House of Commons - Taxes and charges on road users

Taxes and charges on road users - Transport Committee Contents

4 What measures have been tried?

59. Over recent years, successive Governments have altered the level and structure of taxes and charges on road users, not only to raise revenue but also to achieve environment and transport policy objectives. Local authorities have been given additional powers to impose charges on road users. For example, the Transport Act 2000 gave local transport authorities the powers to introduce local congestion charges or a workplace parking levy.

Road fuel taxation

60. The major tax on road users is fuel duty (see Box 4) which raised £24.9 billion for the Exchequer in 2007-08. Fuel duty contributes to the price of petrol and diesel, which in turn influences the amount of fuel purchased and mileage driven. Demand for fuel is relatively 'inelastic', i.e. an increase of, say, 10% in fuel prices leads to a reduction of less than 10% in fuel consumption and an even smaller reduction in mileage. Nonetheless, higher fuel prices do have an impact on behaviour.

Box 4

Fuel duty and other excise duties
Excise duties are levied on five major goods: beer, wine, spirits, tobacco and fuel. They are levied at a flat rate (per pint, per litre, per packet etc.). Since flat-rate duties are expressed in cash terms, they must be revalorised (increased in line with inflation) each year in order to maintain their real value. VAT is charged on the total sale price of all excisable goods, excise duty included. VAT-registered businesses can reclaim VAT but not duty.

61. Early 2008 saw the fastest period of fuel price increases of recent decades. Typical retail prices in mid-July 2008 were £1.20 per litre for petrol and £1.33 pence per litre for diesel. Prices have subsequently fallen back and in January 2009 petrol had reduced to around £0.86 per litre with diesel at around £0.99 per litre.[49]

62. The high fuel prices reduced the amount of fuel purchased, the mileage driven, as well as congestion and motorway speeds. They may well have contributed to the significant reductions in fatal road accidents in 2007 and 2008.

The road fuel escalator

63. In 1993 a 'road fuel escalator'—a commitment to increase fuel duty rates by a specified percentage each year—was introduced. Initially the rate was set at 3% though this was soon increased to 5%. In his 1998 Budget speech, the new Chancellor, Rt Hon Gordon Brown MP, said:

The last Government introduced a road fuel escalator, the principle of which we supported. They set it at 5 per cent. Since July it has been 6 per cent. There is agreement that only with the use of an escalator can emission levels be reduced by 2010 towards our commitments.

64. Following a substantial rise in world oil prices in 1999 and fuel price protests by lorry drivers there was a change of policy. The Chancellor announced in his 1999 Pre-Budget Report that any real-terms rises in road fuel duties would be "an annual Budget decision" and that the money raised would go to "a new ring-fenced fund for roads and public transport". In the 2009 Budget, the Chancellor, Rt Hon Alistair Darling MP, raised fuel duty by 1.84p per litre to 54.19p per litre. The Chancellor also announced a return to a fuel duty escalator.

I will continue to monitor oil prices, but I expect that fuel duty will increase by 2p per litre in September [2009], and then by 1p a litre above indexation each April for the next four years.[50]

65. As duty is a fixed sum, the 'tax take' percentage varies with retail fuel price. During much of the 1990s, falling fuel prices and substantial real-terms increases in duty rates saw the tax take, as a proportion of the total sale price, rise to a peak of 86% in early 1999. The relatively small increases in duty since 2001, in conjunction with higher oil prices, have seen the tax take decline. When VAT (now 15%) is included, tax represents around 71% of the final pump price for petrol, and 65% of the pump price for diesel (as of February 2009).[51]

66. All the motoring organisations that appeared before us agreed that fuel tax is the most efficient, equitable and effective way to tax road users. Those who drive the most and pollute the most, pay the most. Motoring groups state that drivers prefer fuel duty to road pricing. For example: "[in] AA research members said they would prefer retention of fuel duty rather than a national road pricing scheme."[52]

67. Fuel duty is the most effective way of encouraging fuel efficiency and reducing carbon emissions. However, a basic maxim of taxation is that taxes should be broadly-based and reliance on a single tax is unwise. Indeed, as cars become more fuel-efficient, revenue from fuel duty and VAT on fuel may fall. This may be one of the reasons for the recent increases in VED. With the prospect of growth in the number of vehicles powered by electricity or alternative fuels, reliance on revenues from fuel duty is likely to become more problematic.

