It is a myth that car useres pay more in taxes than is spent on roads

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Common Urban Myths About Transport

Myth: Motorists pay more in taxes and fees than is spent on roads
Fact: Part of the problem here is the underlying premise: just as we don’t expect all money collected from gamblers to be spent on casinos, or all money collected from liquor excise to be spent on pubs, so we shouldn’t expect all money collected from motorists to be spent on roads. But in any case, the smallest credible estimate for the total cost of the road system in Australia is $52 billion a year, of which $35 billion a year is collected in taxes and charges on motorists, leaving a ‘road deficit’ of at least $17 billion a year.
It’s often claimed by the RACV and other road lobbyists that the cost of roads is only a small percentage of what Australian motorists pay in fuel tax, registration and other fees. This is untrue: in fact, taxes and charges on motorists fail to cover the cost to the public of car use. The confusion arises because of the peculiarities of our federal system, where the Federal Government collects most of the tax revenue, but state and local governments are responsible for most of the spending.

Headline-grabbing figures for fuel tax are easy to obtain simply because there are well over 10 million motorists in Australia, so if each motorist spends just one dollar there’s suddenly over $10 million changing hands. To take just one example, in June 2006 the Herald-Sun ran large headlines about the $2 billion a year ‘stolen’ from Australian motorists in GST on petrol. This sounds impressive until you realise it represents less than $200 a year per motorist – a fraction of what it costs to fill a pothole in the street, let alone resurface a road or repair a bridge, and a similarly small fraction of the $5000 a year one will typically spend to own and run a car.

Tallying Road System Public Costs and Revenue

The tables below outline just those costs of motor vehicle use that can be quantified in dollar figures, and the total revenue collected from Australian motorists each year. See the Appendix for more detail on how these figures are obtained.

(Our figures are updated from time to time to ensure they remain current. Earlier versions of this analysis appear in some PTUA documents. The bottom line, however, is little changed from 2005 when we first undertook this exercise, and found the road deficit was $15 billion per year.)

Annual costs of motor vehicle use in Australia
Item $million
Total 52,300
‘Financial’ costs
Road construction and maintenance 14,100
Road trauma and damage 16,900
Tax concessions for car use 7,400
State fuel subsidies 0
‘Economic’ costs (externalities)
Land use cost 6,000
Noise 700
Urban air pollution 4,300
Climate change 2,900
Annual revenue collected from Australian motorists
Item $million
Total 35,300
Road Deficit 17,000
Petrol and diesel excise (net of rebates) 10,300
GST on fuel and vehicles 5,000
Vehicle registration fees 3,500
Insurance premiums 12,100
Tolls 2,000
Other revenue 2,400
Sources: Bureau of Infrastructure, Transport and Regional Economics, Transport Statistics, various years; Public road-related expenditure and revenue in Australia (2011 update). Connelly et al, The economic costs of road traffic crashes: Australia, states and territories. (Accident Analysis and Prevention, 2006.) Bus Industry Confederation, submission to the National Fuel Tax Enquiry, 2001. Australian Tax Office, Taxation Statistics, various years. Australian Prudential Regulatory Authority, Half Yearly General Insurance Bulletin, June 2009. Laird et al, Back on Track, UNSW Press, 2001. PTUA calculations (see Appendix).

We have been careful to include in the ‘revenue’ table all the taxes and charges motorists actually pay for the use of roads. To avoid any arguments over the ways in which motorists ‘pay their way’, we include many items that many would say are not really ‘user charges’ at all, such as GST on car purchase and maintenance as well as fuel, and premiums for all motor vehicle insurance (not just the compulsory third-party component).

On the other hand, figures in the ‘costs’ table have been deliberately kept on the conservative side, and should be regarded as minimum estimates. There are many important exclusions. For example, construction and maintenance costs for toll roads by the private sector are not included, even though we count tolls as one of the charges motorists pay for roads. And we ignore the very large sums provided in government support for the car industry (although part of this is offset through import tariffs).

We also leave out the considerable social costs of mass car use, such as reduced neighbourliness within communities, reduced independence of children, and the increase in obesity resulting from lack of ‘incidental exercise’ such as cycling to the shops or walking to the bus stop. These costs are still subject to a lot of uncertainty. According to the road lobby, they are so nebulous that they shouldn’t be counted at all. In any event, we haven’t counted them here.

As transport researcher Garry Glazebrook has suggested, transport costs to the general public can be divided into two categories. ‘Financial costs’ are those which show up directly on financial accounts, as subsidies to road users from governments and those outside the road transport system. On the other hand, ‘economic costs’ or ‘externalities’ represent the burden of the road transport system on the broader economy, including on non-users of roads, expressed in equivalent dollar terms. For example, when traffic noise forces someone to move house or install double glazing, the cost of this does not appear as a direct subsidy in transport budgets, but it should be considered nonetheless.

The table above is very conservative in accounting for ‘externalities’. As we say above, difficult-to-quantify burdens such as health and social effects are mostly ignored. One other that is very commonly cited, but that we have omitted, is the notional cost of traffic congestion: usually estimated as around $15 billion a year in Australia. As we explain elsewhere, many international transport experts dispute that the ‘cost of congestion’ is a meaningful notion. Traffic congestion is also often used as an argument for building more roads, despite the fact that this doesn’t actually work.

