A Framework for Reform of

Taxes
Related to Roads &
Transport in Australia

Harry Clarke (with D. Eldridge & D.

Prentice).

May 2009
Transport sector

• About 5% of Aust economy - the

effects of the transport system
influence the costs of almost every
good or service.

• Countries with efficient transport

systems have an advantage.
Transport sector

• Is a big user of public resources – in

2005/06 spent $11b on roads and
bridges.

• A big generator of revenues – fuel

excises in 2005 were $10b.

• A big source of external costs – in

2005, $9.4b in congestion externalities
alone.
Status quo

• Currently most road costs are more

than met by excises on petrol, car
registration charges & an array of
other charges.

• Road users ‘pay-their-way’ but

payments don’t reflect particular
costs generated e.g. congestion or
road damages on particular road.
Thus....

• Registration charges - while scaled

up to reflect road damages - do not
reflect distances travelled on roads
of differing durability.

• Fuel excises do not significantly

reflect congestion or road damage
costs.
Policy possibility

• Should the current two-part tariff

charges (fixed charges such as
vehicle registration & variable
charges such as excises) be replaced
by targeted user charges such as
congestion tolls or vehicle-distance-
mass charges?
Motivation

• Charging on basis of specific user costs

leads to behaviour that economises on
costs not just cost-recovery. There is an
efficiency dividend.

• Basing road supply decisions on

revenues collected from user costs
(reflecting demand) can lead to
improved infrastructure supply
Models used

• Partial equilibrium – Compare

current DWLs with the sum of those
arising when various user charges
are used plus the costs of switching
to a new system.

• General equilibrium – Try to

account for effects of charging in one
market on outcomes in other
markets – especially labour markets.
• Our analysis - mainly partial
equilibrium but we discuss general
equilibrium effects.
1. Fuel excises

• A crucial feature of Australian fuel use

demands - they are very price inelastic.

• Elasticities around -0.2.

• Hence if you believe the Ramsey

‘optimal excise’ story they should be
taxed heavily irrespective of arguments
for using them as proxies for user
charges.
• Indeed DP estimates an optimal tax of $1-99
per litre considerably exceeding the current
tax of 38 cents. Mostly ($1.51) this reflects
Ramsey tax-gathering objectives but even
the environmental component alone (48
cents) exceeds the current tax.

• Again a case for levying high excises on

fuels can be provided irrespective of
environmental proxy arguments.

• The case bolstered by low costs of collecting

such taxes & low evasion possibilities
Critique
• This argument depends on whether the
Ramsey viewpoint is valid.

(Assumption) Fuel use cannot be used

as a tax base alternative to untaxed
leisure. True if fuel use & leisure are
substitutes.

• Plausible evidence suggests

independence or complementarity so
case for using hefty taxes on fuels is
strong.
Take care

• We are not saying that petrol proxies

well for user charges. We agree that
it doesn’t.

• Moreover, we support user charging

but don’t suggest this, in itself,
should be ‘balanced’ by cuts in fuel
excises.
2. Other arguments on
taxes
• Concessionary taxes on alternative
fuels cannot be justified on
environmental grounds.

• Luxury car tax yields only small

DWLs but no sensible efficiency
arguments for retaining it.

• No sensible case for retaining the

10% tariff on imported cars.
3. User charges -
congestion
• Congestion not well caught by fuel
excise since time & location dependent.

• DWLs of congestion concentrated in

Sydney, Melbourne ($3.5, $3b).
Australia-wide (in capital cities) ≈ 6.8
cents/km.

• Arguments for comprehensive & partial

reforms.
Congestion pricing

• Comprehensive – electronic pricing

based on GPs. Feasible now?

• Partial reforms – cordon pricing of

CBDs plus pricing of major ring-roads
and arterials.

• Complicated case based on transaction

costs, public acceptability & ‘second-
best’ issues.
Perhaps an argument for
waiting…
• Not for doing nothing but for
initially using cheap partial reforms
(cordon, parking policies) & then
jumping into comprehensive
electronic pricing.