68. Fuel duty is, in most respects, the better way to raise revenue, to encourage fuel efficiency and reduce CO₂ emissions. Those who consume the most and pollute the most, pay the most. Motoring organisations and others see it as a fairer tax and suggest that there should be a switch from Vehicle Excise Duty to fuel duty. However, raising the same overall sum would involve a substantial hike in fuel duty. Given existing high levels of fuel duty, it is not clear if such an increase would be supported by motoring organisations or the public. We recommend that the Government focuses future measures on taxes that vary with use, such as fuel duty.

Vehicle Excise Duty

69. Vehicle Excise Duty (VED) raised £5.4 billion for the Exchequer in 2007-08. The Chancellor announced in the 2008 Budget that, with effect from April 2009, VED for cars, registered during or after March 2001, would be reformed to include six new bands. From April 2010, a new first-year VED rate on new cars will be introduced. VED will rise significantly for cars emitting more than 180g/km of CO₂.

70. In the Pre-Budget Report of November 2008, this policy was amended for cars registered before March 2006. The increase in VED in 2009-10 will now be limited to a maximum of £5 and in 2010-11 it will be limited to a maximum increase of £30 (as opposed to £70, as previously announced).[53] The new first-year rate will go ahead as planned in 2010-11.

71. The VED proposals of the 2008 Budget were widely criticised for being retrospective and for penalising owners of larger, older cars. The RAC Foundation, which previously backed rises in VED,[54] refers to the Government's proposals as "flawed", shifting taxation away from car use and towards car ownership.[55]

72. The changes have also been criticised for being insufficient to significantly influence CO₂ emissions.[56] Exchequer Secretary Angela Eagle told us that the VED changes are a signal to motorists and that the Government expects the revised VED changes to save one million tonnes of carbon by 2020—a similar amount as the original proposals.[57] If lower VED increases will have the same impact on CO₂ emissions, it raises a question about the justification for the original VED proposals.

73. HM Treasury countered charges of "retrospectivity" by arguing that VED changes always apply to older vehicles and that it would be too complex to have different VED rates for different ages of car. Yet the new system is perceived as both retrospective and complex. The AA argues that previous changes aimed at cars emitting high levels of CO₂ (band G) were restricted to new sales.[58]

74. The most significant financial impact for car owners is, however, likely to be the depreciation of the resale value of higher-emitting older cars. The British Vehicle Rental and Leasing Association (BVRLA) estimates that the original VED proposals would have reduced the resale value of a three to five-year old car by £400-£800.[59] The scale of the financial impact for some motorists, combined with the retrospective nature of the changes, has added to the mistrust of the tax system by some motorists.[60]

75. We acknowledge that the Government has moderated the increases in Vehicle Excise Duty rates and agreed to phase their introduction. This is to be welcomed. However, the whole process has been handled badly. Perhaps the most worrying aspect of the recent Vehicle Excise Duty changes is the damage that has been done to the image of environmental taxes and the loss of trust by motorists in the tax system. It is vital that future motoring tax changes are better planned and not perceived by the public as retrospective.

London congestion charge

Cutting congestion

76. London is the only UK city with a road pricing scheme.[61] The central London congestion charge was introduced in 2003. In July 2005 the basic charge was increased from £5 to £8 per day. It was extended westwards, by Mayor Ken Livingstone, in February 2007. Following a change of Mayor and fresh public consultation in 2008, Mayor Boris Johnson announced that the western extension would be scrapped. (The earliest that this can occur is 2010.) The Mayor's representative, Mr Kulveer Ranger, told us that there was no intention to change the nature of the scheme but to make it fairer and easier to pay.[62]

77. The charge is intended to deter a proportion of less-essential traffic from entering the charging zone. In this way the remaining traffic benefits from faster and more reliable journeys. It is part of a wider strategy to encourage public transport, walking and cycling.[63] The scheme is enforced by automatic number-plate recognition cameras.

78. Initially (2003), the congestion charge achieved an 18% reduction in traffic and a 30% reduction in congestion within the central zone, compared with 2002. The levels of traffic and congestion remained below 2002 levels for several years but, by 2008, congestion had returned to pre-charge levels.

79. Traffic levels are still reduced (by 21% in 2007) and TfL estimates that, in the absence of the congestion charge, congestion would be 30% worse in the central London zone. The main reasons that congestion has returned are:

a major redevelopment (Scotch House Corner, Knightsbridge) that reduces capacity locally and across the network;
additional road works, including sewer replacements;[64]
new traffic signals and changes to signals timings, and
other changes to the road network that have reduced overall capacity.[65]

80. Some factors, such as road works by the utility companies, are largely outside the control of TfL or the Mayor. Others, such as changes to the capacity of the road network and planning permission for major development schemes, fall at least partly within their control.

