Electric vehicles spark tax challenges

If every vehicle in Ireland could turn electric overnight, the upsides for climate action would be substantial, as 18% of the country’s carbon emissions come from transport. For the government, though, this might not be entirely cause for celebration.

That’s because motor fuel is historically one of Revenue’s ‘old reliables’. Today, excise duty alone feeds around €2.5bn annually into government coffers. While this may be modest compared with other tax heads, it has the bonus of stability that policymakers crave.

It may not sound like becoming a problem any time soon given that electric vehicles (EVs) currently account for just 2.7% of Ireland’s total car count, albeit growth levels have surged in recent years.

A recent study by Uswitch sheds some light on why there are so few EVs on Ireland’s roads. Despite lucrative incentives such as vehicle registration tax (VRT) relief of up to €5,000 on EVs, Irish buyers have been reluctant to embrace them. Not only that, the study found Ireland to be the worst country in the EU to own an EV, with the lowest availability of charging stations per square kilometre and some of the highest charging costs.

Inexorable

Some of this, though, is set to change. Earlier this year the government announced its first national EV charging infrastructure strategy. It promised investment of €100m in the coming three years, with Eamon Ryan, the transport minister, confident it ‘will encourage more and more people to choose EVs’.

The government hopes to have 845,000 EVs on our roads by 2030, which would represent 40% of all cars in the country. With the EU committed to banning the sale of internal combustion engine (ICE) cars by 2035, it seems only a question of when and not if the current motor taxation base will need to be reformed.

While the environmental bonuses are clear, a report from Revenue’s tax strategy group (TSG) in July highlights the ‘significant revenue risk’ that arises from the proposed ‘electrification’ of the national car fleet. It estimates the Exchequer will lose around €1.5bn annually from motor tax, VAT and fuel excise as ICE vehicles disappear.

Pay per use

The potential for a universal road usage charge (RUC), currently being explored by Transport Infrastructure Ireland, is identified in the TSG report as one medium-term solution.

At their simplest, RUCs are a per-kilometre charge for use of the national road system, with potentially different rates charged on the basis of vehicle type, number of occupants and time.

Media reportage of the proposal earlier this year, suggesting a car journey from Cork to Dublin could cost €163 under the system, points to significant challenges in gaining public acceptance. Drivers of ICE cars might reasonably complain of being taxed twice, while drivers of EVs might wonder how exactly their superior environmental performance was being rewarded.

In the UK, the challenge of singling out high-emission vehicles for penalties has become a fraught political debate. The introduction of an ultra-low emission zone, with higher-emission cars charged £12.50 a day for driving in that zone, proved largely a success in central London but much more contentious in outlying suburbs, where transport options are fewer.

Counterproductive

In a world where tax from fuel is shrinking but EVs are not yet ubiquitous, a key challenge for tax authorities will be timing. A report from EY this year finds that, globally, high fuel cost is the top consumer driver for purchasing an EV; a tax that impairs this driver could easily prove counterproductive.

Nor is it clear how any such tax might work. Writing for Forbes, technology journalist James Morris argues that extra taxes on the electricity that powers EVs is a non-starter. ‘Only public chargers could be reliably targeted, and if this was too onerous people would simply avoid public charging as much as possible.’

A more likely approach is the one currently in place in Victoria, Australia, where EV drivers are now charged A$0.028 for every kilometre driven. The result, according to Which Car, is ‘a Tesla Model 3 driver travelling 15,000 kilometres per year must pay A$390 [€232] to the government’. The tax has, however, been dubbed ‘the world’s worst EV policy’ in Victoria, led to the cancellation of EV registrations, and is currently being challenged in the Australian courts.

Load surcharge

Another possibility explored by the TSG is a rebalancing of VRT, which is in part dependent on emissions. The TSG says a 1% hike for vehicles in the higher VRT bands would raise €26m from those with above-average emissions in line with the ‘polluter pays’ principle.

Perhaps the most palatable proposal identified by the TSG is a move to weight-based taxation for passenger cars. The TSG report states that ‘countries such as Norway, Belgium and the Netherlands all use weight to levy motor tax’. It suggests a possible model for Ireland is the new French vehicle tax, where a surcharge of €10 per kilo is applied to vehicles weighing more than 1,800kg, on top of standard vehicle tax. It’s an approach that currently exempts EVs, however.

The TSG concludes that moving Ireland’s VRT and motor tax system to a weight surcharge approach would represent adaptation rather than radical change. Given that Ireland’s current charging system is emissions-based, heavier vehicles (which typically have higher emissions) already pay higher rates of tax. However, the TSG concludes that the change may still be needed ‘in order to protect the vehicle tax base’.

Experiences abroad and from Ireland’s recent past show that even the most logical foundations for tax reform do not guarantee public acceptance. Tax authorities here and elsewhere have much to consider as they weigh charges on emissions with the need to ultimately bring EVs into the tax net.