Of course the road system also has very substantial benefits, else we would not bother having it in the first place. The important point here is that all the benefits of the road system accrue privately, to individual motorists and to the purchasers of goods and services delivered by road. A person driving a car does not generate any ‘positive externality’ that benefits unrelated members of the public. There are only indirect ‘financial benefits’ to the general public, in the form of direct payments by road users to the public purse – tallied in the ‘Revenue’ table above.

The Road Deficit

The difference between the cost of motor vehicle use and the revenue collected from motorists is the ‘road deficit’. The conservative figures above result in a road deficit of $17 billion a year.

About $3 billion of this – the difference between purely financial costs and revenue – is the ‘financial deficit’, the amount by which the general public (whether motorists or not) directly subsidises the use of cars and the consequences of car use. The other $14 billion represents the ‘economic deficit’, the economic burden on the general public arising from the use of cars and trucks.

Currently, fuel tax raises around $10 billion a year. Thus, if the $17 billion road deficit were to be recovered by raising fuel tax, it would have to nearly triple, from 38 cents per litre to almost $1. But as we have explained, this figure for the road deficit is only a minimum. If all of the various externalities were included, and the revenue more carefully analysed, the difference would be much greater. Petrol would have to be priced at over $3 per litre if the full cost were charged to motorists.

The fact that public transport’s operating deficit is regularly castigated in the media and the road deficit is not – despite the fact they work out to about the same cost per passenger – and that motorists are instead led to assume they’re being ripped off, suggests a double standard is at work. In a 2012 blog post, urbanist Alan Davies tries to rationalise this by noting that the financial component of the road deficit is quite small relative to the economic component, so much of it isn’t a direct financial subsidy like that to public transport. But as an explanation this still doesn’t satisfy, because the financial component at $3 billion is still large in absolute terms. If just that subsidy were eliminated, the extra $3 billion could, over a decade, build at least two extra train lines in every Australian capital city; alternatively, it would suffice to double the service on every urban bus route in the country. (And going on the results of past improvements, it would also generate extra patronage and revenue sufficient to cover much of the cost.)

In truth, the double standard persists because Australia is still a car-dependent society, and planners reinforce this in their decision making despite popular feeling to the contrary. Regardless of whether the cost burden is ‘financial’ or merely ‘economic’, as long as it’s borne by government rather than our own hip pockets, it remains invisible unless it’s pointed out to people. And when it is, it’s usually by powerful defenders of the road lobby status quo, who can appeal to the fact that cars are, after all, quite costly to own and operate, which makes rip-off yarns so believable even if they’re not true.

But even if there were no road deficit, it still wouldn’t necessarily be true that more expenditure on roads or cuts to fuel tax are justified. By buying petrol and registering cars people are not necessarily revealing a preference for road transport. There’s a substantial captive market of people who are forced to buy petrol and pay fuel tax and car registration despite wanting an alternative. They may prefer that the revenue be spent on public transport. (So it should also be obvious that by pointing out the costs of car use we are not trying to ‘blame’ motorists for these costs. It is not the public’s fault that the alternatives to driving are so poorly developed in Australia.)

In the end, it’s not important whether fuel tax and other fees pay for roads or not. They’re just another kind of tax and can be used for whatever we as a democracy want it to be used for. Indeed, we know that improvements to public transport have greater benefits for traffic congestion than building freeways, so public transport improvements can be just as good a use for petrol tax revenue as road works.

Public transport is a State Government responsibility….People pay taxes, petrol excise and speed camera fines to the State Government to fund public transport.
—Cr Ben Clissold, City of Casey, September 2005

Appendix: Detailed Analysis of Road Costs and Revenue

As at the time of writing, the latest period for which all the required detailed figures are available is the 2008-09 financial year. However, to get a reliable picture of general trends, and correct for extraneous factors such as the Global Financial Crisis, we take into account equivalent figures for previous years where appropriate.

Generally, since the commencement of the Howard Government’s AusLink programme in 2005 there has been a sharp increase in road spending by both Federal and State Governments. On the other hand, growth in car travel has been slowed by increases in petrol prices, by generational shifts in travel habits, and by the not-quite recession following the Global Financial Crisis. So there has not been a similar increase in revenue from motorists.

Previously published figures for the road deficit (such as our own earlier figure of $16 billion for 2004-05) therefore give a fairly conservative picture of the present situation. This is despite the various small, fairly cosmetic steps that have been taken to reduce subsidies to road transport, such as the abolition of direct fuel subsidies by State governments (see below).

Road Construction and Maintenance

The road lobby devotes much attention in its PR material to the money spent on road construction (which is always inadequate, despite still exceeding by a factor of four the money spent on new public transport infrastructure). Instead of drawing attention to all the costs that roads and cars impose on the community, road lobbyists simply point to a figure for road construction and maintenance, and claim that this is only some small percentage (say 15 or 25 per cent) of what motorists actually pay in fuel tax. The message that emerges is that motorists are being ripped off.

This canard dates back to the Kennett Government’s Better Roads Levy, which was a 3-cent-a-litre surcharge on petrol targeted toward Victorian road construction. When it was introduced in 1993, Federal fuel excise was around 30 cents a litre, so the Kennett surcharge represented around 10 per cent of the total tax on petrol. This made it possible for the road lobby to claim that only 10 per cent of your petrol tax is dedicated to Victorian roads – despite the fact that Federal funding of Victorian roads (via State and local assistance grants) far exceeded what the Kennett tax was raising.

The way the road lobby misrepresents the facts today is to report only direct Federal spending on roads, which comes to about 25 to 30 per cent of the money raised from fuel tax.

