Should we tax EVs?

Red car

Victoria and South Australia have recently announced the introduction of taxes on plug-in vehicles.  Here’s my take on that.


Richard Keech

I once heard economist Richard Dennis say something simple but profound that really stuck with me

Good public policy means that you tax the things you want to see less off, and subsidise the things you want to see more of’.

I think that’s a good lens to view this discussion about the inevitable reduction in the tax base when less petrol and diesel is consumed. So, my view is that something will need to fill the gap from a drop in fuel-excise revenue, and a switch to distance-travelled basis for road-usage taxation is inevitable. However, it should apply to all road users, and it should be done as a federal, not a state tax. Targeting EVs is highly problematic because it clearly skews incentives in the wrong direction.

Do EV owners pay tax?

Running the car. EV owners already pay tax on their retail purchases of electricity.   People buying petrol pay both GST and the excise.  So yes, ICE car owner pay more tax, but it’s not like EV owners get off scot-free.

Buying the car. EV owners pay GST and stamp duty on vehicles that are, all other things being equal, more expensive than their ICE equivalents.  So EV owners make a larger contribution to the tax takings at purchase time.


Incentivising electric transport

I think supporting the transition to electric transportation is such a fundament common good that the short-term foregone tax income is worth it.  There is a climate imperative to cease using petrol and diesel as soon as possible, and the electricity grid is greening very quickly.  There is also a clear public good from having reduced air pollution from ICE vehicles.  So, on both these grounds, EV owners deserve a break.  They’re choosing to pay a bit more up-front, and society as a whole is better off for that choice.  They should not be hit with an extra impost.


State-based tax returns?

I also wonder how the state intends to go about collecting this tax.  Individual tax payers do not have to lodge a tax return with the state government.  How do the government imagine that they will accurately reckon the EV owner’s distance travelled?  I think it would be a tax collection nightmare.  The cost of collection would be high, and the incentive for EV owners to under-state their travel would be considerable.  I’m not condoning cheating, but perhaps the government under-estimates just how easy it would be technically for people to cheat using so-called ‘mileage correction’ technology.


A fairer way?

I suggest that a fairer way is to apply a user-pays principle to roads that applies to all vehicles.  Ultimately the least worst way of doing this will be with a widespread transponder and toll system.  I think if the introduction of this coincides with the removal of excise, then the backlash would be lessened.  Notwithstanding, it would be a political hot potato, and costly to introduce, and the privacy implications troublesome.


Whichever way things go, I think that targeting EV owners, as has been done by SA and Victoria is opening a huge can of worms that both government will eventually regret.