Revenues, costs and benefits

81. In 2007-08, the congestion charge raised around £137 million in net revenue. The total revenue was £268 million, including £73 million enforcement income.[66] Costs amounted to 49% of the total revenues (see Table 5). TfL attributes the high operating costs to high levels of enforcement and the multiple ways to contact and pay TfL.[67]

Table 5: London congestion charge—revenues and costs, 2007-2008

Costs £ million

Scheme operational, publicity and enforcement costs 91

Other costs: TfL staff; traffic management; TfL central costs 40

Total costs 131 (49% of Total Revenue)

Revenues

Standard daily vehicle charges (£8) 146

Fleet vehicle daily charges (£7) 37

Resident vehicles (£4 per week) 12

Enforcement income received 73 (27% of Total Revenue)

Total revenues 268

Net revenues 137

Source: TfL, Central London Congestion Charging, Impacts Monitoring, Sixth Annual Report, July 2008, p220

82. TfL assesses the costs and benefits of the congestion charge from a range of perspectives. On the basis of the £8 charge:[68]

The principal benefits are time savings and increased reliability to road users. These are estimated at a value up to £260 million, plus benefits to bus users of up to £43 million;
Overall, using a typical year's operation, the identified benefits exceed the identified costs by a ratio of up to 1.7 to one (1.7:1), and
Taking account of the reduced payments of fuel duty, VAT and parking fees, there is a net surplus to the public accounts of £46 million.

83. TfL's assessments all show a surplus of benefits over costs. However, only one quarter of the benefits of the London congestion charge accrue to the charge payers. The main beneficiaries are other road users who do not pay the charge, such as bus and taxi passengers, who also experience less delay.

Foreign-registered vehicles

84. There are particular difficulties with making enforcement effective for foreign-registered vehicles, not only for the London congestion charge but also for parking and other traffic offences. TfL and London boroughs have established a project (SPARKS) to tackle this issue. According to SPARKS:

Enforcing current road user charges on Foreign Registered Vehicles (FRVs) is highly problematic: FRVs are currently twice as likely to avoid paying the London congestion charge as UK registered vehicles.

Although there is a proposed EU Directive designed to facilitate cross-border enforcement in the field of road safety, this will not cover administrative offences such as evasion of road user charges.[69]

Differing perceptions

85. There was no specific public referendum on the London congestion charge. It was a manifesto commitment of Ken Livingstone in the Mayoral election campaign in 2000. Various views on the scheme were put to us during our inquiry.

86. London First has been a consistent supporter of the London congestion charge, on the grounds that it reduces congestion and helps to fund improved transport in London. London First represents larger employers.

87. However, freight and motoring organisations feel that they are now paying for little or no benefit. The Freight Transport Association (FTA) says that time savings are insufficient to enable operators to schedule additional deliveries.[70] The British Vehicle Rental and Leasing Association says that the London congestion charge is seen as a burden on businesses due to the difficulties of payment for fleet operators. The fine regime also imposes significant administrative burdens.[71] TfL acknowledges that the impacts of the congestion charge on business are not uniform and that some smaller businesses are disadvantaged.[72]

88. The London congestion charge was a bold initiative and a flagship for a wider approach to rejuvenating transport in London. Initially the charge reduced both traffic and congestion but congestion has now returned to pre-charge levels. It has encouraged bus use and cycling, and made central London a more pleasant place. The economic appraisals are positive. It is worrying, however, that after five years of operation, running costs remain high, consuming almost half the revenue generated. The level of enforcement required remains high and, without the income from fines, the operating surplus would be considerably smaller. This reliance on fines is unacceptable, particularly as it is often visitors to London, who are ignorant of the congestion charging system, who pay the fines as they have insufficient time to correct their mistakes. If congestion charging schemes are to go ahead elsewhere, less expensive ways of administering them must be found. We endorse the policy of the London Mayor to make payment of the charge simpler and to reduce the level of fines through better information.

London Low Emission Zone

89. London has the worst air pollution levels in the United Kingdom and among the worst in Europe. The objective of the London Low Emission Zone (LEZ) is to improve air quality in London.[73]

90. The LEZ came into operation in February 2008 for lorries over 12 tonnes, and in July 2008 for lorries over 3.5 tonnes, and buses and coaches over 5 tonnes. Vehicles that do not comply with the stipulated emissions standards must pay a daily charge of £200. The scheme is run by TfL.