Motorists pay 38.143 cents per litre in fuel excise alongside state charges such as registration and stamp duty – but they do not see anywhere near that level of income going back into the transport network. At current levels of expenditure, the Commonwealth invests less than one-third of the tax take back into roads and the network.
—Make motoring more affordable, Australian Automobile Association, August 2010

Motorists are already hugely overtaxed with a fuel excise take of 38 cents a litre plus GST. Critically, the Federal Government only returns around 12 cents a litre to improve transport, so Australians are being short-changed by 26 cents a litre to subsidise other demands on the budget.
—RACV President Peter Chandler, RoyalAuto, May 2011

Motorists are paying too much tax already; they’re paying 38 cents a litre fuel excise as it stands, and we’re not seeing that money going fully back into investment in roads and land transport infrastructure, so we’d be very concerned…. currently, less than a quarter of what the Federal Government raises in revenue from fuel excise has been spent back on roads and other land transport infrastructure.
—Andrew McKellar (Chief Executive, Australian Automobile Association), ABC radio interview, 8 May 2014

What these statements never admit is that the Federal Government itself only funds a small number of roads: those classed as part of the AusLink National Network (or before 2004, as National Highways or Roads of National Importance). Most expenditure on roads is incurred by the states, and local government also accounts for a large chunk. Think of all the little streets in your local area: they’re entirely Council funded (from rates and developer contributions, not motorist charges), with the odd State or Federal grant chipping in. But Federal operating grants to the states, or to local government, are often not classed as road expenditure despite the fact that a lot of the money gets spent on roads.

Annual spending on roads by Wyndham City Council
New road construction $16,000,000
Rebuilding existing roads $8,500,000
Routine road maintenance $3,500,000
Road planning and management $1,800,000
Total $29,800,000
Annual road funding from Grants Commission $830,000
Source: City of Wyndham, 2005

It’s virtually impossible to trace a direct money trail from petrol tax to road funding, but that’s not the way government finances work. It’s better to think of all the money collected by all three tiers of government going into a big pot called ‘public revenue’, and all the money spent by governments coming out of the same pot. In the case of roads, petrol tax is collected by the Federal government, but roads are funded by all three tiers of government. In-between are various transfers of money between governments to ensure that everything balances.

The table below shows figures for ‘identified’ expenditure on Australia’s roads by the three tiers of government. This will account for most spending on roads, but not all, as some road spending appears under other budget items (such as ‘Major Projects’ in Victoria). It also excludes all road expenditure by the private sector, which the BITRE estimates at $859 million in 2008-09.

Road Funding Totals ($million)
2004-05 2005-06 2006-07 2007-08 2008-09
Total: 9,009 9,090 10,691 13,299 14,936
Commonwealth 2,101 4,252 2,772 2,724 4,945
State govts 4,270 2,533 5,430 7,431 6,637
Local govts 2,638 2,306 2,489 3,145 3,357
Source: Bureau of Infrastructure, Transport and Regional Economics, Road-Related Revenue and Expenditure (2011 update).

Our nominal figure of $14.1 billion for present-day annual road expenditure is based on the average for the 2007-08 and 2008-09 financial years, and is likely to be conservative. As will be seen, the figure far exceeds the amount actually raised from fuel tax.

Note that although private-sector road expenditure has been omitted here, its effect on government balance sheets is not actually zero, thanks to ‘hidden costs’ in tax concessions and off-budget deals (such as the one with Transurban bringing forward Citylink payments to cover the widening of the Monash Freeway, the cost of which will be borne chiefly by future taxpayers).

Road Trauma and Damage

The Australian road toll is around 1,400 deaths a year. In addition, over 30,000 people each year are hospitalised as a result of road crashes, and every few weeks the news gives us pictures of houses half-demolished by errant vehicles. As a proportion of population our road toll compares favourably with other Western nations; on the other hand, we score poorly compared to other Western nations on the rate of pedestrian and cyclist injuries due to road crashes. It is likely that the number of people hospitalised each year by cars is even greater than the official figures suggest, as not all road incidents are reported as such.

The Bureau of Transport and Regional Economics in 2000 estimated the direct cost of road trauma in 1996 as around $15 billion. In 2006, an update to this analysis put the cost of road trauma and property damage in 2003 at $17.3 billion, broken down as follows:

Road Crash Totals and Costs, 2003
Fatalities Serious Injuries Minor Injuries Property
damage only Cost ($million)
Average
cost -> $1,832,310 $397,000 $14,183 $7329
Total 1620 26562 67119 382872 17,272
NSW 539 8874 18395 126293 5697
Vic 330 6683 15115 91902 4146
Qld 310 5735 11867 79752 3598
WA 180 2837 11209 42748 1928
SA 156 1468 7605 25847 1166
Tas 41 393 2011 7385 310
NT 53 434 679 6873 333
ACT 11 138 238 2072 94
Source: Connelly et al. The economic costs of road traffic crashes: Australia, states and territories. Accident Analysis and Prevention, vol.38 (2006). Figures for ‘property damage only’ crashes are inferred from the authors’ results.

This ‘direct cost’ figure is the one on which our accounting is based: it is a readily measurable minimum that accounts for the cost of treating crash victims, the cost of repairing property damage, and the victims’ lost income. To be conservative, we have adjusted the ‘fatality’ component of the cost to reflect the slight reduction in the road toll since 2003, which reduces the total figure from $17.3 billion to $16.9 billion, but we have not indexed the latter figure for inflation. Accordingly, this is still likely to underestimate the current figure – especially for property damage from car crashes.

