OECD Taxation Working Papers N. 44 – TAXING VEHICLES, FUELS, AND ROAD USE: OPPORTUNITIES FOR IMPROVING TRANSPORT TAX PRACTICE. This paper discusses the main external costs related to road transport and the design of taxes to manage them. It provides an overview of evolving tax practice in the European Union and the United States and identifies opportunities for better alignment of transport taxes with external costs. There is considerable scope for improving transport tax practice, notably by increasing the use of taxes based on road use. Distance charges offer great promise in delivering more efficient road transport. In heavily congested areas, targeted charges are a cost-effective way of reducing congestion. Fiscal objectives provide an impetus for change as improving vehicle fuel efficiency and fleet penetration of alternative fuel vehicles erode traditional tax bases, particularly those relating to fossil fuel use. A gradual shift from an energy-based approach towards distance-based transport taxes has the potential to establish a stable tax base in the road transport sector in the long run. Traditional structures of road transportation taxes in most countries focus on fuels and, to a lesser extent, vehicles. The central message of this paper is that there is considerable scope for beneficial change in this structure, by increasing the use of taxes based on road use, particularly distance charges and congestion charges. Distance charges can raise revenue at economic costs comparable to or lower than those of fuel taxes, and their appeal from this point of view will increase strongly when road transport decarbonises. Distance charges also offer great promise in delivering more efficient road transport, particularly if they can be differentiated to some degree according to vehicles’ emission profiles and to exposure to pollution. The main external cost of transport in urban areas relates to congestion. Targeted congestion charges can cut congestion cost-effectively. Fiscal objectives – of particular concern to finance ministers and administrators of stressed highway infrastructure budgets – provide an impetus for change as improving vehicle fuel efficiency and fleet penetration of alternative fuel vehicles (even if limited to date) erode traditional tax bases, particularly those relating to fossil fuel use. In the longer run, decarbonisation of transport (and other sectors) is necessary to fight climate change. In this context, several countries (e.g., France, India and Norway) are discussing or have announced bans on the sales of vehicles running on fossil fuels (sometimes including hybrids) starting in 2025 or by 2040. In addition, alternative business models and carsharing could reduce car ownership and the tax base that it constitutes. Traditional transport tax bases are under stress and could, in the case of fossil fuels, should decline strongly over time. In addition, the design of current tax, regulatory, and other transport management systems falls well short of addressing some of the worst negative side-effects of transportation, including greenhouse gas emissions, local air pollution, external costs of accidents and of infrastructure wear and tear, and urban congestion. Meanwhile, with developments in electronic metering technologies, fiscal instruments related to vehicle usage are becoming a practical, albeit politically challenging option. As the fossil fuel tax base erodes, a gradual shift from an energybased approach towards distance-based transport taxes would establish a stable and relatively efficient tax base in the road transport sector in the long run. It also potentially represents a major step forward in using taxes to curb the main external costs of road transport. This paper starts out by discussing the main principles for the design of more efficient road transport tax systems, in Section 2. It focuses on the nature and the size of externalities, drawing from overviews of recent cost estimates for the European Union, France, and the Netherlands (Section 2.1). Section 2.2 discusses the potential role of more novel fiscal policies, e.g., congestion charging, to align taxes better with the main marginal external costs. It also briefly investigates how current fuel taxes compare to the ideal level of fuel taxes that should be set if more sophisticated tax systems are out of reach. Setting taxes in line with external costs is an important dimension of transport tax reform, but, as is explained in Section 2.3, other transport-related tax and pricing inefficiencies need remediation, e.g., improving the pricing of parking and removing tax preferences for company cars and commuting. Section 2.3 also discusses how questions related to inefficient land use interact with transport taxation, and considers interactions between transport taxation and the broader tax system. Section 3 focuses on transport taxation practices to date, identifying patterns of change in the European Union (Section 3.1) and the United States (Section 3.2). The underlying causes of the changes are analysed, and the extent to which they align with the design principles of Section 2 is assessed. Section 4 sums up and concludes. The main insights of the paper are as follows: · Although estimates remain uncertain, it is safe to state that the external costs of road vehicle use are large. External costs of congestion in urban areas are particularly high. Per unit air pollution and climate costs are important as well, and the latter will rise in accordance with the social cost of carbon. · Improved control, through prices, of some of the main transport externalities requires increased reliance on distance charges and congestion charges. The investment and operational costs of electronic charging mechanisms are declining rapidly, so that their applicability increases. · Fuel taxes are not particularly effective at curbing external costs other than CO2- emissions. Uniform distance charges can address external costs of road damage. Distance charges that differentiate by vehicle type can help address air pollution, and more strongly so if they are also differentiated by place. Congestion charges, even with limited differentiation over place and time, allow an approximation of marginal congestion costs and therefore yield potentially large benefits where congestion is severe. · Increasing the use of distance charges and reducing the road-use component of fuel taxes can generate considerable efficiency gains. In the longer run, a gradual shift away from fossil fuel taxes will be required if decarbonisation objectives are achieved and revenues from the sector maintained or increased (whether or not these revenues are earmarked for funding road construction and maintenance). Policies that maintain relatively low prices for alternative transport energies to stimulate decarbonisation strengthen the desirability of shifting to road use as the main tax base for revenue-raising reasons. · Distance charges provide an opportunity for also addressing congestion externalities when they can be differentiated, even to a small degree, according to congestion levels. Country-wide distance charges combined with local congestion charging systems can deliver such differentiation. · There is no basis on externality grounds for the common practice of taxing road diesel favourably relative to gasoline on a per litre basis. Instead, there is a case for higher taxes per litre of diesel than per litre of gasoline. Recent trends towards relatively higher diesel taxes in several countries suggest that the problem of relatively low diesel taxes is declining. · Ensuring that the price of parking reflects its costs more closely is potentially as important as internalising the marginal cost of congestion in urban transport prices. Removing or reducing the favourable tax treatment of company cars and the deductibility of commuting will also strongly contribute to more efficient transport and location choices. · Revenue-raising considerations suggest that taxing car use at VAT plus marginal external cost presents a lower bound to fully efficient transport taxes. This is because driving and vehicles, and to a lesser extent fuel, are relatively inelastic tax bases. The rule of thumb of using excises and charges to align prices better with external costs is a cautious approach that is likely to result in considerable welfare gains. · In the European Union, EU Directives constrain country policy, and this may have limited the potential adverse impacts of tax competition. The gradual adoption of distance charges for trucks has arguably improved the effectiveness of taxation in curbing external costs. However, limiting the use of distance charges to trucks is inefficient and strongly constrains their effectiveness as a bridge to congestion pricing. Extending the application of distance charges to passenger cars would be a next step towards more efficient transport pricing. · The practice of transport tax reform in the European Union and in the United States often appears to be driven more by revenue considerations than by alignment of transport prices with external costs. There is considerable scope for such transport tax reform to also produce better alignment of taxes with external costs, resulting in more efficient usage of available infrastructure capacities and steering to some extent towards the development of less car-oriented transport practices. (Kurt van Dender, 2019).
van Dender, K. (2019), “Taxing vehicles, fuels, and road use: Opportunities for improving transport tax practice”, OECD Taxation Working Papers, No. 44, OECD Publishing, Paris,https://doi.org/10.1787/e7f1d771-en.