THE United Kingdom has broken a taboo: Driving electric vehicles (EVs) won’t be tax free – and rightly so.
What follows is an experiment every other Western government will pay attention to.
It’s a perilous process: Replacing the current fuel duty with an EV per-mile tribute.
The upside is limited, at best preserving the fiscal status quo, with the amount raised by the new levy matching the old one.
The downside is vast: Get it wrong, and the United Kingdom risks jeopardising the adoption of EVs, lots of car-industry jobs and a huge tax hole if the new levy doesn’t raise as much as the mandarins at the UK Treasury hope.
First, the news. Last week, UK Chancellor of the Exchequer Rachel Reeves announced the government will start taxing EV driving with a self-reported per-mile system.
Starting in 2028, it would be set at £3 per mile for pure battery cars, and 1.5 pence for plug-in hybrids.
That’s still cheaper than the current fuel duty, which effectively comes, on average, to around £6 per mile for petrol cars.
The change was badly needed.
If European governments succeed with their green plans, fuel-duty revenue would collapse over the next 25 years.
The British Treasury estimates it would halve to £12bil (US$16bil) by the mid-2030s and then plunge to less than £5bil by 2050.
The decline represents a “substantial risk to the sustainability of the public finances,” according to the UK Office for Budget Responsibility.
Every industrialised nation faces the same problem, particularly in Europe where fuel taxes are particularly high.
Until now, few countries other than the United Kingdom have debated whether replacement EV taxes are needed, and if so, when and how to adopt them.
Reeves deserves praise for firmly establishing the principle that driving would remain taxed, regardless of the powertrain.
What’s less clear is whether her approach will work.
For now, the United Kingdom has ruled out other forms of EV taxation, including shifting the burden into general taxation, creating new levies on electricity used to charge the EVs, taxing car registration – rather than driving – more heavily, and using GPS-based system to collect detailed driving information.
I have written about the advantages and drawbacks of each of those systems.
I do think the UK experience would determine whether others drop those other methods forever, or revisit them.
Whatever system governments use, all face the same basic handicap: They compete against a pretty damn good tax – for the tax authorities, that is.
Fuel duties are cheap to manage as they are legally paid by oil refiners, rather than by millions of drivers, reducing their bureaucratic cost.
And they are extremely difficult to evade.
Now consider the shift to EV tax-per-mile, measured once-a-year by a self-declared odometer reading that every car owner would need to input manually in a government website.
Later, the government plans to check the accuracy of the mileage reading when cars are subject to their periodic and compulsory roadworthiness test.
The complexity and costs of the proposed system look much more burdensome than simply invoicing a handful of oil refiners as it’s the case nowadays with the fuel duty.
Odometer manipulation could quickly become a problem.
The UK Treasury already acknowledge that 2.3% of all cars in the country have their mileage manipulated, what locals call “clocking.”
In its consultation paper about the new tax, the Treasury “recognises” that the new EV tribute regime “may increase the likelihood of motorists choosing to clock their vehicles, or allowing the odometer to be inoperative.”
The complexity of the system the UK Treasury is contemplating is inherently linked to the complexity of the future of driving: multiple powertrains.
In addition, EVs aren’t homogeneous: Plug-in hybrids will be treated differently to pure battery cars, creating distortions.
For example, the owners of plug-in hybrids would pay both a per-mile tax and the fuel duty when using the petrol engine for long distance driving.
On the other hand plug-in hybrids would have a tax advantage (£1.5 per mile) to pure battery cars (£3 per mile) over short distances where they can rely solely on the battery.
A tax focused on miles, rather than on consumption, may end creating more EV heavy sport utility vehicle monsters.
And then there’s the matter of foreign travel. British EV drivers would still pay a per-mile tax to the UK Treasury when they are overseas.
And then, there’s another post-Brexit nightmare in the making: Who collects the tax when a UK driver goes on a trip from Belfast to Dublin?
And what happens if the Irish authorities create an EV tax at their border?
There are a few other issues: The fuel duty falls on whoever fills up the tank; the EV tax-mileage would be paid by whoever technically owns the car, creating a nightmarish situation for company-owned cars and certain leases.
Finally, the UK Treasury reckons the tax may reduce EV sales by 400,000 vehicles.
If that’s even close to accurate, car companies would take note, potentially reducing investment – and jobs – in EV factories.
Ultimately, Reeves may get her tax but lose an industry.
The United Kingdom has broken the taboo about taxing EVs. Others in Europe will surely follow.
Still, another truth remains unspoken: EV taxes will rise, and quite significantly, over the next two decades.
Even after the introduction of the £3 per mile EV tax in Britain, the new tribute will only offset about a quarter of the expected drop in fuel duty income by 2050, according to estimates by the UK Office for Budget Responsibility.
It doesn’t take a PhD in the economics of taxation to anticipate how governments would close that 75% gap.
One taboo is gone, another still needs to be addressed. — Bloomberg
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. The views expressed here are the writer’s own.