What are not included are the very substantial indirect health costs of car use. Car dependence is accepted to be a big factor in Australia’s ‘obesity epidemic’ and the increasing incidence of heart disease, diabetes and other obesity-related diseases. Pollution from cars is a major factor in respiratory illness in urban areas. And while our Federal Government has been preoccupied with the challenge an aging population poses to the national budget (in large part because of the ‘obesity epidemic’), some health economists now think a greater challenge is posed by lifestyle-related illnesses such as depression and certain types of cancer that affect young and middle-aged Australians. The incidence of these diseases is closely linked to whether the urban environment is conducive to moderate levels of physical activity and to the existence of healthy social networks.

Cars make us sick, sad and dead – how cars are managed is critical to public health – and much more important than we previously realised – we need to repopulate the streets. Car centred suburbs are ‘obesogenic’ (fattening) and foster depression and isolation by discouraging social interaction, walking and cycling.
—Dr Rob Moodie, Chief Executive Officer, VicHealth. Presentation to Planning Institute of Australia, 2003.

The Heart Foundation, Diabetes Australia and Cancer Council have identified heavy car use as a key factor in the overweight and obesity epidemic in Victoria. The health groups’ recommended responses include:

addressing urban planning to support walkable communities, and
addressing public transport planning to reduce car dependency.
—Diabetes Australia (Victoria), Heart Foundation (Victorian Division) and The Cancer Council Victoria, media release, 2004

The adverse health effects resulting from climate change, road-traffic crashes, physical inactivity, urban air pollution, energy insecurity, and environmental degradation are linked via their common antecedent of fossil-fuel energy use in transport. Public policies that encourage a transition to a low-carbon low-energy transportation system have the potential to bring substantial public-health benefits by affecting all these health pathways. Increased active transport (walking and cycling), with public transport for longer journeys, could have a substantial role in meeting targets for greenhouse-gas emissions and would result in major public-health benefits.
—James Woodcock et al., Energy and Transport, The Lancet, September 2007.

The data show clearly that those living in areas of increasing growth reported high hospital admissions for respiratory problems…. Previous literature shows a strong association between increased respiratory conditions and air pollution.
—VicHealth, Submission to Victorian Parliamentary Inquiry into environmental design and public health, 2012

Our study has shown that not using cars for commuting may be protective against weight gain. This highlights the need for promoting active commuting through public health, urban planning, and transportation initiatives.
—Takemi Sugiyama, Baker IDI Heart and Diabetes Institute, October 2012

Daily active commuting to work is important for reaching recommended levels of daily physical activity. Public transportation users are walking and cycling to stations or stops and between intermediary destinations. Availability of public transport is therefore a determinant of active transportation.
—Sune Djurhuus, Research Centre for Prevention and Health (Denmark), October 2012

The indirect cost to society of all these illnesses is estimated at around $60 billion a year, the largest component of this figure being pollution-related respiratory illness at around $18 billion a year. For the sake of this exercise we have not counted most of these indirect costs, except where others have identified them as specific consequences of car and truck use as in the ‘noise’ and ‘pollution’ figures below.

Tax Concessions For Car Use

The Australian tax system provides generous deductions for the use of cars, and to a lesser extent for the purchase or leasing of cars. In most cases equivalent deductions are not available for use of public transport, even for business activities. The tax treatment of car expenses in Australia is so generous that it has induced people to use cars more often than they otherwise would. Until 2011, the most notorious of these perverse incentives concerned Fringe Benefits Tax (FBT), as financial journalists liked to point out:

The most commonly ‘packaged’ item is a car. This can be attractive no matter what your salary. For a start, cars and car parking are subject to a discounted rate of FBT. For example, using the statutory formula method to calculate the taxable value of the car, the FBT rate depends on how far you travel each year. It ranges from 26 per cent for less than 15,000 kilometres to 7 per cent for more than 40,000 kilometres per year. So the further you travel, the lower the rate.
—Marilyn Smith, The Age (Business), 23 March 2002.

Though the former Howard Government continually maintained it didn’t give tax deductions for private expenditure, the Tax Office website has stated quite clearly that both business and private travel counts toward the kilometres used to determine the statutory tax rate under the old rules. That substantial public funds have been used to subsidise personal car use was confirmed in a 2009 report from the Victorian Auditor-General, which investigated the use of ratepayer-funded vehicles in three local council car fleets. In two cases, at least half of all use was found to be for personal rather than business purposes; in the third case, no data were available to distinguish business from private use.

So it shouldn’t surprise anyone that anecdotes abounded of company-car owners going on gratuitous driving expeditions so as to ‘clock up’ the necessary 25,000 or 40,000 kilometres to claim the FBT tax break. A 2007 Senate enquiry found that half the cars on Australian city streets in peak hour were company cars benefiting from this loophole.

It just seemed to us ridiculous when you are facing oil depletion and climate change that you should have in place a fringe benefit related to employer-provided cars that requires people to achieve a certain odometer reading before they can get the next level of benefit.
—Senator Christine Milne, February 2007

By contrast, it makes no sense for employers to salary-package public transport tickets on behalf of employees, because these incur the maximum FBT rate of 95 per cent.

