Leave gold-standard road-user charges to states - Grattan Institute

It’s pistols at dawn for Attorney-General Mark Dreyfus and Victorian Treasurer Tim Pallas as they turn to the High Court to resolve whether Victoria’s per-kilometre charge on electric vehicles is constitutional.

But whatever the High Court decides, it should be the states that end up with this potentially lucrative but under-exploited tax base in the longer term; and it’s in the federal government’s gift to smooth the transition.

For the past year, Victorian drivers of electric vehicles have had to pay to drive; the rate is 2.6¢ per kilometre, and 2.1¢ for plug-in hybrids. NSW plans to impose similar charges from 2027, or when electric vehicles make up 30 per cent of new car sales – whichever comes first.

Opponents have dubbed the charge “the worst electric vehicle policy in the world”, and two critics of the policy, both Victorian drivers of electric vehicles, have gone further, mounting a High Court challenge against the Victorian government. The federal attorney-general has joined the two drivers, and the fight will now involve the question of whether the charge constitutes an excise – and can therefore be imposed only by the Commonwealth.

Victoria’s stated rationale for its per kilometre charges is not particularly persuasive. It argues that it’s fair for drivers of electric vehicles to contribute to spending on roads. But road spending doesn’t come from road-related revenue – it comes from general revenue.

And while the drivers of electric vehicles have gone from paying no distance-based charge to paying several hundred dollars a year (if they drive 15,000 kilometres), that’s much less than most drivers of petrol or diesel cars pay in fuel excise to travel the same distance. Not to mention the $100 discount electric vehicle drivers get on their registration.

There are strong arguments in favour of the states raising a larger share of their own revenue than at present.

Fundamentally, the fight is over which level of government gets the revenue. Net fuel excise revenue accounts for just 2.5 per cent of Commonwealth tax receipts, raising around $10 billion a year. But the excise is in structural decline, under pressure both from increasingly fuel-efficient vehicles and, ultimately, the existential threat of a fleet that’s turning electric.

No one should lament the passing of fuel excise: these days there are smarter options available. The gold standard for road user charges is a variable rate: one that varies according to a vehicle’s mass, distance travelled, location, and time of day. Gold standard charging reflects pavement-surface damage, the contribution to congestion, and the cost of providing and maintaining roads. Technology is making such fair and precise charging feasible.

Leave it to the states

But it can’t be the Commonwealth that imposes gold standard charges, because the Constitution prohibits it from imposing taxes that discriminate between states or parts of states. And differentiating between different parts of a state is fundamental to gold standard road user charges: it makes no sense to charge the same rate on a rainy Monday peak hour in Sydney as it does on a suburban street or a quiet country road.

States, on the other hand, can use gold standard road user charges – and they should. There are strong arguments in favour of the states raising a larger share of their own revenue than at present.

Australia’s federation is unusual by international standards in the extent to which the federal government raises so much of the revenue, well in excess of its spending requirements, and hands the rest to the states, mostly as tied grants. It’s a constraint on the autonomy of states to be so heavily reliant on federal grants.

The federal government may well argue that it needs the revenue to help fund the $8 billion or so it spends each year on transport infrastructure grants to the states. But the truth is that it could spend far less on transport infrastructure, and hand states not only the right to tax but also the responsibility to spend.

After all, much of what it spends on transport projects is outside the role it has agreed with the states – the federal government is supposed to focus on nationally significant infrastructure, but in reality spends far too much on roundabouts, overpasses and car parks.

Whatever the outcome of the High Court challenge, the writing is on the wall. Fuel excise revenue is either going to wither gradually, or be killed off quickly. Let’s hope this is the prompt for a smarter way to pay for our use of the roads.

Marion Terrill

Transport and Cities Program Director
Marion is a leading transport and cities expert with a long history in public policy. She has worked on tax policy for the federal Treasury, and led the design and development of the MyGov account. She has provided expert analysis and advice on labour market policy for the Federal Government, the Business Council of Australia, and at the Australian National University.

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