Westhub
11-03-2008, 13:17
SUBMISSION FROM AA IRELAND ON THE COMBINED SUBJECTS OF:
Motor Tax Rebalancing to take account of CO2 Emissions
&
Changes to Vehicle Registration Tax to take account of CO2 Emissions
AA Ireland is the country’s oldest and largest motoring organisation, providing motoring services to a Membership that now numbers some 400,000. AA Ireland also plays an advocacy role and seeks to influence public policy on matters that affect motorists. It seeks to give a voice to ordinary car users on subjects such as public transport, road safety, motoring consumer issues, motoring taxation and the environment.
Background & context
There is clearly merit in basing both annual car tax and VRT on CO2 emissions rather than the outmoded and arbitrary distinction of engine size. This is something that the AA has called for in the past. However this falls somewhat short of the total review of motoring taxation that we have wanted to see.
Put simply, in Ireland there is too much taxation on the purchase and ownership of cars compared to the taxation on usage. We have high annual taxes relative to other countries and – in the shape of VRT – extremely high taxes on purchase. Yet we also have among the lowest fuel taxes and no specific tax on usage.
This structure is inherently unsuited to incentivising the environmentally conscious use of cars. A more holistic review of taxation would address this imbalance. Instead both Car Tax and VRT are to be separately recalibrated away from engine size towards CO2 emissions, but in both cases this is to be done without compromising the revenue raised by each of the taxes in isolation.
In the case of VRT, the guidelines supplied by the Department of Finance in respect of submissions warn that any change ‘should not put a significant portion of this revenue yield at risk.’ In the case of car tax, the Department of the Environment notes warn that ‘the new arrangements will apply on a fiscally neutral basis.’
Reviewing car taxes within these narrow restrictions is short-sighted in the AA’s view. Because both Car Tax and VRT do not vary with car usage, coupled with the fact that overall revenues must stay the same, this review is severely limited in its ability to make an environmental contribution. In essence it falls into the ‘Catch 22’ of eco-taxes, whereby the more effective a measure is at is stated purpose of improving the environment the less revenue it raises. Faced with this choice between the two, both Departments have chosen to preserve the revenue.
The AA is convinced that a better system could be devised which would treat the totality of motoring taxes rather than protecting individual types of taxation in their current form. Issues like fuel taxes, the provision of alternative fuels, VAT, tolls, taxes per kilometre and other forms of usage charge should be included in this review. It should be possible to maintain the total motoring contribution to the exchequer at approximately the current levels while at the same time applying measures which genuinely lead to reduced emissions.
Notwithstanding the above, the AA would put forward the following proposal for assessing cars on an emissions basis.
Counting Emissions & Diminishing Returns
The problem with taxing cars on CO2 emissions is that it is a moving target. It can be seen from the Department of Finance briefing notes that 64.29% of all cars sold in 2005 produce between 146 and 190 grammes of CO2 per kilometre. 13.73% are in the high pollution category, producing more than 190g/km. Only 3.85% are in the very low category, producing less than 125g/km.
However this will certainly change. The EU has agreed a target with car makers whereby emissions from new cars will be down to an average of 130g/km by 2012, with the effects of other technologies reducing the overall score to 120g/km. Cleaner and greener fuels will also play a role, and there is no doubt that there will be continuing pressure to push this figure lower and lower. This is very good news for the planet but means diminishing returns for car taxes based on CO2.
Motor Tax Rebalancing
Suggested methodology
The AA suggests that the CO2 emissions of all cars registered in each year should be used as the benchmark for deciding the taxation brackets of the following year’s cars, and that for Motor Tax purposes a vehicle will stay in the bracket that it was first registered in for life.
There are currently 22 bands for Motor Tax based on engine size. These can be re-expressed as bands of ‘CO2 per km levels’ as shown in the table below. We have described 8 bands for convenience of illustration (and labelled them A to H), but they can be divided into smaller units to calibrate the system more precisely. This will marry up reasonably closely to the existing system.
