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Priorities for Reforming Taxes in the Road Transport Sector

Australia is a geographically large country with a dispersed though highly urbanised population.  This creates intrinsically difficult – ‘tyranny of distance’ – transportation issues. Australia relies heavily on trucking as a means of transporting raw materials to population centres and ports but also experiences significant congestion in its capital cities.  Traffic accident deaths, injuries and property damage have significant economic and social impacts.

A crucial remaining area of microeconomic reform for Australia lies in road transport.   Good policies for accurately charging users for the costs they create when roads are used encourages efficiency in road use.  These user charges attack ‘social bads’ such as excessive congestion, road damage and traffic accident costs.  There is an opportunity to levy taxes that limit these ‘bads’ and simultaneously allow reduced taxes on the sorts of things – savings and work effort – that as a society we value.  There are potential ‘double dividends’ associated with road sector tax reform.

Currently a set of fixed and variable charges – a two-part tariff – applies to private vehicle use.  Fixed charges comprise mainly registration, vehicle licensing and insurance charges.   The key variable charge is the fuel price excise.  To some degree this two-part tariff reflects road usage costs but only imperfectly.

Registration charges reflect the weight of vehicles and the heaviest vehicles do cause most road damages.  However such fixed charges do not reflect the extent to which vehicles are used and the types of road surfaces utilised. It is these factors that mainly drive road damage costs.  These costs are more effectively targeted by specific charges related to vehicle weights (‘axle loads’), distances travelled and the durability of the road surface.   This is now technologically feasible at reasonable economic cost by drawing on telematic technology already utilised by trucking fleet managers for logistic reasons – for tracking freight, checking that drivers take safety breaks and so on.

Fuel excises likewise capture some congestion and pollution costs since the extent of road use is approximately proportional to fuel use. It is, however, a poor approximation since congestion costs arise in crowded urban environments but not, for example, on lightly used country roads. Moreover, even where congestion does occur it typically depends on when travel occurs as well as where. The best alternative is to charge directly for congestion using tolls that reflect actual congestion costs.  This is again feasible using transponder, GPS and other technologies.  The appropriate technology should be selected on the basis of a cost-benefit studies of alternatives.

Most insurance changes are fixed and depend on driver characteristics but not distances driven.  Yet evidence suggests traffic accident costs are related to the extent of road use.  Thus fixed insurance charges do not provide the right signals to reduce traffic accidents. It is straightforward, however, to devise distance-related insurance policies which have the desired incentive effects.

These are not small issues. The Australian road transport sector is a significant part of the economy and, like the communications sector, the extent of its efficiency conditions directly or indirectly the efficiency of almost every other sector. Transport generates huge costs and revenues.  The 38 per litre fuel excise delivered $10.3b in revenues in 2008/09, vehicle registration fees provided $3b and tolled roads $2b.  Road supply and maintenance costs were around $14.1b, vehicle insurance premiums $1.2b and the costs of road trauma and property damage in 2006, $17.2b.  There are also huge unpaid for costs – externalities. The pure economic costs of congestion in Australia’s capital cities were forecast by the BTRE to average 7 cents per kilometre or in aggregate $12.1b in 2008/09.  There are also significant noise and pollution costs (perhaps around $2b) and significant climate change costs caused by road transport. Road transport is a significant part of both the measured economy and of unmeasured environmental costs.

Broadly the reform priority should be to establish sensible demand-side reforms for managing road use employing user charges that reflect the costs of congestion created, road damages caused and traffic accident risks posed.  This is not an ‘anti-vehicle’ measure but simply ensures that road users pay the costs they generate.   Thus this achieves ‘user pays’ outcomes but more importantly, provides the right pricing signals for managing road use costs.  Congestion charges make people think twice about joining congested traffic streams and help to reduce congestion.  Use-related charges that reflect road damages encourage truckers to optimise their choice of route and also encourage local governments to make economically sensible decisions about allowing heavy vehicles access to their roads. Distance-related insurance that also reflect individual driver characteristics encourages motorists to pursue patterns of driving that reduce economic and social costs of road accidents.

Finally, the user charges that are forecast to prevail on planned roads provide a guide to the appropriate scale of road investment.  Road supply decisions are often seen as political ‘ribbon-cutting’ operations.  Depoliticising such decisions by tying patterns of investment to the present value of forecast revenue streams from user charges assists in developing appropriate location, scale and durability characteristics of roads.  It also helps to integrate central planning decisions required for network level planning with local road supply provision that is best decentralised. Local government in Australia incurs significant road maintenance costs but cannot sensibly be assigned monopoly power over road pricing because of potential ‘holdup’ problems. Such charges should be set by those in charge of overall road network design and, given these charges, local government can then make sensible decisions on the types of heavy vehicle traffic than should be allowed to use its roads. This efficiently resolves the ‘last mile problem’ by confronting local governments with the cost and benefit information required to make sensible decisions.  Local governments project revenues from potentially allowing heavy vehicle traffic on its roads and allows these traffic flows to occur if forecast revenues cover costs of upgrading roads, bridges as well as possible urban disamenity costs.

