Fuel taxes have been in the news a lot lately with both the proposed Regional Fuel Tax in Auckland and the nationwide increase in fuel excise duty as part of the new Government Policy Statement. As such, there has been a lot of discussion about the positives and negatives of fuel taxes as a way of raising money for transport projects.

Fuel tax, technically called “fuel excise duty” (FED), is around 60 cents per litre at the moment, plus there’s another 6c/litre of ACC levies and GST adds close to another 10c/litre. With petrol currently around $2 a litre, this makes up over a third of the cost of filling up at the pump. It has gone up substantially over time too, including by around 17c/litre over the course of the previous government – although offset by some decreases ACC levy’s. Past FED rates are shown below with the colour representing which party was leading the government at the time.

Interestingly, a 3-4c/litre increase over the next three years puts us back on the general trend we’ve seen in since 2001.

Fuel taxes, alongside road user charges (which are charged on a per kilometre basis for diesel vehicles, generally increasing by axle weight) and vehicle licensing fees provide the money that NZTA distributes from the National Land Transport Fund (the NLTF). At the moment this adds up to around $3.7 billion a year.

Fuel taxes have a number of advantages and disadvantages as a tool for raising money for spending on transport. Let’s run through the advantages first:

Cheap to collect and hard to avoid. Compared to other potential revenue options, fuel taxes are incredibly cheap and easy to collect – which means that essentially all the money raised from them can go into transport investments, without a big chunk of it being siphoned off in the collection process. The compares against other revenue systems like road tolling, where often at least 20% of the revenue is used up in administration costs and therefore can’t be spent on the projects the money is being raised for in the first place. Finally unless you go to pretty extreme lengths, it’s quite hard to avoid paying fuel taxes.

Compared to other potential revenue options, fuel taxes are incredibly cheap and easy to collect – which means that essentially all the money raised from them can go into transport investments, without a big chunk of it being siphoned off in the collection process. The compares against other revenue systems like road tolling, where often at least 20% of the revenue is used up in administration costs and therefore can’t be spent on the projects the money is being raised for in the first place. Finally unless you go to pretty extreme lengths, it’s quite hard to avoid paying fuel taxes. Broadly equates with the amount you use the transport network. While fuel taxes aren’t a pure “per kilometre charge”, the more you drive the more fuel you use up and therefore the more tax you end up paying.

While fuel taxes aren’t a pure “per kilometre charge”, the more you drive the more fuel you use up and therefore the more tax you end up paying. Acts as a useful “defacto carbon tax”. Until we get around to deciding once and for all the world is worth saving from climate change and therefore price carbon properly, fuel taxes can act as a useful defacto carbon tax that discourages people from burning petrol and encourages them to use more fuel efficient vehicles or modes of transport (like public transport, walking and cycling).

Of course it also has some disadvantages:

Potentially regressive. Like other taxes on goods and services (including GST itself), generally lower income households spend a higher proportion of their income on necessities and Auckland’s poor travel choices mean that getting around by car sadly remains a necessity for far too many people. Furthermore, decades of poor housing policies mean that lower income households have been priced out of inner areas and into more peripheral parts of the city, which once again makes them more likely to be dependent on their cars to get around.

Like other taxes on goods and services (including GST itself), generally lower income households spend a higher proportion of their income on necessities and Auckland’s poor travel choices mean that getting around by car sadly remains a necessity for far too many people. Furthermore, decades of poor housing policies mean that lower income households have been priced out of inner areas and into more peripheral parts of the city, which once again makes them more likely to be dependent on their cars to get around. It’s a flat rate. Fuel taxes are the same, no matter when and where you are travelling – a quiet suburban street in the middle of the night or a congested motorway at peak times. However, obviously the true costs of travelling at those times are very different – both in terms of the congestion you’re creating for others and the vast transport spend that’s required to efficiently move you at peak times. At its core, the drawbacks of the flat rate is the main argument for road pricing.

There has been a lot of focus in the recent days about the “regressive” argument, both when it has come to the Regional Fuel Tax and the more recently proposed increases to fuel excise duty. I have some sympathy for this, as I noted above lower income households in Auckland are mainly located in the west and south – parts of the city that are generally more reliant on their cars to get around than more affluent areas in the central and northern parts of Auckland. But at the same time, this just highlights inequities with the current situation and the desperate need for this extra money to fund projects like light-rail to the Airport and Northwest and the AMETI busway, which will provide major car dependent parts of Auckland with quality travel choices for the first time.

Even given this, it would be sensible for the government to look at options for how they might “soften the blow” of these fuel tax increases – especially in light of the Regional Fuel Tax that will be implemented in one big go on the 1st of July. This might mean ongoing 2c per litre annual increases from next year (to avoid an overlap with the Regional Fuel Tax), rather than big initial increases for three years and then nothing. While this might mean a bit less money is available in the National Land Transport Fund initially, perhaps this could be addressed through allowing greater borrowing flexibility – shifting more towards how councils fund their capital expenditure through debt, with those who benefit from the investment once it’s complete being the ones who pay for it. Finally, I suspect it will also take a while for the big new investments the Government wants to make to “ramp up” and go through investigation, design, consenting and property purchase phases before the “big money” is required for construction.

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