For example, the Ford Focus 1.4 litre is currently taxed at €313 per annum based on engine size, and with an emissions rating of 159g/km it would fall into Band C and attract the same €313 charge under the new rating as well. A Mercedes S500, with a 5.4 litre engine and an emissions rating of 281g/km likewise attracts the top rate of €1,343 under both systems.
Fig 1 2008 Table of Motor Tax based on emissions
Motor Tax Bands
A
B
C
D
E
F
G
H
CO2 Emissions
0-135g
136-155g
156-175g
176-195g
196-215g
216-235g
236-255g
Over 255g
Annual Charge
€151
€251
€313
€484
€689
€786
€1,033
€1,343
Although the correspondence is not exact, precisely because engine size is a crude metric to use to decide tax rates, we would still expect the overall result to be a fiscally neutral re-expression of the current Motor Tax system. Currently 73% of cars attract an annual tax of €391 or less whereas only 0.6% attract the top rate of €1,343; we would expect roughly the same proportions under the new system. We suggest that this table of motor tax rates be used in 2008.
Translating engine size to CO2 rating is easy enough, but we must also allow for an annual recalibration of the bands to reflect the improving CO2 scores of newer cars year by year and preserving the relativity.
90% of all new car registrations annually are completed by the end of September. At that time, it is possible to calculate the average emission rating of new cars sold for the year. If it is discovered, for example, that the average CO2 rate for new cars registered in the year 2008 (to end September) is 10g/km lower than 2007, then each of the Motor Tax bands is adjusted downwards by 10g/km for the purpose of the 2009 rates.
Fig 2 2009 Table of Motor Tax based on emissions, assuming 10g/km reduction on 2008
Motor Tax Bands
A
B
C
D
E
F
G
H
CO2 Emissions
0-125g
126-145g
146-165g
166-185g
186-205g
206-225g
226-245g
Over 245g
Annual Charge
€151
€251
€313
€484
€689
€786
€1,033
€1,343
It is important to note that this potentially confusing methodology is essentially invisible to the consumer. Each year’s new car is assigned to one of the tax bands based on its emissions performance relative to its peers of the same year. A 08-registered Nissan Primera with an emissions rate of 173g/km would be classed as Band C, and would remain in Band C for life despite the fact that by 2009 that emissions score would be Band D.
Motorists would simply know that Band C is €313, and if they want that Band for an 09 car then they will have to buy something more efficient.
Fig 3: Annual adjustment of bands
file:///C:/DOCUME%7E1/HUBERT%7E1/LOCALS%7E1/Temp/msohtmlclip1/01/clip_image002.gif
This annual recalibration of motor tax bands should ensure going forward that the aggregate of all motor tax paid should remain consistent. It goes some way towards encouraging the purchase of cleaner cars while preserving the levels of revenue collected.
Vehicle Registration Tax
VRT is despised by motorists. It is viewed as a manoeuvre by Government which is designed to frustrate the requirements of a Single European Market where car prices are concerned. Since its inception in 1993, when it replaced Vehicle Excise Duty, it has been the source of continuous complaints from motorists. It has also attracted the concern of the European Commission, which regards it as an artificial trade barrier that is against the spirit of the Single Market.
It could be argued that as it would in theory apply equally to a car that was manufactured in Ireland it does not fall foul of our treaty obligations. However it does cause distortion in the second-hand market. It makes it more difficult and expensive for a consumer to buy a second hand car in Northern Ireland or Britain (or elsewhere, although left-hand drive cars are not in serious demand).
However, it does raise €1.3 billion per annum. The Department of Finance guidelines make it clear that the current review should not risk any shock to that revenue stream.
The AA would oppose and condemn any attempt to call VRT an environmental tax. VRT came about because Vehicle Excise Duty was cynically renamed to avoid Ireland’s Single European Market commitments. It would be still more cynical to evade the concerns of the consumer and the European Commission by renaming the tax again as a ‘Carbon Levy’ or some similar piece of sophistry.
