The world is rushing to a future driven by electricity. Most major car manufacturers have announced commitments to electrify their product ranges over the next couple of decades. Governments continue to encourage EV take-up with grants and tax breaks. Charging stations are becoming commonplace. The EV has gone from being a “quirky green machine” to a near-mainstream choice.
Tax revenues will fall
Yet there is a problem with this EV future that’s not being widely acknowledged. In the UK, taxes on car ownership generate about £30 billion a year. The vast majority comes from fuel taxes, which make up about two-thirds of the price of a litre of petrol. As less fuel is used by the UK’s increasing EV fleet, so tax income falls.
Losing this revenue won’t happen suddenly. It will be a gradual decline as more people opt for EVs. By 2040, the year new fossil-only cars and vans are expected to be banned from sale, a third of the vehicles on Britain’s roads could be electric and paying no fuel duties. That’s an £8-£9 billion loss, almost all of the UK’s annual road budget.
Governments rarely surrender such a large chunk of revenue willingly. It’s almost certain that fuel tax will rise to push more people into EVs and recover some lost revenue. Longer term this isn’t sustainable.
Taxing ownership or use?
One option is to increase the tax for owning a vehicle, known as the “Vehicle Excise Duty”. Given the average contribution to fuel taxes is over £1,000, adding this to VED would make for an unwelcome shock. It would also be unfair as it doesn’t take into account how much the vehicle is used.
Assuming the Government wants to tax vehicle use road pricing will be needed. This idea has circulated before, and each time has been dropped on privacy and technological grounds. With alternative ways of raising tax revenue still available, this wasn’t a problem. As this revenue dries up, the pressure to introduce it will become impossible to resist.
The simplest form of road pricing is a “distance traveled” model. Not only is it easy to monitor and seems fair, it addresses in part a concern that a Government would know where its citizens were. However, it seems likely that a dynamic model would be used, allowing local authorities to control congestion by increasing taxes at specific times of day or in particular locations.
Start the conversation
Whatever model is adopted, Governments need to lay the groundwork now. An open conversation will limit the backlash when taxes for EV ownership have to rise. The alternative is to raise taxes elsewhere, which hardly seems fair when it’s funding someone’s use of a car.