Wednesday, November 9, 2011

The Curious Case of the Vanishing Car Taxes

The recent Road Ahead Group report on reform of vehicle taxation publicised one of the unintended consequences of UK and European 'green' vehicle legislation – cleaner vehicles could hugely reduce the Government’s income from vehicle taxes.

European legislation has now set a road map for the average CO2 emissions (and hence fuel economy) from new cars. The Government is also strongly encouraging alternative fuels such as battery electric vehicles. As a result cars are becoming far more fuel efficient, and fuel sales are now starting to fall. This process is set to continue for the foreseeable future.

Making a few assumptions, the Treasury’s own figures suggest that fuel tax receipts will fall from 1.8% of GDP in 2010 to 1.0% by 2030, and vehicle excise duty receipts will fall from 0.4% to 0.1% of GDP over the same period. And that's assuming modest increases in the mileage driven.

Of course falling tax receipts may not be the only consequence of more efficient cars. There's a well known phenomenon known as the 'rebound effect' where making something cheaper means that people tend to use more of it. With cars this effect be especially strong, as falling motoring costs compare rather favourably to the rising costs of using trains and buses.

Vehicle and fuel taxes are currently a major cash cow for the UK Government, and the Treasury is unlikely to let them dwindle away. The campaign for road tax reform might then see an unlikely alliance between green campaigners and Treasury economists before too long.

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