The main issue raised in relation to road sector ‘user charge’ policies is their political saleability and related implementation issues.  Beyond a curmudgeonly few there is little debate now on the efficiency case for levying user charges. Moreover, the technical issues of measuring vehicle weight, monitoring vehicle movement associated with pricing have been largely resolved.  The key factor limiting reform is community acceptance that is a prerequisite for reform.  This has been a focus of recent research efforts and a much better understanding of the issues now exists.  Without user charges road use is inefficient on the demand side and, unless supply decisions reflect projected revenues from user charges, there is inefficiency in supply too.  Thus there are net economic gains from implementing user charges.  This means that gainers from such a reform should be able to compensate losers so that all sections of the community are better off with user pricing.  As an example, heavy vehicle charging that reduces road maintenance costs should provide truckers with lower overall costs of using roads than do obtain with inefficient fixed registration charges.  Those who pay congestion charges for peak hour travel can compensate those tolled-off congested roads with public goods such as improved public transport infrastructure again leaving no-one disadvantaged.  Insurance costs should fall in aggregate if insurance markets are competitive and charges reduce accident risks.  These argument need to be pressed in advance of seeking reform.

Even then those who may not understand the logic of user charging might want to see its benefits demonstrated first before endorsing it.   Trial runs of user charging followed by a community vote are possible with those participating in the trials being exempt from conventional charges such as registration by an amount that reflects the efficiency gains.  Offering motorists choice between travelling in priced uncongested lanes and congested unpriced lanes can also advance acceptability of congestion pricing.

Some are cynical about the prospects for reforming taxes and charges in the road transport sector given the apparent slowdown in the pace of microeconomic reform and the cynical campaigns that delivered disinformation about mining and carbon tax reforms.  Apart from road construction companies however who seek overinvestment in roads and those with out-dated views of the world there are fewer interest groups interested in obstructing road sector reform. It is important to continue to make the intellectual case for charging and to seek community understanding of the difficult future Australia will soon face without it.  The BTRE estimate, for example, that congestion costs in capital cities will double to $20.4b by 2020n without charging.  The situation in cities such as Sydney and Melbourne is difficult now – an imperative for keeping on open mind on congestion pricing is to stop this currently bad situation from getting dramatically worse.

I want to close with some remarks on the fuel excise. Moving toward user charges might suggest dumping this excise to compensate for the user charges introduced but, as David Prentice and I argued in our work for the Henry Tax Review, the case for abolition is not clear-cut.   The excise is a useful revenue gatherer that can be justified on ‘Ramsey grounds’ – demands for liquid fuels are quite inelastic and this tax yields much revenue without imposing significant deadweight losses on the economy.  As it has been pegged in nominal terms over recent years its impact will decline anyway.  My feeling that this excise might be retained also as a hedge against unanticipated possible dramatic future price jumps in fuel prices as a consequence of Peak Oil.  This view was probably the least attractive part of our report to laissez faire purists but, on balance, I retain the view.  Australian fuel prices are low by European standards and a bit high by US standards but for a number of reasons it does not seem sensible to cut fuel taxes now.  Of course if user charges are not imposed on road use then, imperfect as it is, the fuel tax works well as a proxy.  Our empirical estimates suggest an appropriate excise well north of its current values so we are happy to stick with our preference for retaining this excise.

3 comments to Priorities for Reforming Taxes in the Road Transport Sector

  • Me

    I am not sure I agree that the user charges should reflect the road damage that is dependent on road type, at least where there is only one road option for a trip.

    It provides the wrong incentive to the road owner – it is OK to keep a poor quality road, because the user will pay the extra damage costs. There may be situations where this will lead to the deferral of road upgrades which are net-beneficial.

    If the charge reflected the damage to the optimal road, the road owner would have an incentive to improve road quality, to reduce their loss from the damage costs exceeding the revenue from road use.

  • John Brookes

    What an excellent plan. At the moment the government seem to have a bit much on their plate though.

    You probably won’t get it through under the next government, as you only really need one farmer to be disadvantaged and it won’t happen…

  • […] Forum I have been attending the Tax Forum in Canberra for the past two days. I made a submission to this Forum on congestion pricing on roads and I made a presentation based on this submission in the Environmental and Social Taxes session. […]