WHILE VOCAL criticism over a proposed increase in fuel prices under the banner of a "carbon tax" by the Commission on Taxation is only to be expected, its proposals to remove Vehicle Registration Tax (VRT) on new cars and used imports didn't receive the effusive welcome many might have expected, reports MICHAEL McALEER, motoring editor
That’s partly down to the pain caused by recent changes to VRT, blamed largely on a lack of consultation with the motor industry at the time. More market upheaval at a time when new car sales are down 64 per cent is hardly what the industry needs right now.
There are some who also wonder whether the 10-year timeframe to replace VRT with a usage tax is merely an economic recognition of the rapid reduction in carbon emissions being made by the motor industry.
If the advent of commercially-viable electric cars and the dramatic reductions in carbon emissions being achieved by manufacturers continues apace, the Government’s tax receipts from the motor sector are going to fall significantly. So, changing the system to charge for road usage, while propping up the overall tax take through fuel price rises, might offer some financial respite to the State’s coffers.
In the short term, the proposed rise of at least 5 cents in fuel costs disproportionately punishes those in rural areas who have fewer public transport options available. The report itself recognises this risk, recommending that: “specific arrangements be put in place to ensure that those who experience energy poverty will be fully protected from the impacts in terms of price rises”. How any Government would go about protecting the thousands of commuters and rural motorists without incurring massive extra administration costs is unclear.
While there is evidence that long-term usage can be changed by rising prices, the short-term impact can be extreme on household budgets already stretched to the limit.
The Government currently garners nearly 70 per cent of the pump price in tax. Again the report warns that the latest price rise “should be visible at the point of final consumption, to help ensure that behavioural change aspects are maximised and it is not seen as ‘just another tax’.”
The reality is that if the increases are part of December’s Budget, most motorists will consider it as just that: another revenue-generating exercise by a Government eager to secure new tax revenue.
The reaction to the proposed replacement of VRT with a tax on usage has failed to attract as much support as one might have imagined. Top of the motor industry wishlist for decades now, the abolition of VRT became something of a background noise at Budget time, an ambition that no one realistically thought would ever be considered, given that it generates about €1 billion in tax revenue on an average year. But this is no average year.
Many motorists support the idea of replacing a tax on ownership with a tax on usage.
In a year when new car sales have plummeted, many motorists and dealers are still reeling from the effects on used-car values from the overhaul of the VRT system last year.
If the recommendations are introduced, car prices should fall significantly over the next 10 years. That in turn will mean that Irish buyers should be able to access the latest cars with the cleanest technology and best safety equipment at a more affordable price.
The major concern for most dealers – and anyone hoping for a decent resale value on their car – is the likely affect on used prices. On paper at least, the prices for some new cars could fall by as much as 32 per cent. Such a radical drop – even over the allotted 10 years – will clearly have a knock-on impact. While you might have paid €25,000 for your car when new, anyone buying it later will not judge its value on the initial purchase price, but instead on the latest or future new car prices. If these are set to fall dramatically then so too will the valuation put on used cars.
The devil will be in the detail and that remains very unclear on how the transition from high-taxation to low taxation on new cars may come about.
Similarly, any timetable for the phasing out of VRT will significantly affect buyer behaviour during that period.
The changes introduced last July caused a jolt to the market, as buyers swung radically away from petrol cars and towards diesel models. Both dealers and the owners of petrol cars found it difficult to move these suddenly unpopular cars.
Attention must also focus on the reaction of the financial sector. Already, lending institutions are basing many of their valuations on very conservative estimates of used car values: they are likely to be loathe to lend money for models that might be perceived as being less environmentally friendly.
For dealers that could sound the death knell for their businesses if their stock is regarded as out of favour with the changing times.
The report calls for VRT to be replaced by a usage-based system, perhaps through a sizeable increase in fuel taxes – increasing them by up to 30 cents per litre. Another option or additional method would be through road charging systems, whereby motorists are billed for the distances they travel. Such a system would need to factor in both location and time so as not to punish those who have little choice but to take their cars. Such schemes are already being tested on the Continent.
When it comes to the motorist, the Commission on Taxation raises more questions than it answers. Cars are often second only to property in terms of a family’s most expensive asset. Any Government move that wipes thousands off that asset while taking more from their weekly household Budget in fuel costs and toll charges is not going to be welcomed by even the eco-friendly commuter.
Motoring proposals - How it might affect you
- A 5 cent rise in the price of petrol and 5.5 cents for diesel with the introduction of a new carbon tax.
The report states: an important part of our proposal is that the carbon tax component should be made clearly visible at the point of final consumption.
It is important to promote the idea that the carbon tax is not “just another tax”, but is designed to change behaviour.
- Current VRT phased out over a 10-year period to be replaced with car usage-based tax schemes.
As the aim is that the change would be revenue neutral, which means the average €1 billion raised in VRT at present would be recouped through increasing fuel charges of up to 30 cent per litre and the expansion of road usage charges through congestion charging or other tolling systems
- The introduction of a scrappage scheme for cars of 10 years or older.
The report says any scheme would be “time-bound and carefully targeted”. “It should focus on promoting the use of environmentally friendly vehicles. For example, a scheme focused on encouraging a switch to very low carbon emitting vehilces (electric, hybrid electric and flexibile fuel vehicles) may be appropriate.