As of 2011, this perverse FBT rule has been reformed so that a flat statutory rate of 20 per cent applies to new company car leases, irrespective of distance travelled. This may help put an end to extraneous personal car use that is driven by tax rules rather than people’s actual need to travel. Yet it remains a generous concession – the same as previously applied to company cars driven 15,000 to 25,000km per year – and it does not affect pre-2011 leases that are renewed. And the novated-leasing industry still loves to point out the value of this tax perk:

Tony wants to pay for your car
Well, not the whole car, he hasn’t hit Oprah status. However, Tony Abbott’s new job title means great things for those of us who need and drive a car. Salary packaging the cost of a car known more commonly as novated leasing is an opportunity to have the taxman pay for a fair chunk.
—Letter to Fincar leasing customers as reported by Crikey, November 2013

Perverse as they are, FBT concessions for car use are actually only a small part of the story. The following table shows the extent of tax deductions claimed for car use in recent years. It also indicates that the rate of growth of car-related deductions (nearly 4.5 per cent per year on average) has been greater than growth in incomes.

Year Personal Work Related Business Motor Vehicle Expenses Total Deductions Revenue Forgone Luxury Car Tax FBT Collections Net Subsidy
Individuals Companies Partnerships Trusts
1997 2131 2000 5876 2240 1384 13631 4907 1515 1622 1770
1999 2399 2132 6349 2153 1527 14560 5242 1881 1651 1710
2001 3379 2231 6992 2140 1669 16411 5908 171 1700 4291
2003 4048 2541 7339 2111 1769 17808 6411 261 1750 4907
2005 4707 2855 8354 2125 2088 20129 7246 300 1796 5150
2007 5988 3544 10502 2279 2731 25044 9016 370 1776 6870
2009 6660 3448 10953 2143 3052 26256 9452 376 1700 7376
Source: Australian Taxation Office, Taxation Statistics, various years; BITRE, Road Related Revenue and Expenditure, 2011 update (FBT figures). All amounts in $million.
‘Year’ is the financial year ending in June of the year stated.
Note that individuals claim two kinds of deductions: ‘work related deductions’ against wage or salary income, and ‘business expenses’ against business income.
Excludes motor vehicle deductions claimed as ‘management expenses’ by superannuation funds, as figures are not available.
Revenue forgone is estimated as 36 per cent of total deductions claimed.
‘Luxury Car Tax’ prior to introduction of the GST in 2000-01 is reckoned as the amount of sales tax collected on new vehicles, less what would have been collected by a 10 per cent GST.
FBT collections for motor vehicles from 2000 are estimates based on total FBT collections, as the ATO ceased to provide FBT statistics by type of benefit. As of 2003-04 figures for motor vehicle FBT are provided by BITRE.
‘Net Subsidy’ is revenue forgone due to deductions, less the amount collected in Luxury Car Tax and FBT.

A table similar to this one appeared in the book Back on Track: Rethinking Transport Policy in Australia and New Zealand by Philip Laird et al. Our figures differ in two ways:

Laird’s table omitted figures for expenses claimed by individuals against business income (the third column above). Thus, the total deductions claimed are somewhat higher than the figures given by Laird.
We calculate the tax subsidy by deducting both FBT and Luxury Car Tax from the revenue cost of deductions. This recognises that the revenue lost through tax deductibility of car expenses is partially recovered through tax when the cars are purchased. To allow the effective subsidy to cars to be compared before and after the GST changes, we reckon the ‘Luxury Car Tax’ prior to 2000-01 as the total sales tax on new vehicles (then 22 to 45 per cent), less what would have been raised by a 10 per cent GST.
Public transport advocates are not the only ones to draw attention to the extent of these tax breaks. Even the right-wing Melbourne Institute, not known for being radical greenies, has questioned whether general taxpayers should be subsidising motorists to such an extent.

Deductions for motor cars have grown more than twice as fast as wages and salaries under the Howard Government — 88 per cent versus 38 per cent between 1995-6 and 2002-3. The car is proving to be even more lucrative than charity.
—Melbourne Institute findings as reported in The Australian, 30 August 2005

The tax subsidy to car use depends on movements in both tax deductions and FBT collections. The trend that can be discerned from the table is for deductions to increase strongly while FBT collections for cars and parking decline, so that the net subsidy steadily increases. For the 2008-09 financial year the subsidy was $7.4 billion.

State Fuel Subsidies – some relief for taxpayers

It appears to be a little known fact that until 2007 all six states, and the Northern Territory, subsidised the consumption of petrol and diesel. In a rare move against other incentives for car use, all these fuel subsidies have now been withdrawn – the last jurisdiction to axe its subsidy was South Australia, in its 2010 Budget.

The largest of these subsidies by far, and perhaps the only one to be really noticeable to consumers, was the Queensland subsidy of a little over eight cents a litre (8.354 cents to be precise). This was eventually abolished in July 2009. But even in Victoria, petrol and diesel subsidies used to cost the government about $40 million a year – enough to grade-separate a significant level crossing every two years, or buy 100 new buses in one year.

These subsidies came about through historical accident. Prior to 1997, all states other than Queensland collected tax of around 8 cents per litre on fuel, in addition to the Federal fuel excise. In 1997 this was ruled by the High Court to be unconstitutional. To avoid the fiscal crisis that would have otherwise resulted (as the states relied on this revenue to help pay for roads), the Federal Government agreed to collect an extra 8 cents itself and pass it on to the states. As Queensland did not actually collect its own fuel tax, it introduced a Fuel Subsidy Scheme, whereby the extra 8 cents from the Federal Government was passed back to consumers. Other states applied smaller subsidies to cover the small difference between the Federal tax and their own taxes (which varied slightly from state to state, and sometimes from location to location within states).

