Earlier this week the “fuel excise duty” (FED) increased by 2 cents per litre. As the Herald noted, taxes of one form or another now make up nearly $1 pre litre from what you pay at the pump:

* Fuel excise – 50.524c
* GST – 27.77c
* ACC levy – 9.9c
* Local authorities fuel tax – 0.66c
* Petroleum monitoring levy – 0.045c
* Total tax – 88.899c.

This money, plus road user charges for diesel vehicles, adds up to around $3 billion a year and makes up all the money that NZTA spends on transport projects – from building new state highways to helping maintain local roads and paying for public transport services.

Fuel taxes are a pretty efficient way to raise money, with there being little in the form of transaction costs – at least compared to complex tolling systems. Presumably the oil companies keep track of how many litres of fuel they sell and just send NZTA a few big cheques every once in a while. Fuel taxes also have the benefits of encouraging us to drive less, drive more fuel efficient vehicles and also – at least in theory – could compensate for the environmental externalities created by burning fossil fuels. The more fuel we go through, the more tax we need to pay.

However, fuel taxes also have a bit of a problem in the longer term – especially as vehicles become more and more fuel efficient and as we shift to hybrid and fully electric vehicles. The problem is that the amount of revenue raised per vehicle kilometre travelled will inevitably decrease.

NZTA have had significant revenue problems in recent times, having to borrow quite a lot of money from Auckland Council for example. I’m not sure the extent to which this is caused by improved fuel efficiency or the extent to which it’s because traffic growth has stalled, but the issue of having less fuel tax being raised than expected is a real one – perhaps the ‘elephant in the room’ when it comes to our ability to actually fund the transport programmes we have proposed.

As time goes by we do have the option of continuing to raise fuel taxes to ensure enough money is raised to pay for the transport programme. Compared to many other countries around the world New Zealand has a pretty low petrol tax. This is highlighted in the graph below, which was from the Ministry of Transport’s briefing to the incoming minister (BIM), released earlier this year:

A higher fuel tax would probably be fairly effective at encouraging people to shift to more fuel efficient (hybrid or full electric) vehicles as those become increasingly price attractive. This is a good thing for the environment and for reducing our dependence on imported fuels, but isn’t really a long term solution to the revenue problem. Quite obviously, as we tax petrol at a higher and higher rate we will encourage more and more people into electric and hybrid vehicles – meaning we need to find a way of raising revenue from those road users.

Presumably fully electric vehicles may end up paying some sort of road user charge. But I suspect fully electric vehicles may be rarer than we think – we’ll instead end up having hybrids that are progressively more dependent on their electric motor than on their petrol one. Do they need to pay a proportion of their travel as Road User Charge and a proportion through petrol tax? Sounds messy.

Lower traffic volume increases in the future – potentially due to higher fuel prices and/or lower economic growth – was put forward in the Ministry of Transport’s BIM as a real pressure on the ability to generate enough revenue to cover the cost of the transport programme in the future. This is highlighted in the graph below:

To the Ministry’s credit they note that high oil price scenarios are likely to mean that much of the proposed expenditure on road capacity expansion may not be necessary (due to lower increases in traffic volumes), but that greater spending on public transport would be required. Even taking the current GDP growth path as a mid-point suggests some significant problems over the next 20 years.

Getting back to the main point of this post, I think there’s a reasonably clear case that – at some point in the future – we will need to shift to a different way of raising revenue for transport purposes. While there are good arguments to be had around the amount of revenue that is required and where that revenue should be spent, we will clearly still need to maintain what we have, we will clearly need to operate a public transport system, we will still need to fix up things that don’t work, and so on. The question really becomes what replaces fuel tax, and how can we be as fair as possible in working out who pays and how much they pay.

This leads us, inevitably, to questions around road pricing. While fuel tax has many great strengths – its low administration cost, the way it is a useful incentive to improve fuel efficiency and minimise the burning of fossil fuels – one thing that fuel tax doesn’t do is vary the amount we pay by the time of day we drive and the particular routes we take.

To give an example, my impact on the roading network from driving down a suburban side-street at 10pm on a Sunday night is almost zero. Perhaps a slight degradation of the road, obviously some environmental impact, but really little else. By contrast, if I drive from Papakura to the CBD at peak times up the Southern Motorway then my impact is huge. I’m not just stuck in the traffic jam, I am the traffic jam. My extra vehicle on the road is slowing down a huge number of other people, just as I am being slowed down myself. Removing a few people from that motorway will improve travel for a vast number of people.

At an overall level, it becomes clear that a relatively small proportion of trips generate the vast bulk of motoring costs. Perhaps put more simply, every additional car travelling across the Harbour Bridge at the ‘peak of the peak’ contributes to the (supposed) “need” to spend $5 billion on another Harbour Crossing. This is the real value of the Northern Busway of course, having ‘knocked the top off’ this peak and delayed the need for spending this eye-watering amount of money. But in the longer run, people travelling across this future Harbour Crossing at peak times should be the ones paying for its construction – rather than someone driving along a suburban street at 10pm on a Sunday night.

