The slow road from rhetoric to reform: an analysis of road pricing policy in Australia

Economic Papers (Economic Society of Australia), March, 2004 by Richard Denniss, Clive Hamilton

An alternative measure to promote the shift to more fuel-efficient vehicles could include the provision of free parking in public parking spaces in the CBD for cars with a very low environmental impact, such as petrol-electric hybrids, fuel cell or electric vehicles and highly efficient conventional vehicles. Vehicles such as the hybrid Toyota Prius and the gas-powered Honda Civic GX produce substantially less pollution compared to equivalent conventional vehicles (ACEEE, 2002). The promise of free parking could serve as a powerful sales device for such vehicles.

5 Perverse Policy

In addition to asking themselves 'how can economic instruments be used to protect the environment?' policy makers should also pay serious attention to a different question, 'why has so little been done to use economic instruments to protect the environment when there appears to be no opposition to the principle?' Despite a large amount of theoretical and empirical evidence, Australian policy makers have not only failed to address market failure in the transport sector, they have moved further away from the efficient outcome.

While discussion of optimal policies for the transport sector is important, it is essential to realise that perverse policies, that is policies which actually reduce the sustainability and efficiency of the transport sector, continue to be implemented, and continue to receive the support of various levels of government in Australia. Table 2 provides a list of some such policies. Substantial improvements in efficiency could be achieved via the removal of these perverse policies. Current Commonwealth rules for fringe benefits taxation (FBT) also provide incentives for excessive road travel, while providing no incentives for employer-provided public transport. Further, the current design of the FBT system provides few incentives to purchase fuel-efficient vehicles because the purchaser often has no responsibility for vehicle running costs. This has major implications for the characteristics of the entire Australian fleet because company vehicle purchases make up a large proportion of new car sales (SECITA, 2000, p. 224) and these are then on-sold.

One of the most perverse incentives, however, is provided by the statutory formula method of calculating FBT for vehicles. Under this method, the taxable value for FBT purposes is based on the value of the vehicle multiplied by a statutory tax rate. This taxable value is then 'grossed up' (4) and it is to this amount that the FBT tax rate (of 48.5 per cent) is applied. The statutory percentage used to determine the taxable value of the vehicle decreases with increasing vehicle travel distance (see ATO, 2000). Table 3 provides an illustration of FBT payable for a vehicle worth $30,000 that is available for private use 100 per cent of the year.

There is anecdotal evidence that employers will remind staff with company vehicles to clock up additional kilometres (sometimes known as the 'March Rally') in order to reach the next threshold, thereby reducing FBT (SECITA, 2000, p. 224). Even in an extreme case where an additional 10,000 km is travelled (to bring total travel from 15,000 to 25,000 km), the cost of additional fuel and maintenance is likely to be around $1,000 less than the reduction in FBT. Accordingly, the statutory method provides an incentive for excessive travel, and the further a car travels, the less attractive alternative forms of travel become.