Electric Vehicles Tax: funding the road to the future: Victorian Budget

The widespread adoption of electric vehicles will significantly reduce Australia’s carbon footprint and it is important we have the right incentives to encourage better choices for our environment.

As part of this week’s state budget, the Victorian Government announced the following initiatives to accelerate the adoption of low and zero emissions vehicles across the state:

  • $25 million towards the development of a public fast-charging network for motorists across major highways and key tourist destinations;
  • Development of a business case to increase the procurement of zero-emissions vehicles in the Government’s fleet; and,
  • Introduction of a new distance-based tax on electric and hybrid vehicle use to ensure these vehicles make a fair contribution to funding the development and maintenance of public roads, while recognising their environmental and health benefits.

The announcement follows the recent lead of the South Australian Government. Both states have said their new taxes will come into effect from 1 July 2021. At this point, it is not clear if the announcements were co-incidental or co-ordinated, and while there may now be some pressure on other States and Territories follow suit, we should not speculate at this point about the approach being taken nor the associated timing.

The market’s response to the new tax announcements have been varied, with some industry bodies arguing it is a fair initiative while others argue the introduction of a direct tax on electric vehicle use will disincentivise their widespread adoption.

Funding the road to the future

Broadly, the proposed tax will charge drivers of electric vehicles 2.5 cents per kilometre and drivers of hybrid vehicles 2.0 cents per kilometre to fund the development and maintenance of public roads. The details of the South Australian tax are yet to be announced.

This tax will mean drivers of low or zero emissions vehicles in Victoria will be directly charged for their use of public roads, but at a subsidised rate to the current excise tax that is indirectly levied on the more common petrol and diesel vehicles.

Under the current excise system, approximately 42 cents of excise tax is levied on each litre of petrol and diesel fuel. Although the excise tax is not hypothecated from the government’s consolidated revenue, it is notionally allocated to the development and maintenance of public roads.

By directly charging the driver for their use of the road, the Victorian Government will be able to better recover the cost of the damage caused to roads by individuals and business to ensure negative externalities are minimised.

The Parliament of Australia’s inquiry into fuel excise highlighted this direct model of taxation is much more effective than the existing indirect model, which effectively uses petrol and diesel prices as a proxy for the social cost of an individual or business’ damage to public roads.

Accordingly, businesses need to be aware that the ATO are currently testing the impacts of similar and alternative taxation models ahead of broader reform to the fuel excise and fuel tax credits legislation at a Commonwealth level.

Incentivising environmental considerations

The road user charge subsidy for electric vehicles will have significant impacts for businesses with large light vehicle fleets and will provide an ongoing tax saving to partially offset the additional upfront investment required for businesses that choose electric vehicles.

On average, Victorians drive 13,818 kilometres per year. Under the proposed tax electric vehicle drivers will pay $345 tax as opposed to $778 that is collected under the current fuel excise scheme. For hybrid vehicles, the impact of the newly proposed tax will vary depending on the fuel split and efficiency of the vehicle.

It should also be noted that while electric vehicles require greater upfront investment, they are significantly cheaper than petrol or diesel vehicles to run and require less frequent and expensive servicing.

Across the country fleet acquisitions by businesses and government account for approximately 52 percent of new vehicle sales and 63 percent of electric vehicle sales. Baring this in mind, it is worth noting the development of the Victorian Government’s business case for electric vehicle procurement could represent a significant supply to the second-hand electric vehicle market when these are retired from the fleet.

At this stage of the industry life cycle, development of electric freight vehicles and agricultural equipment has not reached commercial viability and is largely limited by the availability of charging infrastructure in rural areas. Primarily, we expect the newly proposed taxation of electric vehicles has been designed with light vehicle fleets and domestic use in mind and the taxation of heavy vehicles will be addressed in future reforms.

Delivering effective incentives

While some industry bodies have argued the introduction of the new tax will disincentivise the adoption of electric vehicles, research into the implications of public policy incentives across Europe and the US suggests financial incentives at the time of purchase have a significantly greater impact on purchasing decisions than ongoing incentives that impact running costs.

Several studies have further indicated that the availability of public charging infrastructure is a major determinant in consumer purchasing decisions for electric vehicles, suggesting the Victorian Government’s investment in fast charging network may address an important structural requirement to support a mature electric vehicle market.

In my view, the introduction of the new tax is an effective way of ensuring electric vehicles make a fair contribution towards funding our public road system, and supported by the accompanying initiatives, is unlikely to disincentivise consumers and businesses from making the switch the electric.

To strengthen the incentives for switching to zero and low emission vehicles, there is a strong case for supplementing the new tax with further rebates to luxury car tax, stamp duty and vehicle registration that have proven successful to date.  As businesses and consumers make the shift to electric vehicles, the existing tax base will need to transition to avoid creating a further deficit in our economy.

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