As more EVs hit the road, this gap in our tax system needs fixing
History shows that when you have a crisis as big as the current oil shock, it not only causes short-term problems like inflation, but also long-term changes in people’s behavior.
For example, the global financial crisis of 2008 is said to have made some people in the worst-affected countries more debt-averse; for example, COVID-19 has led to a huge increase in working from home.
What could change this time? I predict rising fuel costs and all those empty cars may change the way many of us think about the cost of driving a gasoline or diesel-fueled car compared to an electric car.
In fact, there are already reports from automakers and dealers that more people are considering making their next car an electric vehicle.
As more people make this decision, it only accelerates the need to address a major loophole in our tax system. The problem is quite simple: the fuel tax is not being collected from the growing number of road users who drive electric cars.
Fixing this by introducing some form of road user charge, dubbed an “EV tax” by some, would be a sensible economic reform that the federal government has already committed to implementing at some stage, but some in the government are reportedly pushing for a delay.
The current fuel crisis helps explain why a road user charge makes sense and why it should happen sooner rather than later.
As gasoline and diesel prices soared this month, the debate inevitably turned to how much of the Bowser price is tax. Answer: 52.6 cents of every liter of gasoline and diesel goes to the taxpayer through the fuel tax, which helps pay for road maintenance.
The opposition says we should cut fuel duty in response to the oil shock, but the problem here is that this leaves a gap in the budget and also encourages spending at a time when the Central Bank wants the opposite.
But there is a strong case for changing the way we raise tax revenues to help fund roads in the long term.
The problem is that electric car owners obviously don’t pay fuel tax, and this will leave a growing hole in the budget as more people switch to electric vehicles as we try to meet our emissions reduction targets.
In response, the government has made clear that a change will come at some stage. Following last year’s economic reform roundtable, Finance Minister Jim Chalmers and state finance officers committed to undertaking further work on charging road users for EVs, adding that the policy should not “hinder the continued uptake of electric vehicles”.
At a time when there is so much concern about increasing productivity, it is worth noting that economists see road pricing as a real economic reform.
This will not only fill a huge gap in the budget, but will also send a “price signal” to drivers, because the idea is that if you use the roads more you pay a higher fee. This kind of thinking appeals to economists because it signals to drivers that maintaining roads comes at a cost.
Last week, Australian He reported that the Treasury was modeling a national road user charge and political objections soon began.
The Greens have attacked the idea of imposing a road user charge on electric vehicles only, calling it a “full-body collision” for electric vehicles. They argued that instead of making clean transport more expensive, we should look at how we can encourage the purchase of electric vehicles.
But it’s hard to see how asking EV owners to contribute to the cost of the roads they drive will actually change people’s incentive to buy electric cars. Of course, we can’t know for sure without knowing the size of the charge, but Chalmers has explicitly said that road user charging will be designed to not hinder EV uptake.
This is also about justice. The road user charge would be a way to help electric vehicle users pay for the roads they use, just like other drivers do when paying fuel excise tax.
Importantly, this is not a short-term revenue grab. Charging road users made sense long before Donald Trump decided to attack Iran and create chaos in oil markets.
Last August Chalmers said charging road users was a “long-term project” and said the status quo would not work in 10 or 20 years as fewer people would drive petrol cars.
Another reason why this is a long-term project is that the practical details of the road user charge are complex. For example, how do you measure how much time someone drives so they can be taxed accordingly? There are privacy concerns about tracking drivers’ movements, while checking odometers also seems cumbersome. The involvement of states adds another layer of complexity.
These are all issues that can be resolved, but perhaps not before the May budget. It would not be surprising if the budget instead considers the long-term risks of consumption tax from accelerating electric vehicle uptake, or perhaps provides more detail on the government’s plans for road user charges.
The idea of an “EV tax” for electric vehicle owners will undoubtedly be unpopular.
But that’s the nature of reform: It’s about the greater economic benefit, which doesn’t please everyone. In the long run, some form of tax on EV driving would be a sensible alternative to a gasoline excise tax, and EV owners should also help pay for the roads they use. After all, one day the vast majority of drivers will travel in electric vehicles, and this oil crisis may well accelerate movement in this direction.
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Clancy Yeates is deputy business editor. He covered banking and financial services and was previously a national business correspondent in the Canberra bureau.Connect with: X or email.
