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Explainer: Oz’s $11 billion electric vehicle problem

Electric cars pose an economic issue for Australia.

Recently, to help deal with the high cost of living, the Morrison government halved the costs of the fuel tax put on fuel. This did drop petrol prices. But there was one sector of car-users that have not been affected: Electric vehicle owners.

Owners of fully electric vehicles never have paid a fuel tax. A complete switch to electric vehicles seems inevitable. So will the government try to recoup the money they collect from the fuel excise, and how will they do it?

What is a fuel excise?

For every litre of petrol that you put in your car, 44.2 cents goes directly to the Federal Government’s general tax collection. This is known as a fuel excise, which was first imposed in 1983.

The money collected from general taxes such as this and the alcohol tax, gambling tax and GST is used to build and maintain our road.

According to Dr Lex Fullarton, a taxation law expert from the University of New South Wales, the estimated annual revenue from these taxes is $1200 billion, with the fuel excise contributing about $11 billion. While data is yet to confirm how much money is actually spent on our roads, Fullarton estimates it to be one fifth of total expenditure.

“In reality it could be anything, but it will be way, way, way more than $11 billion,” he tells upstart.

That means even if you have never driven a car or used the roads, your tax dollars are being used to pay for road maintenance and construction.

As the fuel excise does not directly go back into the costs of maintaining and building the roads, Fullerton has concluded that the levy is simply another form of tax.

“Fuel excises are not road maintenance taxes.  Fuel excises are fuel excises, it’s just a method of taxation… Whether you want to infer that this is a road maintenance tax is up to you.  But the fact of the matter is that it’s not,” he says.

“All they’re doing is muddying the waters with this whole argument about this fuel excise being hypothecated for roads.  It’s just a myth.  It’s just not true.”

But what about electric vehicles?

Even though the fuel excise is being lumped in with other taxes, Clifford Naude, an expert in exponential economics believes the fuel excise still roughly targets the heaviest road users, even if the tax collected doesn’t go directly back into road maintenance.

“The fuel excise is a proxy road usage charge,” he tells upstart.

“The more petrol you use the more travelling you’re doing, and those costs need to be recovered in some way.”

But owners of electric vehicles are not covered by this tax.  As we begin to see more and more of them how will we be able to make sure that all road users and the heaviest road users are the ones that pay for the use of the roads?

Naude believes that drivers of electric vehicles should be charged for their road usage, it’s simply a question of how much.

“So, some level of charge would be important for electric vehicles even if it is a small charge to start off with,” he says.

“Is it going to be for revenue raising or for use of the road?  Maybe the government decides that they want to start with a small charge like they have in Victoria, two and a half cents per kilometre.  I would say that’s still important because you are at least reminding the user that they are paying for using the road.”

But Fullarton argues that a road maintenance tax will discourage the public from buying electric cars and lead to more environmental damage.

“It’s a really stupid idea. You are killing the goose before it’s even born let alone laid its first egg,” he says.

The question on the mind of many economists is, once we switch to electric, will the government try to recoup the annual loss of $11 billion that they receive from taxes?

Naude asserts that electric vehicle owners pay significantly greater tax when they purchase the vehicle.

“Even if we do move across to electric vehicles you will still be recovering GST from the purchase price of the car. Probably less so as time goes on because of course you would expect electric vehicle prices to drop as more people buy them.” he says.

As of 2020, only 0.065 percent of cars owned in Australia were electric, a contributing factor to their high price. Naude believes it’s the high costs of electric vehicles that is deterring people from buying them.

“Obviously as we move towards electric, you’d assume the costs of those cars will go down, but largely it’s going to have to be consumer driven,” he says.

“The other issue with electric vehicles is how you generate your electricity.  Currently, Australia does derive some portion of its electricity generation from coal-fired electricity stations.”

Naude believes that there’s “a whole range of issues that are sort of connected really when you’re talking about a shift to electric vehicles”.

“I think it’s not only going to be the government. It’s going to be the energy industry as a whole, but also the motor industry,” he says.

“Motor vehicle dealers are not keen to write off millions of dollars’ worth of stock.  This issue has been around for decades.  It is really going to be determined by the sunk costs of the motor industry.”

How will the government recoup tax loss when we make the switch?

If the government does want to recoup the approximately $11 billion that they’ll lose when we do switch to electric vehicles, what is the best way to do that?

This question has economists like Naude searching for answers.

“Does it go into a general fund? Or does it go into a dedicated road fund?  That’s quite important because how do you do that at a federal or state level? That would mean setting up a road infrastructure fund, where the revenue that you obtain from road users is directly put,” he says.

“Then you’ve got the issue of how much do passenger cars pay versus heavier vehicles?  That’s why I believe it’s a going to be a long-term issue.  It’s not going to be a very quick adjustment because of all those reasons.”

Author: Mitchell DeLorenzo is a third year Bachelor of Media and Communications (Sport Journalism) student at La Trobe University.  You can follow him on Twitter @MitchellDeLore6

Photo: Fuel Stop by Dawn McDonald is used under the is available here and used under a creative licence.  This photo has not been modified.

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