Certainly while the imperative to maintain overall revenue levels remains in place, re-expressing VRT based on emissions rather than engine size does not constitute an environmental measure. Within that context, which the AA views as flawed as noted above, it does make more sense to base the tax on emissions rather than on engine size.
VRT is currently charged in three bands. This is rather crude and does not differentiate well enough. Our recommendation is that VRT should be calculated in 8 bands as per our recommendations on Motor Tax described above.
A suggested schedule of charges is laid out below:
VRT Bands
A
B
C
D
E
F
G
H
CO2 Emissions
0-135g
136-155g
156-175g
176-195g
196-215g
216-235g
236-255g
Over 255g
VRT Rate
15%
17%
19%
21%
23%
25%
27%
30%
As with Motor Tax, we believe that this re-expression of VRT bands would be broadly fiscally neutral.
Hybrid vehicles, like the Toyota Prius or the Honda Civic Hybrid, merit more preferential treatment because they combine highly efficient petrol engines with essentially zero-emission electric power. Rating them on their petrol use only would be onerous.
We would propose that, as explained above, these Bands be recalculated annually at the end of September when 90% of car registrations have been complete. There would therefore be a single, simple description of the CO2 Tax Band for all vehicles, and this would apply for both VRT and Motor Tax purposes. As before, this methodology preserves the revenue stream while going some way to incentivising the purchase of cleaner vehicles. It benchmarks the emissions performance of cars for tax purposes with reference to their peers of the same year.
From the consumer’s point of view this makes for an easy system that is readily communicated and understood. From the point of view of the trade there is a slight concern in that one cannot be absolutely sure of what Tax Band a particular model will fall into next year. However the market intelligence of the trade and the forecasting of sales makes it likely that they will be able to project Tax Bands with reasonable certainty.
It may also encourage some manufacturers to compete in an effort to squeeze emissions downwards so as to gain an advantage on their rivals. This is very much a behaviour to be encouraged from an environmental point of view.
Motor Tax Rebalancing to take account of CO2 Emissions
&
Changes to Vehicle Registration Tax to take account of CO2 Emissions
AA Ireland is the country’s oldest and largest motoring organisation, providing motoring services to a Membership that now numbers some 400,000. AA Ireland also plays an advocacy role and seeks to influence public policy on matters that affect motorists. It seeks to give a voice to ordinary car users on subjects such as public transport, road safety, motoring consumer issues, motoring taxation and the environment.
Background & context
There is clearly merit in basing both annual car tax and VRT on CO2 emissions rather than the outmoded and arbitrary distinction of engine size. This is something that the AA has called for in the past. However this falls somewhat short of the total review of motoring taxation that we have wanted to see.
Put simply, in Ireland there is too much taxation on the purchase and ownership of cars compared to the taxation on usage. We have high annual taxes relative to other countries and – in the shape of VRT – extremely high taxes on purchase. Yet we also have among the lowest fuel taxes and no specific tax on usage.
This structure is inherently unsuited to incentivising the environmentally conscious use of cars. A more holistic review of taxation would address this imbalance. Instead both Car Tax and VRT are to be separately recalibrated away from engine size towards CO2 emissions, but in both cases this is to be done without compromising the revenue raised by each of the taxes in isolation.
In the case of VRT, the guidelines supplied by the Department of Finance in respect of submissions warn that any change ‘should not put a significant portion of this revenue yield at risk.’ In the case of car tax, the Department of the Environment notes warn that ‘the new arrangements will apply on a fiscally neutral basis.’
Reviewing car taxes within these narrow restrictions is short-sighted in the AA’s view. Because both Car Tax and VRT do not vary with car usage, coupled with the fact that overall revenues must stay the same, this review is severely limited in its ability to make an environmental contribution. In essence it falls into the ‘Catch 22’ of eco-taxes, whereby the more effective a measure is at is stated purpose of improving the environment the less revenue it raises. Faced with this choice between the two, both Departments have chosen to preserve the revenue.
