Government looks to phase out fuel taxes, road user charges under transport review

Fuel taxes and road user charges could eventually be abolished as part of a Government review into the way it collects about £4 billion a year from road users.

The Ministry of Transport has been quietly conducting a “future of the revenue system” work programme, for most of its last term.

Essentially, it’s a high-level review of whether it is appropriate for the Government to rely on fuel taxes in an era when it is also trying to get people to use less fuel, and what to do when revenue from fuel taxes runs out. The revenue from fuel taxes and road user charges is used to build and maintain roads, and other transport projects.

The gradual phase-out of taxes on fuel would be the biggest shake-up of funding for transport in nearly a century – the first taxes on fuel were introduced in 1927’s Motor Spirits Taxation Act.

Transport Minister Michael Wood is looking at other ways of funding transport projects.RICKY WILSON/STUFFTransport Minister Michael Wood is looking at other ways of funding transport projects.

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One option being considered is to replace the taxes with a GPS tracking system on cars, which could effectively toll drivers for how often they used the road. The National Party pledged to support a similar idea at the 2020 election.

Ministers haven’t drawn much attention to the review.

Former Transport Minister Phil Twyford talked about work on reviewing transport funding in 2019 and an introductory briefing to the incoming minister Michael Wood said that officials were looking at new ways of funding the transport system.

But papers released under the Official Information Act show just how radical that shake-up could be, with the Government considering a full overhaul of the transport revenue system.

The first taxes on fuel were introduced in 1927's Motor Spirits Taxation Act.Alden Williams/StuffThe first taxes on fuel were introduced in 1927’s Motor Spirits Taxation Act.

Although with fuel tax revenues projected to continue increasing over the decade, there was no indication fuel taxes would go completely in the immediate future, with Wood saying forecasts show fuel taxes could provide steady income for a decade.

“I don’t intend to make any decisions in the short-term as officials’ advice is that the current revenue system to fund the NLTF is largely fit for purpose until at least the end of this decade based on forecasts.

“It’s important transport services and infrastructure are funded sustainably and can be forecasted accurately to give Waka Kotahi and local government certainty.

“It’s also important issues around equity are considered. I’m looking forward to the report from the Transport and Infrastructure Select Committee’s inquiry into congestion charging in Auckland, which should provide some useful insights which could be applied to this wider ongoing work,” Wood said.

The revenue from fuel taxes and road user charges is used to build and maintain roads, and other transport projectsROSA WOODS/StuffThe revenue from fuel taxes and road user charges is used to build and maintain roads, and other transport projects

The proposal included radical GPS-based measures of charging road users, as well as new revenue tools for local councils to use to pay for their share of big transport projects, like Let’s Get Wellington Moving. Officials said these were “putting pressure on the ‘pay as you go’ principle of the revenue system”.

Transport officials said the current system of funding roads by effectively taxing drivers is world-leading and very effective at making sure that people who use the roads pay for their maintenance.

However, it’s creaking at the seams.

About 95 per cent of transport revenue is collected from people who drive vehicles of some kind.

That money is put into fund at Waka Kotahi- NZTA, which then pays out around £4b a year to maintain existing transport infrastructure, some of it is also used to build new infrastructure like roads or public transport.

The Government wants more New Zealanders using electric vehicles.DAVID LINKLATERThe Government wants more New Zealanders using electric vehicles.

With transport being responsible for about 47 per cent of total domestic carbon dioxide emmissions, officials are keen to move at least some of those drivers into lower-emitting vehicles or public transport or electric vehicles, which are currently exempt from road user charges.

The problem is that if they’re successful in doing so, they’ll blow a hole in their key source of revenue.

This was illustrated during the Covid-19 pandemic, which put pressure on Waka Kotahi, which was no longer collecting much revenue from taxes, but had to fork out more money to keep public transport running for essential workers, necessitating a bail-out of £1b.

“Covid-19 has demonstrated the challenges of the revenue system’s reliance on road users, with travel restrictions reducing revenue from road users while also increasing the investment needed for public transport,” officials said.

Former Transport Minister Phil Twyford talked about work on reviewing transport funding in 2019, but until now the scope of that shake-up has not been known.Hagen Hopkins/Getty ImagesFormer Transport Minister Phil Twyford talked about work on reviewing transport funding in 2019, but until now the scope of that shake-up has not been known.

Officials want to know what the next transport funding system will look like. Currently, it’s largely user pays: drive more, and you’ll pay more tax.

The future system might be different entirely. The briefing asked the minister to consider what the philosophy behind the new revenue system would look like.

“Should a future revenue system be aiming to help achieve broader transport outcomes like reducing emissions or congestion?

What is the potential shape of the future transport system it will help to pay for?” officials asked.

Wood is aware of those concerns, saying that a future revenue system would need to “take into account potentially conflicting objectives such as reducing emissions while at the same time raising sufficient revenue”.

The other big problem is that New Zealand faces a huge infrastructure deficit, particularly in the area of transport. While giving Waka Kotahi the ability to make £4b a year by taxing cars in one way or another is good at maintaining roads, it’s a very ineffective way of making large, multi-generational investments in the transport system.

Officials appear to be looking at a few funding tools. Allowing Waka Kotahi to borrow more is one idea, but officials are scared that repaying the debt could imperil funding future projects.

Tolling is another option, “but is ineffective due to the substantial cost of operating a toll scheme and New Zealand’s low population base”.

Local government could also get a hand up, with “financing” tools to raise debt and capital on the table for local as well as central government.

Another idea floated by officials is to use “new and emerging technologies” to make collecting taxes on road users more “user-friendly”. One idea was to use Global Navigation Satellite System technology (similar to GPS), which would presumably track the distance travelled by road users and charge them on that basis.

Officials raised concerns with this too, particularly the need to protect people’s private data.

There’s no set completion date for the work, so any changes arising from the review might be a long time coming. However, Wood has a big decision to make by the end of the year: what to do with the exemption EVs have been granted from paying road user charges, which ends this year.

“[I]f it were not extended there would be a need to integrate EVs into paying RUC [road user charges].

I’m currently considering whether to extend that exemption – an announcement will be made in the future.

“We do recognise that when EVs are integrated into the RUC system, there will be a need to ensure they are fairly treated.

For plug-in hybrids in particular, we want to ensure there isn’t a situation where they are double charged for petrol excise duty and road user charges,” Wood said.

Stuff