As part of the tax changes in 2000 this additional 8 cent tax was abolished completely, as the states now benefited from a 10% GST on all goods and services, including fuel. Logically then, the state subsidies for fuel consumption would also have ceased. However, the subsidies continued: the Queensland Government in particular retained its 8 cent subsidy on the recommendation of a ‘Fuel Taskforce’ dominated by representatives of the road lobby. (The alternative proposal, for a $150 reduction in annual registration fees, would likely have been of more help to the low income earners the scheme was supposed to assist. It was resisted by the road lobby because by shifting the cost burden from car ownership to car use, it might have created an incentive to drive less.)

Except in Queensland, the fuel subsidies amounted to a fraction of a cent per litre and a few dollars a year per person, and their abolition, except in Queensland and northern NSW, has gone virtually unnoticed to the motorist at the bowser. Yet even these tiny subsidies added up to many millions of dollars a year that could be spent far more sustainably.

State Expenditure on Fuel Subsidies, 2001-02
State /
Territory Fuel Use per Capita
(litres) Subsidy
per Capita Population
(million) Total Subsidy
($million)
Total 1323.9 $26.60 19.0 521
NSW 1179.5 $5.80 6.4 37
Vic 1479.3 $7.20 4.6 33
Qld 1400.6 $114.30 3.7 423
WA 1334.1 $1.50 1.9 3
SA 1355.2 $9.50 1.5 14
Tas 1194.1 $17.80 0.5 8
NT 1118.8 $14.20 0.2 3
ACT 1250.4 (none) 0.3 (none)
Source: Commonwealth Grants Commission. Subsidies – Petroleum Products, Draft Assessment Paper CGC 2003/52, August 2003. Australian Bureau of Statistics, 2001 Census (population figures).

(This same source draws attention to the disturbing fact that Victoria has the highest per capita fuel consumption of all states and territories, even taking into account the broad expanses of Queensland, WA and the Top End! This highlights the fact that Australia‘s unsustainable level of fuel consumption is due not to long-distance travel in the bush, but to routine travel in urban areas for which public transport substitutes more easily.)

According to the Queensland Budget Papers, payments under the Fuel Subsidy Scheme totalled $572 million in 2008-09, its last year of operation. While this will have added to the road deficit for 2008-09, we have omitted it from our calculations in recognition of the fact that this item does not appear in future years.

And although the state fuel subsidies have now been abolished, this has often come with a ‘quid pro quo’ for the car lobby. In Victoria, the abolition of the fuel subsidy in 2007 was linked to a reduction in stamp duty on mid-priced cars, at a revenue cost greater than the removed subsidy. Similarly in Tasmania, abolition of fuel subsidies was used to partly fund a 21% reduction in motor vehicle tax. So while the states no longer subsidise petrol consumption, the net effect on the road deficit – other than in Queensland – has arguably been detrimental.

Land Use Cost

When you buy or rent a house, a large part of what you pay is to cover the cost of the land. When you purchase goods or services, you pay a certain amount to cover the proprietor’s business overheads, including the rent on the premises. On the other hand, land for the roads that cars drive on is provided for free, courtesy of the common weal. The cost of acquiring land to build roads is paid by all of us as taxpayers.

This is part of what makes ‘just-in-time’ (JIT) inventory management so attractive for businesses. To store goods in a warehouse you have to pay rent on the warehouse, but storing goods in trucks that never leave the open road incurs no cost beyond a relatively small amount for registration and fuel. This is a classic market distortion that results in excessive numbers of large trucks in our streets.

Just as the cost of roads includes the cost of building and maintaining the roads, it also has to factor in the cost of the land they use. In 1996, the National Institute of Economic and Industry Research (NIEIR) estimated the value of land under public roads to be between $100 and $120 billion. This figure doesn’t include roads and car parks on private land – urbanist David Engwicht has estimated that when you take into account all the space given over to driveways, carports, and commercial car parks (most of which sit idle for half the day), the typical family car has around three times as much space allocated to it as the typical family home. However, car space on private land is privately costed, so we don’t count it in the public cost of car use.

Allowing for inflation between 1996 and today, and the roads built during that time, makes NIEIR’s upper estimate of $120 billion a very conservative estimate for the value of land under roads now – even after excluding footpaths, bike lanes, bus lanes and tramways. If the value were deemed to increase at the same rate as Australian house prices, it would now be between $250 and $300 billion – and that still excludes the value of roads built since 1996. Nonetheless, to avoid accusations that we’re unnecessarily padding the figures, we’ll stick with the lower estimate of $120 billion.

The annual rent on land typically sits at around 5 per cent of the site value. 5 per cent is also close to the ‘risk free rate of return’ that sets the minimum yield for low-risk investments such as government bonds. Thus, a conservative cost for public land use by cars is 5% of $120 billion, or $6 billion a year. This represents the ‘opportunity cost’ to the Australian public of turning over land to the more-or-less exclusive use of cars and trucks rather than other uses.

It should however be noted that the notional ‘Capital Asset Charge’ the Victorian Treasury applies to all public infrastructure (with the anomalous exception of roads) is based on an 8 per cent rate of return. Using this rate would put the land use cost of Australian roads at $10 billion a year. But in keeping with the conservatism of our figures, we use the lower $6 billion figure in our calculations.