• The costs of far-reaching partial

reforms (e.g. London pricing scheme)
high & higher in Australia. Significant
Digression - Telematics

• In-vehicle boxes with GPS capabilities

can revolutionalise transport:

• –for regulatory reasons (congestion, mass-charging,

tracking the delivery of dangerous goods and to maintain
driver-specific information on number of rest breaks,
distance travelled and to ensure safety standards &
commercial reasons – fleet management ,
tracking/tracing , for pay-as-you drive insurance, anti-
theft devices, vehicle-to-vehicle communications &
navigation services, emergency help if accident & for
managing parking.
4. User charges - parking
• Parking taxes only bear on
terminating traffic but a useful short-
term surrogate for road pricing.

• People are ‘used to’ parking charges.

Pay for something ‘visible’.

• No coherent parking policies in

Australia & little research.
5. User charges – GGEs

• Petrol excises do accurately reflect

GGEs.

• But no need for a particular transport

tax once the ETS introduced.

• $20/tonne CO2 about a 5 cent

charge/litre on unleaded petrol.
6. User charges :
Vibration/noise costs

• Very location-specific.

• Best dealt with by regulation not

taxes.
7. User charges – traffic
accidents

• 70% of traffic accidents involve another

vehicle.

• If average damage per vehicle is D

social damage is 1.7D – an externality.

• Hypothesis - collisions increase with

traffic density.
Internalising accident
externalities

• Tax insurance – for US estimated

tax would be 200-400% of premia.
Huge.

• Charge insurance using driver

characteristics & distance
travelled. Somewhere in range 2-6
cents per km.
Accident externalities

• A very significant area for Australian

research – no work done.
8. User charges – road
damages

• Road damage costs proportional to

the 3rd or 4th power of vehicle’s axle
load.

• Means almost all damages are

among heavily vehicles.

• Actual damage depends on road

User charges – road
damages
• Currently damage costs are recouped
via registration charges – don’t depend
on loads, location, distance travelled.

• There are outright bans on certain

heavy vehicles using low durability
roads.

• Major COAG proposal is to change this

so mass-distance-location pricing
occurs.
User charges – road
damages

• There are technological issues

related to pricing - close to resolved.
Resolved in experimental settings –
‘cranes in Melbourne’.

• Interim policy about to be introduced

is ‘incremental pricing’ – can use low
durability roads if pay extra fees.
9. Matching up with supply
reforms

• The decision to impose user charges

on roads has been linked to proposed
COAG changes in the way roads are
supplied.

• Current road planning in Australia is

divorced from economics - driven by
engineering issues & safety
considerations.
….yet there is a role for
economics

• e.g. Small & Winston (1988) show that

switching from current to optimal road
durability on US highways reduce
maintenance costs by 40%.

• Indeed, with optimal durability, road

damages almost disappear so fixed
capital costs should be met more by
fixed than user-based charging.
What is sought?

• Now road construction is budget &

engineer driven.

• What is wanted is road design in terms

of capacity & durability which optimises
the present value of road’s as capital
assets.

• Need to account for CSO’s &

indivisibilities.
Example

• The government might offer $30m to

construct a road from A→B.

• The road supply agency estimates optimal road to cost

$100 & the present value of receipts with efficient
charging would cover this cost & provide commercial
return on capital.

• Then proceed with the road after borrowing $70m

or raising $70m in equity markets.
Idea - commercialise road construction
& maintenance.

• Efficient charges forecast on the basis

of projected demands by user type.

• Efficient charges return costs with

appropriate return on capital (theory
says this will be so provided roads have
constant returns).

• Road services are delivered as

efficiently managed capital asset.
Critique

• Problems with cost-recovery if road use

by heavy vehicles is uneven or with
indivisibilities.

• Roads are investments with huge sunk

costs & much uncertainty including
network uncertainties.

• Roads are local monopolies so

regulatory issues.
Conclusions

• A case for shifting to user charges on

roads. This is independent of the
case for hefty excises on fuel.

• The big reform agenda is to link up

revenues from these charges with
efficient road provision.