Victoria’s electric vehicle tax and the theory of the second-best

That’s the title of my latest piece in The Conversation. Key para

Just as much (or more than) the owners of electric vehicles, the owners of conventional vehicles pay a mere fraction of what they should. Increasing what the owners of electric-powered vehicles pay is a second-best solution that might move us further away from first best.

9 thoughts on “Victoria’s electric vehicle tax and the theory of the second-best

  1. Your argument was good as far as it went John, but you didn’t address the argument by the Treasury boffins that introducing a kilometage tax early on in the development of the electric car industry is the most politically feasible way of eventually getting to a kilometage tax on all vehicles when the fleet is completely electric. They argue that politicians will not be able to introduce such a tax once a substantial proportion of voters have electric cars because it would be too unpopular. And although they would agree there are higher environmental costs in the short to medium term with the early introduction of the tax, that is less costly than the risk of not having such a tax at all.
    I’m not convinced by this argument, but I do think it needs to be addressed.
    I wonder if some alternative approach to moving towards a kilometage tax might be better eg the ACT Government is considering a kilometage tax as a voluntary alternative to registration fees.

    ‘Mr Barr said any road user charging measures considered in the ACT in the next four years would be voluntary for vehicle owners and not be limited to electric vehicles.
    ”That is, it would be opt-in, open to all vehicles and designed to incentivise less driving, saving households money and reducing congestion on our roads,” he said.
    ”For instance, if the driver is a minimal road user, they may opt for a per kilometre or block kilometre charge that is less than the amount they would otherwise pay on the flat registration fee.” From the riotact.

    There are obvious problems with Andrew Barr’s proposal, but something like it might be a good way forward.

  2. The Victorian tax is a blatant attempt to kill electric cars. It cannot be interpreted in any other way. It looks like a case of little, old Victoria doing exactly what the oil and gas lobby want it to do.

    “Oil and gas exploration and production in the Bass Strait and Gippsland Basin has an exciting future, with approximately 50,000 direct and indirect jobs being created in Victoria.” – The Australian Oil and Gas Review – 2012.

    Climate criminals!

    Actually, the Bass Straight fields are looking rather sick now so why protect them?

    “ExxonMobil has called off the potential multi-billion-dollar sale of its oil and gas assets in the Bass Strait after responses from potential buyers failed to draw a price that tempted the US major to divest.”

    Looks like it’s a poor, dying field that nobody really wants. But still the Vic govt is fronting up to kill electric cars for ExxonMobil.

  3. Health damage is not proportional to miles driven, it’s concentrated in towns and cities, like the traffic congestion externality. The first-best scheme is a mixture of fees proportional to miles (infrastructure wear and tear), levied on all vehicles but rising steeply by axle weight; a carbon tax on fossil fuels; congestion charges in towns, varying by time of day; and an urban air pollution surcharge on the fossil-fuelled vehicles. Feasible? I doubt it.

  4. Having worked a bit in tax policy I am actually very sympathetic to the argument outlined by John Goss. It is fundamental that the ONLY politically possible taxes in a democracy are old taxes; new taxes disturb existing rents (a genuine welfare loss as these rents are typically fully capitalised) and introduce uncertainty. When ICE cars are replaced we are definitely going to need a replacement for fuel tax so best make sure that ithe new tax is now old before we do it.

    Ideally this should be a combination of a weight tax, a congestion tax and a kilometrage tax, but a weight tax is going to penalise electrics anyway (as well as encouraging unsafe car designs) and a congestion tax is already politically impossible.In tax, all experience is that the best is not merely the enemy of the good but the bosom friend of the bad.

    And to overcome John’s point about driving people to less desirable alternatives (which is only loosely the theory of the second best, but OK) the new tax should be accompanied by an increase in fuel tax – the opposite of what would happen with a revenue-neutral package. But yeah, that’s not going to happen.

    The key point is that in order to get the tax in place it is best to initially make it a token one – which in my understanding is exactly what the Vics have done. Not just the politics but the economics (ie John’s point) are all far easier. As ICE is replaced and so the fuel tax ceases to raise enough money then you can gradually up the rate; raising the rate of an existing tax is orders of magnitude easier to do than introducing a new one.

  5. DD and JG, we’ll see how this goes politically. My guess is that they are going to get much more resistance than the number of electric cars would suggest.

  6. John Quiggin
    I own an electric car and I read ‘RenewEconomy’ religiously, so I know there is/will be a major political reaction against the proposed tax. But imagine how much worse the reaction would be in 3 or 5 years time, so this is not an argument against early introduction of such a tax. And at this point those who are/will be angry are almost all Labor/Green voters, whereas in 3 to 5 years there will be a fair number of swing voters with electric cars

  7. Derriaderider: “… a weight tax is going to penalise electrics anyway (as well as encouraging unsafe car designs) …”
    BMW 3 series V curb weight ca. 1,600 kg
    Tesla 3 curb weight ca. 1,800 kg (+12%)

    The weight difference is no longer significant for a hypothetical weight tax. The range of the Tesla is perfectly adequate (base model 350 km, other models up to 500km), so future increases in battery energy density will mostly be cashed by electric carmakers in lower weight and sale price. The big exception is long-range trucks (which aren’t really on the market yet), but any weight tax there should be per axle, and it’s easy enough to add these.

  8. The more I think about it, the more I’m attracted to a road user charge for electric vehicles along with substantial registration and stamp duty concessions. This gives the best of both worlds. Introducing a road user charge when its politically easier to do it, while at the same time giving an incentive for electric vehicle purchase by registration and stamp duty concessions.

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