Until recently, no government had a “cogent plan” to deal with impending combustion of Commonwealth fuel excise revenue. But now Victorian Treasurer Tim Pallas has risen to the challenge both to future proof Victoria’s road charging regime, and make Zero and Low Emissions Vehicles (ZLEVs) a more affordable choice for drivers.

Public roads require significant amounts of land and maintenance. Supplying road space to meet demand is increasingly inefficient in our urban areas, and comes at a high cost relative to alternatives such as public transport. Distanced based, and dynamic demand based (congestion) road-user charging have long been advocated for by economists, transport planners, and infrastructure bodies.

At present, road use and its social and environmental costs are not fairly priced. While it’s true that the accessibility benefits of the road network diffuse into land values, the benefits that accrue to road-users do so unevenly. These vary based on where you drive, how often, how far and at what time of day. High environmental costs attend mass vehicle production (e.g. mining), along with urban sprawl, and microplastic pollution. The most obvious cost is emissions from fuel.

Currently the Federal government recovers some of these costs from (and benefits to) road users through fuel excise tax.[1] However this system is facing a slow motion crisis, as the market inevitably moves towards 100% ZLEVs – with leading manufacturers aiming for 2035. Numerous governments globally have also committed to targeting 100% ZLEV new car sales between 2030-2040.

The Commonwealth has not made any plans to manage this technological shift, or encourage the inevitable growth in ZLEVs. Nor has it kept pace with OECD emissions standards (and subsequent fuel savings) – measures that could save motorists $830 p.a and reduce carbon emissions. There is no plan for when fuel excise revenue runs dry. Victorian Treasurer, Tim Pallas, has decided to put the pedal to the metal.

The timing of this tax is crucial; if it is left too late, the politics become excessively hard. Currently there are “fewer than 7,000 electric vehicles registered in Victoria and only 20,000 on Australian roads”. Most of them are luxury vehicles, with cheapest being about $44,000 – indicating the tax would initially fall on those who are most able to pay. However as the cost of ZLEVs fall and more people buy them, the political resistance to introducing a new tax grows too. Victoria has a once in a century chance to technologically grandfather in a fairer road-user charge system.

At this point in time, demand for ZLEVs is not very price sensitive.[2] Global car manufacturers are on track to phase out combustion engines, and will hardly be deterred by Australia’s insignifiant import market. This makes the proposed tax levels reasonable. Lower amounts are also paid for plug in-hybrids, with the top ZLEV tax still lower at 2.5 cents per/km compared to an average ~4 cents per/km in fuel excise tax. This revenue contributes to fair road use pricing for ZLEVs, while also accounting for their environmental benefits compared to combustion vehicles.

If State governments begin to collect revenue from ZLEVs, they have an incentive to increase uptake. We see how this already plays into the government’s new target for 50% ZLEV new car sales by 2030. Tightening emissions standards is an obvious next step, and one that far sighted State governments could take alone.

The proposal also increases independence and accountability in tax and spending decisions at both levels of government. Vertical fiscal imbalance has been a problem since WWII: states pay most of the bills, but the feds collect most of the money. The gap is ~21.5% of state government funding (excluding GST), and growing. This gap is even more extreme for road expenditure. Through this proposal, state governments will be able to reclaim a revenue source from the Commonwealth, potentially reducing state-federal dependency by up to 20%.

A fairer tax system would include passive value capture through land value taxes, as well as fair road-user charges. Eventually we want to see distortionary and regressive stamp duties on vehicle transfers, insurance duties, and rego axed – timed to accelerate uptake of ZLEVs at a critical market transition point.

Finally, these reforms are coupled with excellent spending initiatives that are a win-win on many fronts:

  • It creates jobs through investing in necessary charging infrastructure
  • It improves environmental outcomes, accelerating ZLEV uptake at lower ends of the market with rebates (refunding about 10 years worth of the new tax upfront)
  • It leverages public (and commercial) procurement policy for public good

Most importantly, it future proofs Victoria’s tax system. This is pragmatic, good policy, and another example of how states are leading the charge on solid tax reforms.


[1] States charge flat registration and vehicle stamp duty, and councils fund local roads through rates.
[2] The 2019-20 budget also exempted low emissions (<120g/km CO2) vehicles from increased luxury car duties, making luxury ZLEVs more price competitive after tax regardless.