Motorists may be taxed on distance driven rather than paying excise on fuel

Motorists may be taxed on the distance they drive rather than paying excise on fuel at petrol station pumps, under plans proposed by senior officials.

The Government is considering numerous schemes to ensure the overall tax take from motoring does not drop significantly as a result of moves to lower emission vehicles.

The Department of Finance has outlined a series of options on how to ensure the exchequer does not lose out, such as a fixed charge on the purchase of every car, no matter how low its emissions levels are.

Recent policy has been designed to encourage motorists to purchase lower emission vehicles, which are subject to lower vehicle registration taxes (VRT) and annual motor tax.

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However, officials now warn that, although lower emissions will still be incentivised, the move towards such vehicles, particular electric-powered cars, will “severely challenge the revenue” accrued by the exchequer through VRT, excise and motor tax.

A similar proposal to tax motorists on the distance they drive was mooted when the VRT scheme changed a decade ago but it is understood a predicted backlash from TDs in rural and commuter belt counties stopped the proposal from advancing.

Carbon taxes

Taoiseach Leo Varadkar has already indicated that carbon taxes will rise in the October budget, saying the State will have to "grasp the nettle" to reach its climate-change commitments.

A report on environmental taxes from the Department of Finance outlines a number of longer-term proposals to ensure motoring still generates taxes for the State.

The most significant is a mooted change from relying on excise at the pumps to taxes based on how much people travel on the State’s roads.

“In relation to replacing fuel excise duties the possibilities of shifting taxes to road usage should be considered in the context of the uptake of EVs [electric vehicles] or ‘super low’ emission vehicles,” the document says.

Although it does not go into further detail, the idea of charging for road usage based on distance travelled has been proposed at EU level and is already in place for trucks in a number of member states.

A move away from relying on excise levied on diesel and petrol is not the only change proposed by the department.

Fixed charge

The VRT system could be reformed too, officials argue. A new system could, for example, apply a fixed charge of 2.5 per cent of the purchase price of a car, as calculated by the Revenue Commissioner, as well as variable charges.

A minimum rate of VRT of 10 per cent on the value of a car would also apply to ensure that cars with the lowest emissions still pay a certain level of tax, ensuring that income to the State remains stable.

“The purpose of a fixed-charge component and the minimum rate would be to protect the exchequer from losses due to very low emitting CO2 cars,” officials say. It would still “broadly mirror the current regime insofar as rates is concerned”.

Overall, environmental taxes in Ireland are projected to yield €3.55 billion this year. Excise rates on petrol and diesel have remained unchanged since 2012, with 58.7 cent excise and a 4.6 carbon charge on a litre of petrol. The corresponding rates for diesel are 47.9 cent and 5.3 cent.

The Department of Finance tax strategy papers, which include the study of environment tax, says there is a “strong environmental rationale” for eliminating this gap.