Victoria’s electric vehicle tax crushed by High Court – what’s next?

If ever a tax deserved to be totally crushed by the High Court, it was Victoria’s tax on electric and hybrid vehicles.

Any tax that relied on car owners to take a photo of their odometer and send it in or risk the vehicle becoming unregistered deserved to be treated with contempt.

And that is exactly what the High Court did in spiking the tax and in the process stopping the other states from joining the gravy train and slowing down a much-needed energy transition.

However, the end of the tax raises a lot of very important questions as well – one being how does the Victorian government plan to refund the drivers hit by what turned out to be an illegal tax?

Pressure on the Feds to design a new road tax

The biggest question though is how the Federal Government will respond to an issue that was also raised in the latest intergenerational report.

With the current system of funding roads through a hefty tax on petrol and diesel set for a long wind down, what is the best replacement rather than simply putting the burden on taxpayers through income tax?

This is also a question of equity because as the number of petrol and diesel vehicles begins to go down, it would be unfair to lump all of the road maintenance burden on their drivers while those predominantly wealthier electric car drivers pay much less to use the roads.

As we have seen from Victoria’s clumsy tax attempt, this is a difficult area and it will be for the Federal Government as well.

Electricity difficult to tax fairly

Unlike petrol and diesel, it is very difficult to tax electricity to fund roads because it is used for so many other things as well.

A smaller tax on all electricity might work but it would have far-reaching effects on households and industrial users.

Already there are some people driving around in electric cars that are largely powered by solar panels on their own house roofs – it is hard to see how you could apply a tax in that situation.

A tax could be applied on all commercial charging units, leaving home charging untaxed, although that raises other issues of compliance and fairness.

Then again, perhaps EV’s could remain partly tax free, with the rationale that they are using a much lower polluting local “fuel”, some of which will be subject to GST, instead of buying foreign petrol or diesel.

Feds don’t have the registration details

Adding to the complexity is the fact that the states have all of the car vehicle registration details, which they are unlikely to want to share with the Feds to apply a direct tax unless they get a slice of the action.

We still need to fund roads no matter what powers the cars and trucks that drive on them and there is some preliminary evidence to suggest that electric cars actually promote more driving.

At the moment fuel excise represents about 48c for every litre of petrol sold which adds up to a far from insignificant $22 billion a year – a number we can expect to see fall slowly over the years as less fuel is consumed for transport.

Taxing the young even more is not a solution

Already the intergenerational report has pointed to this trend for an important indirect tax base to recede as a challenge that could land a higher tax burden in the laps of younger workers at the same time as the bulk of the Baby Boomer generation retire in a blaze of largely tax-free cash.

There are plenty of large political risks involved in replacing fuel excise including the balancing act between taxing EV’s and their older fossil fuelled cars but it seems likely that some sort of new tax will need to be introduced to replace excise over time.

It was way back in 2010 but the largely ignored Henry Tax Review recommended a congestion tax and heavy vehicle charging by mass and distance that might be worth re-considering.

Tackle congestion at the same time?

Congestion in the major cities has some very real costs in the form of lost productivity and reduced employment growth plus higher emissions and reduced air quality for as long as we keep burning fossil fuels so tackling this issue at the same time as some attempt to tax more evenly across internal combustion and electric cars is worth considering.

Advances in GPS monitoring could also be used to charge all cars and trucks a per kilometre fee related to weight, although there would be civil liberties and technical barriers to overcome.

The other possibility is to perhaps look at raising the GST a little as a replacement for fuel excise over time, given it is arguably the largest and most efficient indirect tax and already has a formula that allows revenue to flow through to the states.

Act early or the politics will get harder

Whatever the solution chosen, the sooner the Albanese Government acts the easier it will be.

By allowing a free ride for EV’s too far into the future, the screams about a “new” EV tax will get louder and more difficult to answer.

It is going to take some creative thinking and some political courage but Treasurer Jim Chalmers should have his best and brightest working hard now to come up with the fairest and most elegant solution to fund roads into a future in which fuel excise will keep shrinking.