Noise and Pollution

These figures are taken from a 2001 submission by the Bus Industry Confederation to the National Fuel Tax Enquiry. As explained at the outset, they represent ‘externalities’ associated with car and truck use: costs that are paid neither by motorists nor by transport authorities acting on behalf of motorists.

The value of $700 million for noise costs is the BIC’s ‘lower’ estimate; the ‘upper’ estimate is close to $2 billion. Uncertainty arises because the most recent comprehensive studies of noise damage appeared in the early 1990s, and changes in costs since then have to be estimated. The BIC also notes that their figures assume that noise damage does not occur in non-urban areas, an assumption that many rural Australians might dispute.

The figure for pollution takes into account some of the indirect health costs due to respiratory illness mentioned above. However, the approach taken is more conservative, setting aside possible effects about which there is still much uncertainty. So again, this is a minimum credible estimate rather than a most probable estimate. The figure has not been time-adjusted, as on past experience any marginal improvements in pollution performance since 2001 wlll have been more than cancelled out by the increase in car and truck travel and by cost inflation.

Climate Change

Our figure for climate change is also based on the BIC submission to the National Fuel Tax enquiry, but has been updated to reflect trends in motor vehicle emissions since 2000. The figure has also been verified against later estimates both here and overseas, notably the Stern Review released in the UK in 2006, and the Garnaut Review here.

Following the BIC methodology, climate change costs are estimated based on the short-term marginal effect of greenhouse gas emissions. The marginal cost is estimated at $40 per tonne of CO2 equivalent, which was close to the minimum estimated cost (before the Global Financial Crisis and subsequent recession deflated prices) for the European Union to meet its target under the Kyoto protocol, and is also roughly equivalent to the fixed price for ‘small-scale technology certificates’ under the Australian renewable energy obligation. As the BIC states, it is stressed this value is only relevant for the short-term: the marginal damage costs and the marginal abatement costs will increase dramatically in future years.

We note that the UK Department for Transport gave a lower bound cost (assuming a ‘business as usual’ scenario) of £42.44 (about AU$70) per tonne of CO2 in 2006, rising to £98.32 (about AU$160) per tonne in 2060. The Stern Review on the economics of climate change gave a lower estimate of US$30 per tonne of CO2 (about AU$32), assuming that action to stabilise greenhouse emissions commenced in 2006. With action delayed, the cost is US$85 (about AU$90) per tonne, similar to the UK DfT estimate. In all cases the costs rise further over time.

In December 2007, British Prime Minister Gordon Brown instituted a national ‘carbon price’ to be used in the economic assessment of government decisions. The price started at £25.50 per tonne (about AU$42) in 2007 and rises annually, to reach £59.60 per tonne (about AU$100) in 2050. The Gillard Government famously nominated $23 per tonne as its starting carbon price based on a modest 5% reduction target in emissions by 2020. This is below the lowest cost figure from the Stern Review (now almost certainly out of date) and would need to be significantly higher to achieve the minimum 20% reduction by 2020 that has been put forward as a meaningful global target.

According to the BITRE Infrastructure Statistics Yearbook, the aggregate emissions from road vehicles (excluding buses) have remained between 71 million and 73 million tonnes of CO2 equivalent since 2004, with no evident trend upwards or downwards. Taking 72 million tonnes as a ‘best fit’ estimate and costing emissions at the conservative $40 per tonne gives the $2.9 billion figure used here. Costed at the UK ‘business as usual’ figure of $70 per tonne, the figure would be about $5 billion, rising in future years.

Petrol and Diesel Excise

According to the Australian Taxation Office, fuel excise raised $10,332 million in 2008-09. The total excise collected on all petroleum and related products was $15.5 billion, but around $5.2 billion of this was rebated. Rebates are available for use of diesel and some other fuels in trains, ships, large trucks and buses, farm machinery, mining operations, electricity generation and health care. At various times, rebates have also been available for general fuel sales in rural areas, and for designated ‘clean’ fuels such as biodiesel.

Once again, we have been deliberately conservative in using the raw Tax Office figures for excise and rebates. This gives figures for net excise that are about $1 billion higher than those reported by BITRE in their ‘Road Related Revenue’ summary. This may be due to the inclusion of certain other fuels and products unrelated to road transport (such as aviation fuel and condensate) in the ATO figures but not the BITRE figures. Again, to avoid any doubt about the good deal motorists get under present-day arrangements, our accounting aims to ensure that any foreseeable errors are on the side of overestimating revenue and underestimating expenditure.

Petrol/Diesel excise and rebates ($million)
2004-05 2005-06 2006-07 2007-08 2008-09
Net fuel excise revenue 10,525 10,136 9,708 10,248 10,332
Total excise collections 14,246 13,949 14,840 15,116 15,543
Rebates (off-road uses)* 2,552 2,603 4,789 4,709 5,065
Rebates (on-road uses)* 890 916 194 7 4
Rural sales rebate 261 255 25 1 0
Stewardship rebate 16 17 32 36 40
Cleaner fuels grants 2 22 92 115 102
Source: Australian Taxation Office, Taxation Statistics, various years.
* In 2006 a new Fuel Tax Credits Scheme replaced the earlier rebate schemes, with the effect that ATO figures no longer discriminate between ‘off-road’ and ‘on-road’ uses. The full scheme amount has been assigned to ‘off-road uses’ above as this still accounts for the majority of rebates.

