Electric cars: call for tax on road usage to cover lost fuel revenue

The thinktank said the government’s pledge that the UK would reach zero net emissions by 2050 meant the tax take from petrol and diesel would shrink to nothing over the coming decades and a new way to raise money from drivers was needed.

The IFS said decisions by both Labour and Conservative governments not to raise fuel duty in line with inflation meant that duties had fallen from 2.2% to 1.3% of national income since peaking in 1999-2000, costing £19bn a year in lost revenue. It added that the government would lose a further £1bn a year if rumours of a 2p a litre cut in fuel duty in the budget proved to be true.

In a report, the IFS said taxes on driving would still be necessary even after the replacement of fossil-fuel-powered cars by electric models because the costs of congested roads would remain a factor.

The ideal approach, it added, would be a system of road pricing under which the charges for driving would vary according to the time of day and the location. Those driving in busy places would pay more, but the majority of journeys would be taxed less heavily than at present, the IFS said.

Road pricing has proved to be a hard sell with the public and the IFS said a second-best solution would be the introduction of a flat-rate tax per mile driven that would be used to supplement reduced revenue from fuel duties and help correct for the social costs of driving.

There was an advantage in acting quickly, the IFS warned, because it would be much harder politically to introduce such taxes only once the revenue from fuel duties had dropped much further and many people had bought hybrid or electric cars in the expectation of paying little tax on them.

Rebekah Stroud, an IFS economist and co-author of the report said: “Cuts to fuel duties over the last two decades have contributed towards revenues’ being £19bn a year lower than they would have been.

“Another 2p cut, as reportedly mooted by the prime minister, would cost a further £1bn a year. The bigger challenge is that revenues are now set to disappear entirely over the coming decades as we transition to electric cars. The government should set out its long-term plan for taxing driving, before it finds itself with virtually no revenues from driving and no way to correct for the costs – most importantly congestion – that driving imposes on others.”

Larry Elliott

This article first appeared on the Guardian