proof), but other motorists must present some official registration papers to a retail outlet to officially register for the discount.  

Alternatives seem either complex (e.g. having a database of all makes and models, so vehicle owners can select their vehicle type and year online, automatically giving them a price) or too simple (e.g. making a vehicle's age be the determining factor), and all face issues of potential fraud.

On top of that is the scope of the vignette.  If it applies to all public roads in Germany, then it is relatively easy, but if it is only for motorways then there will be some Germans only too happy to not pay it and avoid the motorways if they rarely drive on them, and get a discount on Motor Vehicle Tax.

So is it simply too difficult to reform?

Voluntary distance based charging

A vignette could be introduced, the annual rates could be discounted from Motor Vehicle Taxation, but this would mean vehicles registered since 2009 would pay more.   So something has to be done for them.  

I'm going to be radical here and suggest it is a way to move to distance based charging. 

The way to do that is far more radical and complex, but it would mean introducing an option to pay much less fuel tax in exchange for paying for road use by distance, on the motorways only.  

That means there would be two options:
1)  Pay a vignette; or
2)  Register to pay to use the motorways by distance, with a partial deduction in fuel duty paid in Germany.

Motor Vehicle Taxation in Germany would be lowered by the value of the annual vignette (and be zero for low emission vehicles).  Fuel tax would remain the same, except for those who pay the distance charge, which could be proportionately lowered (i.e. for every km charged by toll, there would be a smaller proportion credited against a fuel purchase as a tax refund).  

German motorists with vehicles that are in higher emission categories could pay the vignette, pay lower Motor Vehicle Tax and notice little real effect.  They could instead pay to use the motorways by distance and pay lower fuel tax.  

German motorists with vehicles in lower emission categories could do exactly the same (and would have zero Motor Vehicle Tax), but many would be better off not paying the Vignette, but rather paying on a distance basis as those charges would be lower for lower emission vehicles.

Foreign motorists would have exactly the same choices.  Pay the Vignette or register for the distance based toll (including the option of paying less for low emission vehicles) and get a discount on fuel purchased in Germany. 

Complicated?  Yes.

However, it would be one way of introducing voluntarily, a way to transition Germany away from such reliance on fuel taxation and charge for road use.   That isn't easy, particularly as making this option available is going to delay introduction of the vignette and because the central problem is that the portion of the car fleet that the Federal Government wants to favour the most (low emission vehicles) will inevitably have to shift to distance based charging to approach tax neutrality.

A step too far then?

So for now, the policy objectives for Germany need to be defined.

If it is about raising more revenue, then the next question is whether it matters if Germans are charged more.   It probably does, in which case the true scale of possible vignette revenue needs to be ascertained (taking into account the need to offset other taxes for Germans).  

For me it highlights the fundamental problem of there being little connection between motoring based taxes and usage of roads and spending on roads.

I'd suggest that Germany look more thoroughly at vehicle and fuel taxation, and consider how it should move forward.  It may be much easier to consider Motor Vehicle Taxation and Fuel Tax together, and think about where policy on charging vehicles should head in Germany.  That may raise issues about governance of the motorways, including whether Germany should move towards the Austrian model of putting motorways into one (or more) state owned companies empowered to levy charges on road users.

Now that is a much bigger issue, but given it looks like the vignette proposal is too difficult, in balancing German political imperatives and EU law, it would be timely for Germany to look at charging and funding policy for roads more generally.

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