The tax implications of electric vehicles

In the previous post we looked at the potential loss of tax revenue which will happen once 50% of the petrol vehicle fleet is electric. The government projections are for this to happen by 2040. (/Tui)

To replace this lost revenue there are three general methods: the salami principle, the cross-subsidy method, and the direct taxation method. Each of these mitigation measures can be appropriately applied at various stages of electric vehicle market penetration.

When the market penetration of electric vehicles is only 1%, then, indubitably, the easiest way to recover the lost revenue is to simply increase the existing petrol tax. A 0.8 cent increase in tax will doubtless be absorbed almost without comment from the struggling, battered motorist.

“‘Tis but a scratch.”

One can be sure that this increase will not be sold on the basis that, “We need to do this so that you petrol guzzlers can subsidise your neighbour’s electric car.” There will be some other weasel reason.

Once the market penetration reaches 10%, the salami principle becomes less viable. Petrol tax now has to increase by 8c a litre (plus GST) putting further financial strain on the lower-paid motorists who cannot afford the luxury of an electric vehicle (or even a modern, fuel-efficient petrol vehicle). At this level of penetration, other effects will also become significant such as a noticeable increase in congestion in priority and bus lanes.

Assuming that, in accordance with government stated policy, the increase in the proportion of electric vehicles starts to accelerate toward 50%, the salami principle becomes a politically unacceptable thick slice, effectively doubling the tax per litre to $1.40 ($1.60 in Auckland).

“It’s only a flesh wound.”

The next option open is the cross-subsidy method whereby other taxes such as GST, income tax, business rates and (hopefully not) capital gains tax are increased to reduce the impact of the decreased petrol tax take. Because petrol tax is a relatively small component of total tax revenues, this can be considered as a politically acceptable variant of the salami principle.

However, as the market penetration of electric vehicles approaches and exceeds 50%, it is not hard to conclude that taxation in general will increase to levels the population finds unacceptable and political fallout occurs.

And so, inevitably, the point will be reached where electric vehicles will no longer enjoy privileged treatment; the owners will have to pay full licence fees, be excluded from priority lanes and pay a specifically targeted direct tax to make up for the loss of petrol taxation revenue. Such a tax (totalling $2.2bn in 2017 dollars) could take several forms but the most appropriate methods would be taxation per electrical unit (kWh) or per km.

Taxation per kWh can be achieved by cross-subsidy or by direct taxation. Electricity demand in NZ is 41TWh of which domestic consumption accounts for 13TWh or roughly one third.

A cross-subsidy approach would spread the $2.2bn across 41TWh plus the additional energy consumption of petrol substitution which is 3.2bn litres times 2.5kWh. (see last post for these calculations) This is equivalent to 8TWh. Added to the current 41TWh the total is now 49TWh

So, the cross-subsidy would spread $2.2bn across 49TWh which is equivalent to 4.5c per unit. (Amortising the investment required to provide the additional 8TWh is not considered here – that will all be covered in the “4.5 wind farms per year” etc.) This outcome is not great – about a 20% increase in the unit cost, but the problem is how to calculate and apply the tax and to which sector: generation, transmission or distribution? A Gordian knot level of complexity seems certain.

Now, instead of paying for your neighbour’s electric car tax rort at the pump, you will pay for it when you turn your lights on or cook your dinner. What fun!

It would be simpler, and fairer, to tax per kWh of charge. That is, 28c+GST (32c+GST in Auckland) per kWh. Metering can be achieved easily with currently available technology. A mandatory sealed energy meter on the vehicle would record the kWh charged, the data could be uploaded wirelessly and the vehicle owner billed monthly. Commercial vehicle electronic monitoring is already commonplace in New Zealand.

The alternative is a per km charge – this already applies to diesel vehicles and is well-established practice. There would be some complexity in fairly equating the kilometres travelled to the charge consumed but this could be adjusted according to vehicle weight with relative ease.

The conclusion is that direct replacement of petrol taxation provides the simplest and most equitable solution to charging electric vehicles.

Of course the Greens and the Tesla owners of Remuera will howl with pain and anger at the loss of their special privileges, but the rest of us will quietly enjoy the Desolation of Smug.

(Once again ToBoldLeeGoh did the heavy lifting. I had the easy ride.)

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