A graph from a UK study confirms that the marginal costs imposed on the transport system come from a pretty tiny minority of trips:


What this graph highlights is that for the vast bulk of trips we are paying too much in fuel tax, compared to the impact we are having with our trip. However, for a few trips the fuel tax is nowhere near covering the impact of those trips. I’m possibly not entirely convinced the marginal cost curve should be quite this steep as the methodology used to calculate it is overly focused on congestion, but I think the general point holds. I generally use public transport during peak times and drive during off-peak times – yet find myself paying for road widening projects that will really only benefit people travelling during the peak on a select number of routes. While the subsidies for my PT trip compensate for this situation to an extent, the situation still seems a bit unfair.

Ultimately this approach to road pricing, as an eventual replacement for fuel tax that more fairly apportions cost based on the impact you’re having on the transportation network, seems the most likely way to see it actually implemented. As shown in the graph above, the vast majority of trips would be better off under this pricing scheme than they are at the moment. A few trips would be much worse off, but presumably that would act as a disincentive to travel at that time of the day on that route.

Nevertheless, this approach presents two possible problems:

  • The administration cost of implementing this kind of scheme ‘properly’ – differentiating between different routes, different times of the day and then coming up with a charging mechanism.
  • As we’re relying on taxing a few trips to provide the bulk of our transport revenue, if those trips disappear so does most of our revenue. I guess of course we also see many of our problems solved, but the extent to which this works probably depends on the extent to which congestion is seen as the main transport problem.

I guess this is an issue we’ll eventually have to tackle though.

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14 comments

  1. Very good post, and highlights the diminishing returns we get from further investment in driving infrastructure in urban areas. Whatever it is, more parking, additional motorway lanes, we already have a huge road and parking resource that most of the time is more than adequate. Clearly if we used currently available funds in the Land Transport Fund destined for Auckland and changed the bias towards investing them instead more in complementary systems we could smooth those peaks off and save ourselves a considerable amount of money. In short get more value out of both the existing driving infrastructure and the relatively under-available other modes. Seriously it matters enormously what we DON’T build as much as what we do. Which is why I flatly reject the NZCID infrastructure wish-list as more than just unaffordable but also as destructive and undesirable.

    This is how the current system can work. There is a subtext to your post Peter and that is an assumption that User Pays is the ideal model; you are exercised that your Sunday driving can be considered too costly. Well you answer this in the post. First that equity can be covered by the fuel tax funding improved complementary systems- which you and others use through the week but are sub-optimal across the whole of Auckland, yet help keep the traffic flowing. And second no matter how User Pays appeals as an idea is very very hard to make work in practice; there are always winners and losers as it is impossible to slice every cost, benefit, and externality perfectly and all such systems generate their own unintended consequences- like the enrichment of collection agencies and especially uncharged environmental and social externalities.

    In my view the pursuit of a sufficiently exact but workable version of User Pays is nothing but a distracting chimera in transport funding arguments; it reduces what should be economic evaluations to financial ones.

    All we need is the NLTF to be able to be spent better than it currently is; the transformation of NZTA from a highway pusher to being an actual mode neutral Transport agency. And one with a greater duty of care to quality of place as well as movement in its work.

    Frankly this is cleverer than just trying to find more money to build more of the same.

  2. Drop all the taxes from fuel except the carbon tax (encourage fuel efficiency) and put in place a universal RUC. The RUC will be supported by a transponder connected through the cell phone network that reports:

    1.) Real time mass of the vehicle
    2.) Odometer reading
    3.) Time and location that it’s being used

    This would allow correct charging for road use including fixed charges for maintenance and variable congestion charges.

    The mass charge would see proper charging of the damage done to the roads from trucks effectively making them uneconomic for long haul trips and so resulting in an increase in trains and shipping. Congestion charging would see a decrease in single occupied vehicles from the roads and a corresponding increase in PT use. All of which should result in more efficient use of our scarce resources and bring about the necessary change in priorities to transport infrastructure.

    1. Every vehicle in the country reporting through the cell network. That’s a huge amount of data being fed in every minute, then it needs to be analysed and stored somewhere. What would the collection costs on a scheme like that be?

      1. I doubt if it would be that much bandwidth. A few bytes from every vehicle every few minutes – I doubt if it’d get much above a few mbps total. Once it gets to individual cell tower use I doubt if it would take up more than a 4g cellphone. Route it all to a single PC somewhere with a good database on it. What’s that? Maybe $40 to $50 per month? Throw in security monitoring and it may get $1000/month.

        Notice the Cloud? Yeah, that’s companies trying to get millions of customers with gigabytes of data each. Storage isn’t a problem.

    2. Draco, why would you retain the ETS tax, being the only one with no purpose or meaning? Oh, and like it or not, a universal GST must remain unless you want to go back to Muldoon’s 66% or Clark’s 39% income tax.

      Your idea is of course nice in theory, but as Nick implies, not a practical proposition now (maybe one day). That’s aside from any privacy issues. And yes, I do realise that you’re just taking the mickey. 🙂

      BTW, do you pay more or less when the mass of a car increases (representing more passengers) to offset the congestion charge component? How do you weigh it?

