Australia's Future Tax System

Final Report: Detailed Analysis

Chapter E: Enhancing social and market outcomes

E3. Road transport taxes

E3–2 The current system raises revenue, but harms efficiency

In 2006–07, the Australian Government collected around $14 billion in fuel tax, of which roughly $4 billion (ATO 2008) was returned through the fuel tax credit scheme. While fuel tax credits primarily remove tax paid on off-road use, they also make fuel tax used in heavy on-road vehicles partially refundable. Part of the fuel tax credit is withheld as a 'road user charge'. Light vehicles, including vehicles used for business, are not entitled to fuel tax credits. Deducting fuel tax credits from fuel tax revenue leaves net fuel tax of around $10 billion per year for the Australian government.

In the same year, the States collected a further $6 billion from road users through annual motor vehicle registration charges, stamp duties on the sale of new and used vehicles, surcharges and levies on compulsory third party insurance, car parking space levies, and other minor taxes (Clarke & Prentice 2009, p. 29).

Collectively, this amounts to around $16 billion collected annually from road users in additional taxes. This combination of annual motor vehicle registration and fuel excise could be viewed as a crude 'two-part tariff' for road usage. While road taxes are not hypothecated (that is, earmarked) to road spending, revenue from these taxes does cover the direct cost of infrastructure spending on roads and bridges, which was $12 billion in 2006–07. A range of additional costs are also borne by governments in relation to roads (for example, policing, justice, emergency services and additional health expenditure). Nevertheless, it is an open question whether these should be financed through specific taxes on road users, or whether the community at large should pay through more efficient taxes.

There are a range of costs that are not, and cannot be, efficiently priced using the traditional 'fuel tax and rego' model. For example, the costs of urban congestion (which vary according to location and time of day) as well as the costs of road-wear caused by heavy vehicles (which vary according to the mass, distance and location of travel) cannot be efficiently priced through fuel tax. This is because the costs are not closely related to the amount of fuel used. These costs are large, and if not addressed through changes to the way roads in Australia are priced, are set to grow further.

Moreover, the supply of roads and bridges, and access to them for heavy vehicles, is not always responsive to the economic needs of businesses and other users.

Finding

The existing structure of fuel tax, annual registration and other road-related taxes is designed primarily to raise revenue. These taxes more than cover the direct costs of providing road infrastructure, but are not capable of providing specific prices that vary according to location or time of use.