Since 2001 the rate of fuel excise has been frozen so that it doesn’t rise with inflation (unlike the price of everything else, including public transport). This means that growth in revenue from fuel excise is almost entirely due to growth in car and truck use, which roughly coincides with growth in GDP. Without adjustment for inflation, excise is an unsustainable revenue source: given an economic downturn or further rises in fuel prices, traffic levels and hence revenue from fuel excise can be expected to decline, while many of the costs of car use (such as the cost of maintaining roads) will continue to rise with inflation.

From the table above, and that for road expenditure, we can already see this starting to happen since 2005. While expenditure on roads has steadily grown, excise revenue has been stagnant or even declined slightly. Until about 2006 it was possible to at least say that fuel excise revenue sufficed to cover the raw cost of road construction in Australia, leaving aside other costs such as road trauma and pollution. This is no longer possible: indeed as of 2009 there is a shortfall of at least $4.6 billion between what is collected in fuel excise and what is spent on roads.

GST on Fuel and Vehicles

GST is charged on the pump price of fuel, and on the purchase and maintenance costs of vehicles, just as it is on public transport fares and all consumer goods other than basic food. Because it’s levied equally on all forms of transport it is questionable whether the GST should be counted as a tax on road use, but we include it anyway for the sake of argument. It’s important to realise that the government doesn’t actually get all of the GST money collected, since any vehicle use for business purposes has the GST refunded as an ‘input tax credit’. The GST revenue figure is thus equal to total GST collections less input tax credits refunded.

The GST is unlike many other charges in that it fluctuates with retail prices, so estimates will vary from year to year. BITRE used Bureau of Statistics figures to estimate GST on the purchase, maintenance and fuelling of motor vehicles as $4,022 million in 2004-05. This will certainly have increased up to the present day, both through inflation and through increasing fuel prices. We regard $5,000 million as a credible maximum estimate for 2008-09, based on the 2004-05 figure.

It’s worth noting that even at today’s high prices, the overall tax on petrol is still less than it would have been under pre-GST arrangements. The excise now set at 38 cents per litre would by now have risen to 56 cents per litre had the Howard Government not cut excise and abolished the automatic indexing with inflation in 2001. So until average pump prices rise to $1.98 a litre (when the GST collected is 18 cents), the motorist is still getting a better deal than previously. (This is also confirmed by the ABS Household Expenditure Survey, which shows expenditure on petrol decreasing as a proportion of household income.)

Vehicle Registration Fees

Car and truck registration fees levied by State governments raised $3,052 million in 2008-09, according to the BITRE. This is a decline from the record of $3,911 million set in 2006-07, before the global financial crisis. In the interests of conservatism we split the difference, reckoning the longer-term sum as $3,500 million a year (the same it was in 2004-05).

Year Vehicle registration revenue ($million)
2004-05 3497.0
2005-06 3647.0
2006-07 3911.0
2007-08 2846.6
2008-09 3051.5
While much is made of the money State Governments collect from registration fees, the total is barely half what the Federal Government gives back through vehicle-related tax concessions!

Insurance Premiums

The Australian Prudential Regulatory Authority (APRA) compiles annual statistics on the Australian insurance industry, including the total annual premiums paid for various classes of insurance. From these statistics it is possible to determine the total insurance premiums received from motorists, both for compulsory third party (CTP) insurance (paid to both public-sector organisations like the TAC and to private-sector companies) and for other kinds of car insurance (almost all to private-sector insurance companies).

The general trend in premium revenue is evident by comparing the 2008-09 figure with that from 2004-05:

Motor vehicle insurance premiums ($million)
Insurance type 2004-05 2008-09
Total 10,438 12,102
CTP (public) 1890 2196
CTP (private) 2429 2286
Commercial vehicle 1330 1602
Domestic vehicle 4789 6018
Source: Australian Prudential Regulatory Authority. Half Yearly General Insurance Bulletin, June 2005 and June 2009.

The $12.1 billion total for 2008-09 has been used in our accounting. Note again that this figure is for all car insurance, not just that which covers damage due to crashes. And while premiums do show a growing trend, the amount is still a good deal less than the estimated financial cost of road trauma and damage.

Tolls

Figures for toll revenue have been provided by the BITRE up to 2008-09:

Year Toll revenue ($million)
2004-05 778.2
2005-06 931.4
2006-07 1131.3
2007-08 1974.4
2008-09 1462.0
We shall assume the decline in 2008-09 is attributable to the global financial crisis, and use the 2007-08 figure of $2 billion as a longer-term estimate.

Other Revenue

Aside from registration fees, State governments also collect revenue from motorists in the form of stamp duty on registration transfers, driver licence fees, and sundry road transport and maintenance taxes. These various fees totalled $2,331 million in 2008-09. There is no evident upward or downward trend in this annual amount.

To this figure must be added the small amount collected by the Federal Government under the Federal Interstate Registration Scheme. This amount was $55 million in 2008-09.

Until 2000, State Governments collected around $1.5 billion a year in franchise fees from fuel retailers. This fee was abolished with the introduction of the GST, so any reference to it in road lobby literature may safely be ignored.

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© 2010 Public Transport Users Association Inc. (PTUA), Victoria, Australia. ABN 83 801 487 611.
General copying and distribution on a non-commercial basis is permitted subject to proper acknowlegement.
Authorised by Tony Morton, 247 Flinders Lane, Melbourne, for the PTUA

Last modified: 13 May 2014

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