The AA is convinced that a better system could be devised which would treat the totality of motoring taxes rather than protecting individual types of taxation in their current form. Issues like fuel taxes, the provision of alternative fuels, VAT, tolls, taxes per kilometre and other forms of usage charge should be included in this review. It should be possible to maintain the total motoring contribution to the exchequer at approximately the current levels while at the same time applying measures which genuinely lead to reduced emissions.
Notwithstanding the above, the AA would put forward the following proposal for assessing cars on an emissions basis.
Counting Emissions & Diminishing Returns
The problem with taxing cars on CO2 emissions is that it is a moving target. It can be seen from the Department of Finance briefing notes that 64.29% of all cars sold in 2005 produce between 146 and 190 grammes of CO2 per kilometre. 13.73% are in the high pollution category, producing more than 190g/km. Only 3.85% are in the very low category, producing less than 125g/km.
However this will certainly change. The EU has agreed a target with car makers whereby emissions from new cars will be down to an average of 130g/km by 2012, with the effects of other technologies reducing the overall score to 120g/km. Cleaner and greener fuels will also play a role, and there is no doubt that there will be continuing pressure to push this figure lower and lower. This is very good news for the planet but means diminishing returns for car taxes based on CO2.
Motor Tax Rebalancing
Suggested methodology
The AA suggests that the CO2 emissions of all cars registered in each year should be used as the benchmark for deciding the taxation brackets of the following year’s cars, and that for Motor Tax purposes a vehicle will stay in the bracket that it was first registered in for life.
There are currently 22 bands for Motor Tax based on engine size. These can be re-expressed as bands of ‘CO2 per km levels’ as shown in the table below. We have described 8 bands for convenience of illustration (and labelled them A to H), but they can be divided into smaller units to calibrate the system more precisely. This will marry up reasonably closely to the existing system.
For example, the Ford Focus 1.4 litre is currently taxed at €313 per annum based on engine size, and with an emissions rating of 159g/km it would fall into Band C and attract the same €313 charge under the new rating as well. A Mercedes S500, with a 5.4 litre engine and an emissions rating of 281g/km likewise attracts the top rate of €1,343 under both systems.
Fig 1 2008 Table of Motor Tax based on emissions
Motor Tax Bands
A
B
C
D
E
F
G
H
CO2 Emissions
0-135g
136-155g
156-175g
176-195g
196-215g
216-235g
236-255g
Over 255g
Annual Charge
€151
€251
€313
€484
€689
€786
€1,033
€1,343
Although the correspondence is not exact, precisely because engine size is a crude metric to use to decide tax rates, we would still expect the overall result to be a fiscally neutral re-expression of the current Motor Tax system. Currently 73% of cars attract an annual tax of €391 or less whereas only 0.6% attract the top rate of €1,343; we would expect roughly the same proportions under the new system. We suggest that this table of motor tax rates be used in 2008.
Translating engine size to CO2 rating is easy enough, but we must also allow for an annual recalibration of the bands to reflect the improving CO2 scores of newer cars year by year and preserving the relativity.
90% of all new car registrations annually are completed by the end of September. At that time, it is possible to calculate the average emission rating of new cars sold for the year. If it is discovered, for example, that the average CO2 rate for new cars registered in the year 2008 (to end September) is 10g/km lower than 2007, then each of the Motor Tax bands is adjusted downwards by 10g/km for the purpose of the 2009 rates.
Fig 2 2009 Table of Motor Tax based on emissions, assuming 10g/km reduction on 2008
Motor Tax Bands
A
B
C
D
E
F
G
H
CO2 Emissions
0-125g
126-145g
146-165g
166-185g
186-205g
206-225g
226-245g
Over 245g
Annual Charge
€151
€251
€313
€484
€689
€786
€1,033
€1,343
It is important to note that this potentially confusing methodology is essentially invisible to the consumer. Each year’s new car is assigned to one of the tax bands based on its emissions performance relative to its peers of the same year. A 08-registered Nissan Primera with an emissions rate of 173g/km would be classed as Band C, and would remain in Band C for life despite the fact that by 2009 that emissions score would be Band D.
