The Wolfson Economics Prize is run by Policy Exchange and seeks to encourage innovative ideas in economics. It has run three times in the past, each time with a specific question. This year’s was on transport, with entries invited in response to this question: ‘How can we pay for better, safer, more reliable roads in a way that is fair to road users and good for the economy and the environment?’
The winner was Gergely Raccuja with a rather straightforward proposition: scrap Fuel Duty and Vehicle Excise Duty, and replace them with a charge per mile, calculated and paid annually.
Motorists in Britain pay two main taxes. First, you have your vehicle tax. This has been around since 1888 and was originally to pay for road construction. Today it’s lumped in with general taxes, but the general principle is that you pay a share into the roads budget for the right to drive a car. Since 2001 there have been different tax bands for cars that produce more CO2, but it’s a flat fee based on the car, not on how much you drive it.
Then there’s a second tax on fuel. It’s very high compared to most other developed countries, currently 58p a litre. With VAT on top of that, road users pay more in tax than they do for the fuel itself. This is deeply resented, and chancellors like to score cheap headlines by putting in a freeze or a cut in duty right at the end of their budget speeches. The tax is supposed to be an instrument of transport policy, and was supposed to pay for and encourage public transport. But it brings in so much money – £28 billion a year to the treasury – that the government is now quite dependent on it. They are particularly scared that if we move towards electric cars, that source of funding will dwindle away. Nobody wants to raise fuel duty to make up for more efficient cars, or start slapping taxes on electric cars either, so it’s a growing problem.
Hence Wolfson’s question, and Raccuja’s proposed solution. There are several benefits to a pay per mile system.
- First, it’s simpler to administrate than the two existing taxes, and hopefully cheaper. Since insurance companies already collect mileage information, they could calculate and collect the tax every year as we renew our insurance. Mileage would be cross-checked for accurate reporting as part of the MOT.
- Secondly, it’s fairer. As a bill for using the roads, it’s a charge that is transparent and intuitive. You’ll know exactly what you’re paying, and it will be proportionate to your actual driving habits.
- The treasury wouldn’t need to lose out either, depending on how high you set the charges.
- Most importantly for my own purposes, it would be a greener way to pay for roads. The charge you pay would depend on the environmental impact of your car. It includes CO2 and other pollutants, unlike the current duty which only looks at carbon. Raccuja also includes the weight of the car as a factor, so that heavier cars that cause more wear and tear to roads would pay a higher share. The greater the environmental impact of your car, the more you’ll pay.
What’s particularly useful is that there’s a very straightforward relationship between how much you drive and what you pay in tax. That incentivises people to drive less, in a much better way than my own speculative ideas around insurance.
One possible downside is that it would lower the cost of owning a vehicle, which might mean more cars on the roads. It would make it cheaper to keep a second car that doesn’t get used as much, because you’d only be paying for the distance you actually drive in it, rather than paying vehicle duty just for it to sit there. Fewer people might choose to live without a car. That’s one less positive effect, potentially, but overall the effect would be positive.
Is it going to happen? The Wolfson Prize is quite high profile, so it will have been noticed. The Telegraph reports that officials have already discussed it, maybe rolling it into those plans to phase out fossil fuels. Other places are discussing distance based taxation too, including the US states of Oregon, Nevada and Minnesota.
- You can read the full details of pay per mile charging in the submission to the prize.