      1. why would you retain the ETS tax

        (encourage fuel efficiency)

        GST is regressive and needs to be removed and and NZ was doing better under the 66% tax of Muldoon than 33% tax of today.

        That’s aside from any privacy issues.

        Two points:
        1.) You’re using the states resources and thus you actually need to justify that use.
        2.) What’s the difference between the bank knowing everything you do and the government? Personally, I’d prefer the government as they’re at least accountable while the bank isn’t.

        And yes, I do realise that you’re just taking the mickey.

        No, I wasn’t.

        BTW, do you pay more or less when the mass of a car increases (representing more passengers) to offset the congestion charge component?

        If we went that precise it wouldn’t be done on mass but on if the seat belts were plugged in and weight in the seat. That’s probably impractical though so, tough.

        1. My apologies Draco, I really thought you were joking (1984 and all that). I see that Sanctuary (below) has picked up on this too.

          As for taxes, well the parliamentary Finance and Expenditure Committee has noted that 40-50% of NZ households pay no net income tax, while the top 10% of earners pay 40-50% of the tax on income. GST is on top of this of course, and while technically regressive, in dollar terms the majority is also paid by “the wealthy”. And I’m not sure how the ETS tax encourages fuel efficiency, it’s just a money-grab that, according to your own argument, affects the poor more than the rich.

          A good point about using seatbelts to identify passengers; the headrests on my car go up and down depending on whether the seatbelt is fastened so that feature together with a weight sensor could easily be hooked into a transponder.

  3. What about incorporating car registration and third party insurance into the fuel tax. Not to sure how you would handle drunk drivers or cars which dont have WOF,s but the idea would be to have most of the costs of travel built in to the fuel cost. That way when drivers are faced with the true cost of their travel they may consider taking the bus. I wouldnt worry to much about electrics I doubt wether there is 10 of them in the country at the moment. Fuel is such lovely stuff to tax. Pity we have the RUC,s for deisel fuel taxes are much more efficient.

  4. “…Drop all the taxes from fuel except the carbon tax (encourage fuel efficiency) and put in place a universal RUC. The RUC will be supported by a transponder connected through the cell phone network that reports…”

    The Orwellian idea of a universal surveillance state as a form of administrative convenience for revenue collecting raises serious issues around freedom to go about your business without government interference. To my mind, this sort of sleep walking to a surveillance state should be resisted at all costs by anyone interested in the liberty of a human being to live their day to day life untroubled by state surveillance. Does anyone really believe that details of your every vehicular (indeed, via RFID technology and facial recognition software, ANY journey) would always simply be used to ensure you pay the right fuel tax? How long before data sharing between police and WINZ and ACC and God knows who else allows the state to build a picture of anyone of interests every movement via a simple data query? If big brother is the price, then no public transport system is worth the cost. We all know that once privacy and liberty concerns have been ridden over or ignored or scorned and the information starts to be collected, the government will start to use it for all sorts of other reasons. All in the name of efficiency, of course.

    1. Sanctuary I agree, but please this system isn’t proposed for the benefit of public transport but for the ideology of User Pays purity. And is insane.

      1. “isn’t proposed for the benefit of public transport ”

        Public transport isn’t an end unto itself Patrick.

        Road pricing is low hanging fruit in heading toward a less car dominated, more urban future. Why is it low hanging fruit? Most other major initiatives involve asking (and therefore having to convince) people for their money to do something with it that they are not directly demanding. Road pricing on the other hand is simply getting everything onto an even keel.

        Easier to move a pendulum back to the centre than try to push it up the other side, might as well do that first.

  5. There is eRUC now in NZ, extend it to all vehicles, initially voluntarily.

    The scaremongering about privacy is just that, who needs to know the names of roads people drive on when what matters is distance, road type and time of day. For example, road type need only be split into 5 categories:
    – Rural state highway
    – Rural local
    – Urban state highway
    – Urban arterial
    – Urban local

    Peak charges could apply to all roads of a certain type in specific cities at specific times, there might even be greater levels of disaggregation.

    The study you took the graph from outlines the problem and what’s wrong with fuel tax (in the UK context) here:

    http://www.racfoundation.org/assets/rac_foundation/content/downloadables/fuel_for_thought-johnson_et_al-150512.pdf

    The US is light years ahead of thinking on this because it is facing the problem due to the politics of increasing fuel tax. Oregon is the leader in the US on this, and is developing a distance based charging system for electric and hybrid cars:

    http://cms.oregon.gov/ODOT/HWY/RUFPP/docs/evstakeholders_presentation_nov172011ruftfmtg.pdf

    It has already developed a system that would enable fuel tax to be refunded at the pump as a transitional measure:

    http://cms.oregon.gov/ODOT/HWY/RUFPP/docs/rufpp_finalreport.pdf

    Given that there are already road pricing systems of this kind applying to heavy vehicles in Switzerland, Germany and Slovakia (and soon to be in France and Belgium as well), none of this is rocket science or difficult. Just look at what EROADS does now as a New Zealand company leading development in this sector.

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