Revenue from road use

Rob Dossor, Economics

Key Issue
Revenue from the primary road user charge, fuel excise, has been falling for some time due mostly to improvements in vehicle efficiency.
The pressure to secure other revenue streams to replace fuel excise presents Governments with an opportunity to design a system to replace existing road related revenue charges with one that solves the revenue decline and better reflects individual driver's use of roads, with the added potential to address traffic congestion.

Decline in road related revenue

Public sector road-related revenue primarily comprises state-levied vehicle registration fees and stamp duty and the Commonwealth-levied fuel excise and GST. Although none of these charges are hypothecated to road funding, they form a significant part of total government revenue.

Fuel excise is the largest source of road-related revenue but it has been falling for some time.

According to the Bureau of Infrastructure, Transport and Regional Development, in 2013–14, public sector road related revenue totalled $27.8 billion. Fuel excise contributed about $10.8 billion or 39 per cent, down from about 44 per cent in the early 2000s.

The decline in fuel excise revenue is attributed to improvements in fuel efficiency of conventionally powered vehicles and the increase in alternatively powered vehicles like electric and hybrid vehicles. This trend can be expected to continue.

This decline will add pressure for governments to find alternative sources of revenue.

However, it also presents opportunities to design better systems for charging for road use that more closely align with the use that individuals make of roads—road use being a rare exception to the general proposition that the more we use of something, the more we pay. A feature of stamp duty and registration charges, in particular, is that they are fixed and do not vary with the extent to which a person uses roads.

Absence of strong price signal

A system that puts a price on road use offers a tool that can be used to address public policy issues such as traffic congestion.

It is estimated that during the morning peak period, over 20 per cent of Sydney road users travel for discretionary reasons—for example, shopping, recreation or other personal reasons—rather than for non-discretionary work or educational purposes. In the afternoon that rises to 39 per cent.

At the same time, there are no strong price signals to provide people with an incentive to modify their vehicle use by, for example, travelling in off-peak times. Stamp duty and registration charges do not vary at all with use. Fuel excise does vary with use, but few are aware how it is levied (it is about 39.6 cents per litre for petrol and diesel), plus it does not vary with time or place, so it is ineffective device for moderating behaviour.

Possible solutions

Infrastructure Australia recommends reform to the whole system; that is, that all existing government road use taxes and charges be removed and replaced with ‘direct charging that reflects each user’s own consumption of the network, including the location, time and distance of travel, and the individual characteristics of their vehicle such as weight and environmental impact.’

This system is also recommended by Infrastructure Partnerships Australia, which says it ‘offers strong opportunities to rationally price access to, and usage of, the road network—providing a mechanism to fund network additions, fund maintenance and improve network performance by aligning supply and demand.’ Australia motoring lobby group, the Australian Automobile Association is in favour of this reform.

Other policy options include the introduction of zone pricing, particularly in cities, and corridor-specific charging.

Zone pricing

Zone pricing (also known as a congestion charge or tax) charges road users to use certain road systems. Zone pricing has broad support from economists, and has been implemented in a number of places, notably in London, Singapore and Stockholm.

Corridor-specific charging

Corridor-specific charging, works in the same as city toll roads. A fee is levied on users who access a particular road, much the same way as a toll road, except the corridor may be publicly, rather than privately, owned.

Equity effects of road pricing reform

In considering these policy options, one of the relevant considerations is the equity effect of the system. Elements of the current system tend to operate against the interests of those lower incomes. Fuel excise, for instance, falls more heavily on those who to drive less efficient vehicles, commute further and have few alternative commuting options. Fuel efficient or alternatively powered vehicles, like electric and hybrid vehicles, tend to have initial high costs which deters low income purchasers.

The equity effects of road pricing reform are complex and uncertain, however. For example, lower income workers—generally having longer commuting distances, fewer alternative means of transport and less flexible work times—would likely continue to pay higher road use charges. However, the reduction of discretionary travel by others in peak times could benefit those same people through reduced travel times. The interactions are complex and deserve close consideration.