I have been reading through sections of the weighty (in thought and mass) Henry Tax Review: See here. This tome has had only a few immediate political impacts but it will help drive debate on tax reform for decades. My interest is the transport sector for which I co-wrote a consultancy for the review with David Prentice. The natural focus for a consultant here is the extent to which the final report of the review (hereafter, the Review) is consistent with the ideas in our contribution and, ultimately, the extent to which government policy might change policy in a way that is consistent with our arguments. It is too much to hope for clear evidence of a direct influence here since many of the arguments we put forward would be accepted by almost all economists. There are a few areas where the Review did not endorse our arguments and many where the Review improved quite a bit on the style and clarity of argument. The Review is a clear, well-written report that deserves to be discussed, argued about and taken seriously.
I have a particular interest in the Review today as I am talking to a Local Roads Congress on Monday and I am sure someone will ask how well our consulting report has been reflected in the Review.
The Federal Government by the way has only so far made one specific reference to the transport sector proposals in the Review – it has rejected the proposal to abolish luxury car tax (LCT). David and I supported abolishing this tax since, although it imposes only small deadweight losses, it has no real economic rationale at all. Why select one luxury good alone out of the many and subject it to a specifically high tax? If redistributive objectives are pursued then adjust income taxes not a specific excise. This is, anyway, a minor item on the tax reform agenda so not much lost. The main items are petrol excises and user charges and the Government has not committed itself on these issues.
The sections of the Review concerned with the transport sector are the “Part One Overview” (sorry, POO) and “Part Two Volume 2 of 2” (PTV2). I found the definitional material distinguishing “taxes” (a payment but not for provision) and “charges” (a payment for provision of something) on page 325 useful. A congestion charge we know typically recoups less than the congestion costs someone who continues to drive on a tolled road incurs – so a congestion toll is a mix between a charge (for avoiding congestion) and a tax. This distinction is important since a charge represents an efficiency-enhancing voluntary exchange whereas taxes do not.
POO
POO sets out broad conclusions of the Review. It sees future tax revenues coming mainly from personal income taxes, business income taxes, consumption taxes and revenue from resource rent taxes (including land taxes). Externality taxes were seen as correcting market failures but not as a major source of revenue. This surprised me – taxes on congestion in our capital cities would raise $10b – hardly an amount to be sneezed at Moreover, there is a case for taxing harmful activities in society (pollution, congestion, gambling, cigarettes and alcohol) rather than work effort, investments and savings – it is these latter things that are often targeted.
POO suggests that stamp duties on motor vehicle purchases as well as the LCT should be abolished – a proposal we endorsed. But it also suggests abolishing all fuel excises and car registration charges longer-term if these charges are ”replaced” by more efficient road user charges. The word “replaced” here is a misnomer since fuel and registration charges are not currently hypothecated to deal with road costs. Indeed David and I did not endorse the abolition of fuel excises given that they are efficient way of surrogating for user charges and, even with user charges, provide large revenues at negligible deadweight losses. We endorsed Ramsay arguments for levying hefty taxes on goods in very inelastic supply – Australian fuel demands are astonishingly inelastic – although we noted criticisms of the Ramsay approach if fuel demands are independent of work or leisure demands. More on this later!
On page 10 the Review notes that current methods of assessing fringe benefits tax on vehicle use can create incentives to drive – and congest/pollute more –to reduce the taxable value of a car. Our report noted the same distortion.
Page 11 notes that new technologies – such as vehicle telematics – facilitate the potential for user charging in transport a point we also emphasize.
Page 13 cites KPMG estimates of the marginal deadweight losses of various taxes – a report I hadn’t seen – with estimated marginal losses of 40 cents in the $1 for motor vehicle taxes. On checking I couldn’t find this report and so am unclear what taxes are being referred to here – stamp duty, registration charges or what?. The estimated marginal deadweight losses seem high.
In Chapter 8 there is a endorsement of user charges to address congestion and heavy vehicle charging. The standard argument for not relying on supply-based policies alone to address congestion is advanced. Congestion charge revenue should be hypothecated ‘initially’ to provide public transport with revenues from heavy vehicle charging hypothecated to road maintenance. This is about correct in terms of Mohring-type self-financing results provided congestion does not interact with road damage costs.
The Review does not go as far as others in tying supply decisions to profitability once optimal user changes are in place. But the suggested approach of using strategic planning accompanied by hard-headed cost-benefit analysis isn’t a bad start. We waffled a bit in our report on this and left things vague – there are very complex issues involved in applying a straight cost-benefit test to assets providing CSOs and subject to indivisibilities.
Page 92 lists specific recommendations on road transport taxes that include points made above.
On mass-distance-pricing of heavy vehicles the Review argues that revenues should be allocated to road owners so that local government – which owns 80 per cent of Australian roads and which incurs major road maintenance costs – would receive very considerable revenues. Roads should be treated as assets and managed as such to provide a return comparable to other assets – a key argument in our consultancy report also.
On insurance our report argued for distance-based insurance policies. This was not taken up in the Review but it did argue for a more careful assessment of personal characteristics in devising premiums. This is a bit disappointing since, to assess accident liability, what matters is not only who you are but also what you do – whether you drive a lot or a little!
Where rail has to recover fixed capital costs so too should competing heavy vehicles. I think we missed this point – it is a good one.
The divergence in our views from those of the Review on fuel taxes has been noted though they do advocate taxing competing fuels that do provide the same externalities as petrol comparably. We made the same point. They also suggested that – if you do have fuel excises that they be indexed to the CPI – a point we missed – but which is sensible.
That productive use of fuels is not taxed is sensible in terms of Diamond-Mirrlees optimal tax theory. We applauded this in our report and the Review endorses it.
According to the Review, State taxes on motor vehicle ownership should be related longer-term to fixed costs of road provision and to recovering costs of government services. We obviously agree.
The Review’s proposal to completely liberalize entry into the taxi industry is something we questioned because it seems to us significant regulatory machinery needs to go along with this move. The scale of the implied compensations to license holders is so enormous that there are practical difficulties with this policy unless it operates by expropriating long-held asset values.
PTV2
PTV2 provides a detailed analysis of the major arguments of the Review and background for suggested policy positions. Sections on “User Charging”, “Taxes to Improve the Environment” and “Road Transport Taxes” were of interest to me as were arguments about revenue transfers to local government as a consequence of user charges on roads in a section “Local Government”.
There are sound arguments here for direct policy measures (taxes on fuel to encourage fuel efficiency) rather than stamp duty discounts for fuel efficient cars since the latter will favor purchasers who purchase fuel-efficient cars but don’t drive them far. Differential LCT, stamp duty and registration charges are less efficient than measures which directly charge pollution.
The case for congestion charging and for charging for road damage costs is presented with congestion charges being hypothecated to public transport with fuel taxes now being cut and stamp duties on vehicles abolished. The fixed costs of road provision would be covered from general taxes and registration charges.
Supply decisions would optimize road asset values and would be made on the basis of cost benefit analysis. New roads would be constructed by assessing the value of time saved and the current capital as well as future maintenance costs. The benefits information here requires carefully prepared forecasts that need to be centrally determined. The role of user charges in influencing demands is not made explicit in the Review. This might be a slip but it is an important omission.
Australia’s 560 local governments own and manage around 80 per cent of Australia’s road networks and spending on roads is the largest expenditure item for many. Heavy vehicle charges that accrue to road owners should provide significant transfers of revenue to local government – this is important since local governments cannot levy motor vehicle taxes. Heavy vehicle charges would not fund all parts of a local road system so local government would still remain dependent on grants.
Recent Comments