Transport isn’t cheap: the government, and councils, will spend about $4 billion in the next three years to maintain and improve the transport network. These costs are funded through taxes on petrol, and Road User Charges for diesel and other vehicles, with both of these charges getting funnelled into the National Land Transport Fund. Local roads are also partly funded by council rates revenues.
If you drive a petrol car, the amount you pay towards the road network depends on how much petrol you use. If you buy a car which uses half as much petrol as your old one, you’ll only pay half as much into the National Land Transport Fund.
A consumer who buys a more efficient diesel car, though, will essentially continue to pay the same amount of tax. As I’ve written previously, that’s quite a bit less than for petrol cars, although this discrepancy is (slowly) being phased out. This means that petrol car drivers are more incentivised to choose efficient cars than diesel drivers. That isn’t a major issue, though, given that around 90% of the cars in New Zealand run on petrol.
The current system amounts to a hidden subsidy for consumers who use efficient petrol cars, as they contribute less towards maintaining the road network (as well as paying less in ACC levies, which I hope the ACC is taking into account in the reviews they’re running at the moment). The subsidy isn’t necessarily a bad thing. It may be welfare-enhancing, i.e. make society better off, if consumers “undervalue” fuel economy. International research on how consumers value fuel economy has given very mixed results, so the jury is still out on that.
So, the current regime encourages the uptake of more efficient petrol vehicles, which could include petrol-electric hybrids. At the same time, however, the system could slow the uptake of efficient non-petrol vehicles, such as diesel cars or fully electric vehicles. Unlike many other countries, New Zealand doesn’t provide any other incentives to choose more efficient cars, so that could be one argument for retaining the current system.
A 2007 paper by Simon King at the Ministry of Transport noted that as efficient petrol cars become more common, the government’s tax take will decline, meaning that the per-litre level of excise duty will have to be raised to maintain government revenues. He argues that “this could be justified as an incentive to adopt more efficient vehicles”, while pointing out that “a more comprehensive solution is to apply Road User Charges… for all vehicles”. Of course, we’re already seeing a falling tax take, as Matt has pointed out in the past, although that’s more due to a decline in total travel than improvements in efficiency.
The Road User Charges Review Group, which published its findings in 2009, recommended that the government level the taxation playing field, either adopting the Road User Charges scheme for all vehicles or replacing the charges faced by diesel cars with an excise duty, similar to that on petrol. The group stated that “preference is given” to the first option, i.e. making the Road User Charges scheme universal.
While the differential taxation systems on petrol and diesel do not appear to be a priority for the government at this stage, it is likely that they will need to be addressed at some stage in the future – especially as more advanced vehicles become available. However, King’s 2007 paper noted that for the meantime, the petrol duty “is extremely efficient, easy to administrate and guarantees a steady flow of incoming funds”. The current system seems likely to be around for at least another few years.