Australia's Future Tax System

Final Report: Detailed Analysis

Chapter E: Enhancing social and market outcomes

E3. Road transport taxes

E3–1 Quicker, more reliable trips on less congested, better maintained roads

Every industry depends on an efficient and competitive transport sector for the timely movement of people and goods between geographically dispersed centres and for access to domestic and global markets. Australia's transport sector is also critical at a social level, providing access to jobs, services and other people. Most people use roads and bridges most days of their lives, whether as a motorist, a pedestrian or a cyclist, to get to work or school or to participate in the community. Road transport is an input to almost all the goods and services we consume.

But despite the fundamental demand for roads, road markets are subject to major market failures and poorly adapted institutions. In particular, congestion costs in urban areas are almost entirely unpriced. Road-wear charges for heavy vehicles do not accurately reflect the damage that particular vehicles do to the roads. These deficiencies impose large costs on the Australian economy.

These costs affect not only individual drivers, but also reduce the nation's wealth — much of which is generated in urban areas that are affected by congestion. Capital cities contributed 78 per cent of the nation's economic growth between 2001 and 2006 (Infrastructure Australia 2008). Much of the innovation and invention that drives sustainable growth occurs in cities and has led to the saying that 'cities are the engines of growth' (Lucas 1988). However, opportunities for growth are hindered by poor use of infrastructure.

In making decisions about where, when and how to drive, road users sometimes make choices that delay others, damage public roads or pollute the environment. Road prices that reflect congestion, road-wear and environmental costs would give road users both the information and the incentive to reduce the trips that are most costly to society. (The potential to use motor vehicle taxes to improve the environment is discussed in Section E2 Taxes to improve the environment.)

This section proposes a major reform of road transport taxes. The vision for road tax reform is for quicker and more reliable trips on roads that are less congested and better maintained. All road users, private and commercial, would save time, vehicle and fuel costs. All drivers would have real incentives to choose different routes, times or transport modes, so as to produce lower emissions and less noise, and help create more sustainable and liveable cities.

Taxes on roads or road user charges should principally be used to provide signals that improve the use or building of roads. There is also a case to recover a fixed-cost component of road use as an access fee or user charge. Coupled with institutional reforms, this could improve accountability in the provision of roads. Fuel tax and other transport taxes are not an efficient or equitable means of financing general government expenditure.

The reforms to road transport taxes proposed in this section would help achieve a road system that meets the social and economic demands of both the general public and the freight industry. The financial incentives for transport agencies would be more closely aligned with the demands of road users. Businesses with specific transport needs could negotiate with road suppliers to provide key infrastructure or service guarantees.

The current institutional architecture is not well-geared to the efficient use and supply of roads. In conjunction with improved pricing, the institutional structure needed to mediate the efficient supply of, and demand for, road infrastructure must be considered. This will require cooperation among governments.

The discussion of roads in this Review is predicated mainly on existing technology for road pricing. In the long term, further technological changes may enable further reforms. The changes to institutional arrangements suggested in this section would facilitate innovation based on such developments.


Transport-specific taxes should only be imposed where they improve the way that people, businesses and governments make decisions. In general, this means that transport taxes should be designed to correct market failures in the transport sector — specifically, to ensure that users of transport make decisions based on the full costs of their activities on the community (including unpriced costs that spill over to others and the cost of consuming infrastructure).