Motorists would simply know that Band C is €313, and if they want that Band for an 09 car then they will have to buy something more efficient.
Fig 3: Annual adjustment of bands
file:///C:/DOCUME%7E1/HUBERT%7E1/LOCALS%7E1/Temp/msohtmlclip1/01/clip_image002.gif
This annual recalibration of motor tax bands should ensure going forward that the aggregate of all motor tax paid should remain consistent. It goes some way towards encouraging the purchase of cleaner cars while preserving the levels of revenue collected.
Vehicle Registration Tax
VRT is despised by motorists. It is viewed as a manoeuvre by Government which is designed to frustrate the requirements of a Single European Market where car prices are concerned. Since its inception in 1993, when it replaced Vehicle Excise Duty, it has been the source of continuous complaints from motorists. It has also attracted the concern of the European Commission, which regards it as an artificial trade barrier that is against the spirit of the Single Market.
It could be argued that as it would in theory apply equally to a car that was manufactured in Ireland it does not fall foul of our treaty obligations. However it does cause distortion in the second-hand market. It makes it more difficult and expensive for a consumer to buy a second hand car in Northern Ireland or Britain (or elsewhere, although left-hand drive cars are not in serious demand).
However, it does raise €1.3 billion per annum. The Department of Finance guidelines make it clear that the current review should not risk any shock to that revenue stream.
The AA would oppose and condemn any attempt to call VRT an environmental tax. VRT came about because Vehicle Excise Duty was cynically renamed to avoid Ireland’s Single European Market commitments. It would be still more cynical to evade the concerns of the consumer and the European Commission by renaming the tax again as a ‘Carbon Levy’ or some similar piece of sophistry.
Certainly while the imperative to maintain overall revenue levels remains in place, re-expressing VRT based on emissions rather than engine size does not constitute an environmental measure. Within that context, which the AA views as flawed as noted above, it does make more sense to base the tax on emissions rather than on engine size.
VRT is currently charged in three bands. This is rather crude and does not differentiate well enough. Our recommendation is that VRT should be calculated in 8 bands as per our recommendations on Motor Tax described above.
A suggested schedule of charges is laid out below:
VRT Bands
A
B
C
D
E
F
G
H
CO2 Emissions
0-135g
136-155g
156-175g
176-195g
196-215g
216-235g
236-255g
Over 255g
VRT Rate
15%
17%
19%
21%
23%
25%
27%
30%
As with Motor Tax, we believe that this re-expression of VRT bands would be broadly fiscally neutral.
Hybrid vehicles, like the Toyota Prius or the Honda Civic Hybrid, merit more preferential treatment because they combine highly efficient petrol engines with essentially zero-emission electric power. Rating them on their petrol use only would be onerous.
We would propose that, as explained above, these Bands be recalculated annually at the end of September when 90% of car registrations have been complete. There would therefore be a single, simple description of the CO2 Tax Band for all vehicles, and this would apply for both VRT and Motor Tax purposes. As before, this methodology preserves the revenue stream while going some way to incentivising the purchase of cleaner vehicles. It benchmarks the emissions performance of cars for tax purposes with reference to their peers of the same year.
From the consumer’s point of view this makes for an easy system that is readily communicated and understood. From the point of view of the trade there is a slight concern in that one cannot be absolutely sure of what Tax Band a particular model will fall into next year. However the market intelligence of the trade and the forecasting of sales makes it likely that they will be able to project Tax Bands with reasonable certainty.
It may also encourage some manufacturers to compete in an effort to squeeze emissions downwards so as to gain an advantage on their rivals. This is very much a behaviour to be encouraged from an environmental point of view.