91. The vehicles affected by the LEZ are older diesel-engine lorries, buses, coaches and large vans. Cars and motorcycles are not affected by the scheme. The Mayor of London, Boris Johnson, announced in February 2009 his intention to suspend the third phase of the LEZ, which was due to affect vans and minibuses from October 2010.

92. The set-up costs for the scheme were estimated at £50 million. Operating costs were estimated at £80 million (present value to 2015-16) while the scheme was estimated to generate revenues of £5 million to £7 million per annum. The LEZ is, according to the Office of National Statistics, a tax rather than a charge, as no benefit accrues to the payer.

93. Apart from the cost of daily charges for non-compliant vehicles, TfL has estimated the wider cost of the scheme. These are mainly the result of having to invest in newer, cleaner vehicles. TfL describes these costs as "significant":

It is estimated that in economic output terms the costs of 'compliance' associated with asset replacement and vehicle upgrade and retrofitting in response to the scheme would result in overall net economic 'loss' of some £80-110 million (present value to 2015-16).[74]

94. The economic benefits resulting from improved health in London and beyond are estimated at £140-210 million or £250-£660 million, depending on the methodology used.[75] Clearly, the levels of estimated benefit are highly dependent on the assumptions and methodology.

95. TfL forecasts show that much of the improvement in air quality resulting from the LEZ would occur anyway as a result of wider trends towards more modern vehicles and European pollution control requirements. TfL's monitoring baseline report shows that the LEZ achieves these improvements about two years sooner than the trend. Michelle Dix from TfL told us that over 95% of heavy diesel-engine vehicles in central London are now compliant with Euro3 standard and that there had been a 2% reduction in "some vehicle emissions".[76]

96. Improving air quality and health in London is very important but it remains to be seen whether the London Low Emission Zone will achieve enough that would not have been achieved by other means to justify the overall cost. The Government and others need to be mindful of the impacts on business and employment in relation to the benefits when assessing methods to reduce harmful emissions from transport and to improve air quality.

Parking

97. Parking charges have long been a demand management tool available to local authorities.[77] This usually involves restricting the provision of spaces and increasing charges for parking in central areas; and providing public transport, park and ride, and other alternatives to the private car. As we explored in our Report Parking Policy and Enforcement, parking is an important transport policy tool for local authorities.[78] It can be used effectively to manage traffic levels in specific areas. However, the Local Government Association and others note the limitations of using parking charges to reduce congestion and achieve other objectives.

[…] the equity and effectiveness of such [parking charge] schemes are limited because they cannot affect people parking at home addresses or other private parking facilities.[79]

In the absence of other measures, such as congestion charges, parking charges will continue to be an important local transport policy tool.

98. Recently, some councils have sought to use parking charges to pursue other objectives, notably CO₂ reduction. Richmond upon Thames Borough Council charges residents for parking permits according to the CO₂ emissions of the vehicle. The Council is considering extending this principle to charges at parking meters and in car parks. Edinburgh City Council has proposed to introduce a similar CO₂-related charge for residents parking permits.[80]

99. This approach to charging has been criticised as unjustified, ineffective in terms of CO₂ emissions and undermining of green taxes in general.[81]Norwich City Council, on the other hand, charges on the basis of the length of the car—a criterion that could be said to relate, at least partly, to the service provided. The AA also criticises these charges for unfairly "surcharging" owners of larger engine cars—regardless of use. It too believes that such schemes are detrimental to the relationships between the motorist and the local charging authority.[82]

100. We are concerned at the increasing trend to base service charges, such as parking charges, on grounds unrelated to the service. If parking charges are to be used for wider policy purposes, these should be proportional, explicit and properly justified.

49 Petrol and Diesel Prices, Standard Note SN/SG/4712, House of Commons Library, 12 March 2009 Back

50 HC Deb 22 April 2009 c244 Back

51 Taxation of road fuels, Standard Note SN/BT/824, House of Commons Library, May 2009 Back

52 Ev 161 Back

53 Angela Eagle Q 507 Back

54 RAC Foundation, Roads and Reality, 2007, p 27 Back

55 Ev 140 Back

56 Environmental Audit Committee, Tenth Report of Session 2007-08, Vehicle Excise Duty as an environmental tax, HC 907, August 2008 Back

57 Angela Eagle Q 524. These calculations do not take into account the carbon involved in scrapping old vehicles or manufacturing new ones (see Ev 219). Back

58 Ev 161 Back

59 Mr Lewis Q 243 Back

60 Mr Lewis Q 224-225 Back