Tax on Vehicle Miles Traveled Gains Support, but Raises Orwellian Questions - SA's DOT plans something similar

The good thing about having a Google alert is that you also get to see stories that you never intended to receive in the first place. I just came across such a story, that of Tax on Vehicle Miles Traveled (VMT) which is being proposed in the USA and some European countries - a tax charged to motorists based on the kilometers traveled instead of the fuel consumed by the vehicle. Its an interesting topic that its supporters think will solve the problem of depleting revenue from fuel tax. For those criticizing the plan, points that this depleting tax revenue are as a result of increased fuel efficient vehicles and the VMT will encourage more people to drive vehicles that emit more pollution as put by a columnist Glenn Reynolds;

"Gas taxes are a pretty good proxy for road usage -- the more you drive, the more gas you burn -- and there's a bonus: Gas taxes encourage people to use less gas. ... A mileage tax, presumably, doesn't care whether you're driving a Prius or a Hummer, giving no incentive to save."

To address the concerns mentioned below, a final report by the National Surface Transportation Infrastructure Financing Commission said new technologies could allow for a mileage gas tax that would take into account the type of vehicle and level of emissions. Such programs of that type are being developed in other countries, including Germany and the Netherlands, the report said (1).

Here at home, the National Transport Master Plan 2050 (NATMAP), through its FILM (Finance, Institutional, Legal and Management) of which I was lucky enough to be part of suggest we follow something similar here in SA;

“Within 5 years to develop a revenue collection design, funded through user pay methods, acceptable and visible to the public, that ensures a flow of revenue sufficient to annually maintain, preserve and improve highway and road system” - Page 31

It goes further and says;

Internationally, traffic congestion is costing countries a lot. On the other hand high international fuel prices increase pressure on fuel levies as an acceptable source for infrastructure spending. It is therefore time to move towards “Variable User Charging” (VUC) to capture externalities like congestion, air pollution, greenhouse gas emissions and safety.

Once the NATMAP bill becomes an Act, we may as well start preparing ourselves for tax based on how you drive and not how much fuel you consume. How that will be done may not necessarily follow what is being proposed in the NATMAP but how its going to be implemented is something interesting to watch.

1 - http://edition.cnn.com/2009/POLITICS/02/20/driving.tax/

Enter DNA Economics - Vehicle Emission Tax Debate goes on

You may be familiar with the Business Day vehicle emission tax debate as I posted here and here. The latest defender of the tax is no other than Mr. Brent Cloete whose article appeared yesterday on Business Day. He argues that the tax is a good start even though we do not have cleaner fuels in South Africa. You can read his articles below or here. What I also learned is that double cabs are not yet being charged this tax but will be charged next year in March.

Carbon tax on cars is a good start

The tax applies to domestic sales of new passenger cars and is levied at R75 (before VAT) for every gram of CO² emitted per kilometre driven above a threshold of 120g/km.

SA’s new carbon dioxide (CO² ) emissions tax aims to encourage the purchase of fuel-efficient vehicles. The tax applies to domestic sales of new passenger cars and is levied at R75 (before VAT) for every gram of CO² emitted per kilometre driven above a threshold of 120g/km. The tax will be extended to double-cabs in March (at R100 for every gram per kilogram above 175g/km) and other light commercial vehicles will follow. Minibus taxis may be included in future.

The Treasury is also considering the use of annual vehicle licence fees, differentiated by emissions levels, and higher fuel levies to give people an incentive to switch to more fuel- efficient cars.

It has been argued this tax is unfair. It requires consumers to pay indirectly for transport carbon emission without extensive public transport alternatives. There are also few truly fuel- efficient vehicles available locally (only two models fall below the threshold) since sufficient quality fuel to use the latest technologies is not available in SA, and is unlikely to be for years .

Further , the tax threshold is lower than in the UK (165g/km) and France (155g/km), where modern fuel alternatives are available. It has also been argued that the tax may be ineffectual. An average price increase of 2%-4% is unlikely to have a significant effect on purchasing decisions in the long term, and is much smaller than the 27% import tariff on motor vehicles that consumers already bear.

The tax also doesn’t give people an incentive to drive less or in a more fuel- efficient way, whereas an increased fuel tax would. Consequently, many commentators view the tax as a revenue-generating instrument masquerading as an environmental tax.

These criticisms are overstated. While it would have been much better to co-ordinate tax changes with improvements in fuel technology and public transport, it is hardly within the Treasury’s ambit to enact fuel quality standards and drive buses.

The government has chosen an ambitious emissions trajectory, pursuing targets in the Copenhagen Accord. To remain on this trajectory climate policies must be adopted early and include carbon taxes. Waiting for fuel and public transport improvements would have put SA behind the climate change policy curve.

The Treasury should be applauded for taking a leading role in fighting climate change. Although the tax isn’t large enough to change consumer behaviour directly, it will make consumers aware of the climate change implications of vehicle purchases — and the possibility that decisions now could have repercussions if an additional fuel levy or differentiated annual licence fee is introduced.

It may, however, have been wise to start with a higher threshold that moved down over time as more fuel- efficient cars became available locally. This would have given consumers more opportunity to avoid the tax, thereby allaying fairness concerns and reducing the impression that the tax is mainly aimed at raising revenue.

Finally, it is important to note that this new tax simply aims to reduce vehicle emissions. The Treasury is considering a broad-based carbon tax that will increase the price of products that are carbon-intensive to produce, like cars. If implemented as a tax on coal, which seems likely, it may also increase the cost of fuel (23% of local fuel is produced from coal-to-liquid technology). The emissions tax is thus just one component in a suite of policy instruments that will be required to reduce SA’s greenhouse gas emissions.

For the government’s efforts on climate change to work, it is critical South Africans respond appropriately. It is therefore disappointing that the Treasury’s discussion document on the use of carbon taxes, and the green paper on climate change by the Department of Environmental Affairs, were not finalised before the vehicle emissions tax was implemented. A clear indication of future policy will enable consumers and producers to adjust their behaviour pre-emptively, making current policies more effective. It would also help to allay feelings of being “caught out” by changes such as the “surprise” introduction of the CO² vehicle emissions tax.

- Cloete is an economist at DNA Economics, an economics consulting firm, and leads the company’s climate change practice
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