Electric cars pose threat to tax revenue

Despite a slow start, the number of electric cars on Australian roads is set to increase significantly.

Electric cars might represent the future of road transport, but they also pose a significant taxation and funding dilemma for governments.

Electric cars – also called electric vehicles (EVs) – make up an average 2 per cent of the global auto fleet but forecasters believe that could change rapidly, with consequences for government revenues from fuel excise.

EVs comprise only 0.2 per cent of the vehicles on Australian roads, while the figure for Norway, where 39 per cent of all cars sold in 2017 were EVs, is 6.4 per cent.

Despite this slow start, the number of electric cars on Australian roads is set to increase significantly. 

There was a 160 per cent increase in the number of EVs sold in Australia in 2017, bringing the number to 8300. 

Motoring organisation NRMA says that 40 per cent of motorists are considering an electric car as their next vehicle purchase, and for the under-25 age group the figure is 58 per cent. 

Jump in electric car sales

According to the Australian Department of the Environment and Energy, EV numbers are likely to increase to 1.1 million by 2030 out of a national vehicle fleet that currently numbers over 18 million.

The implications of this transition have been the subject of a Senate inquiry on electric vehicles, which has heard submissions not only on the environmental benefits of EVs, but also how the shift will impact on taxation revenue and infrastructure.

Infrastructure Partnerships Australia CEO Adrian Dwyer says the decline in revenues from the fuel excise, which have already fallen by 30 per cent as a share of GDP this century, is a “burning platform” for the tax system.

Fuel excise contributes A$18 billion a year to government revenues, representing 5 per cent of the total, although some of this is returned through rebates on diesel fuel.

More fuel-efficient cars are already hitting revenues. Infrastructure Partnerships Australia’s submission to the inquiry shows that although Australian drivers have increased their annual travel from 217 billion kilometres in 2005-06 to more than 250 billion in 2015-16, the amount raised from the fuel excise fell in real terms by A$1.1 billion over that time.

Electric cars: good or bad?

Paul Drum, CPA Australia general manager, policy and advocacy, says EVs pose a “riddle and a conundrum” for the taxation system, exacerbated by the “mismatch” created by the division between commonwealth and state revenues. 

Raising registration fees to compensate for falling fuel excise revenues, for example, is not a solution because registrations are state revenues, while the excise is federal.

In some states, notably the Australian Capital Territory, there are incentives for purchasing EVs. Buy one in Canberra, and there is no stamp duty to pay and an ongoing 20 per cent discount on registration.

Related video: Uptick in electric cars prompts fuel tax review

What buyers save on state charges, however, is balanced by the fact that if they buy a Tesla, where all models cost over A$100,000, they are liable to pay the commonwealth’s Luxury Car Tax, which starts for vehicles over A$75,000 and is then charged at 33 per cent for every A$1 over the threshold.

Drum says the issue becomes even more complicated when factors such as charging infrastructure and demands on the electricity grid are considered.

Electric car impact on electricity grid

The inquiry heard that access to charging infrastructure is the greatest barrier to EV adoption, but it is unclear as to who will pay for this – will it be the car manufacturers, motorists who will have a station installed in their apartment complexes, or will it be government subsidised?

There is also added demand on the electricity system. This is beyond the anomaly where much of the power for supposedly environmentally-friendly EVs comes from coal-fired power.

The Australian Energy Market Operator (AEMO), which operates the national electricity market, warns that the rapid and uncoordinated uptake of EVs could have an “adverse impact” on the power system, forcing up bills and forcing costly infrastructure upgrades.

“If everyone has a fast charger sitting at home and they come home at 5 o’clock and plug in their vehicle, the grid will break,” Dr Matthew Stocks, from the College of Engineering and Computer Science at the Australian National University, told the inquiry.

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Government policy on electric cars

At industry group the Electric Vehicle Council, chief executive Behyad Jafari says government policy around EVs needs short-term policies to accelerate adoption and get the market off the ground, and then longer-term “people policies”, which integrate EVs with the electricity system and ultimately rationalise the revenue and taxation issues.

“The road pricing discussion should be around reform because the current system has had unfairness built into it,” he says.

“You pay the fuel excise per kilometre if you are in the middle of the bush, and you pay more if you don’t have access to public transport.”

Jafari’s warns that if Australia does not begin to move fast on EVs, then it will become the “Cuba of the Asia-Pacific”, and a dumping ground for obsolete petrol-powered vehicles that manufacturers are unable to sell elsewhere.

“Industry understands that the EV decision has been made globally so it is moving in that direction,” he says.

“Government needs to understand how we can capitalise on this change, but the current conversation with government is stuck on whether we need to do anything at all.”

Read next: Are electric car owners getting a free ride on the taxpayer?

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October 2021
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