International trends in raising revenue to fund roads

Around the world, many nations are grappling with the question of how to replace or supplement petrol taxes. The need is pressing.

A general trend towards more fuel-efficient internal combustion engine vehicles (ICEVs), combined with a shift to electric vehicles (EVs) and other zero-emission vehicles (ZEVs), means petrol taxes will supply progressively less revenue over the coming years, in some cases at a quite rapid pace. Countries like the U.S. that have failed to maintain the real value of the existing taxes have added to the problem of asking people to pay differently by also needing to convince them to pay more.

However, the correct, new, way to have the public pay is unclear. What should petrol taxes be replaced with, and how should a jurisdiction go about doing so? What are the options, and what defines a good replacement?

Confronted with these questions, and intending to advance public policy deliberation of them in 2025, a North American policy agency contracted Nina Elter of NEWROAD Consulting, supported by Peter Carr from EROAD Ltd, to undertake a study of international literature on these topics. The purpose of this study was to identify options and provide a framework, first to determine a short-list of alternatives specifically for replacing a petrol tax, in the context of the jurisdiction in question, then to assess those alternatives and provide advice on the best mix and options for moving forward.

The question of options might strike people as strange, given the general trend is towards adopting some form of distance-based charging, whether using tolling technology like in Europe, or an odometer-based system like New Zealand’s road user charges (RUC) scheme. However, tax systems are bespoke things, personal to each jurisdiction and political economy.

A variety of alternatives exist, any of which might better suit a particular tax system given what is already there, what the community deems most important to achieve and to protect, and how much adjustment might be needed to accommodate a change in the method of taxing for road funding. And even in New Zealand, as we close in on its fiftieth anniversary, RUC is far from universally beloved.

In terms of generic good practices, Adam Smith defined a good tax as one that is certain, convenient, efficient and fair. Subsequent studies have supported this foundational statement while grappling with unpacking it to reveal and respond to the multi-faceted natures of each of Mr Smith’s four principles.

Common questions addressed included the meaning of ‘effectiveness’, the dimensionality of ‘fairness’, including the salient characteristics ‘equity’, and extent to which a tool or suite of tools might respond to various externalities. Newer questions included consideration of the privacy implications, especially of monitoring and assurance for tax purposes in a digital world, and of the challenges of providing for inter-operability and the complementarity of tools and systems, across multiple jurisdictions.

We resolved on seven principles, 22 criteria, and 40 evaluative questions. To start with! The principles and criteria were:

• Simple: the taxpayer should easily know what is owed and how to pay.
• Robust: there should be no false positives or negatives; the tax should be hard to avoid and evade; and it should be enforceable.
• Equitable & fair: the tax should be transparent and just, deliver horizontal and vertical equity, and be seen to provide a proportionate return to the taxpayer.
• Efficient: the tax should deliver good revenue with low administration and compliance costs; it should inform better decision-making by taxpayers and the internalisation of the costs of those choices.
• Sustainable revenue: the revenue source and the mechanism for tapping into it should both be enduring.
• Secure: the tax should only draw on the minimum of personal private information needed and be able to keep that information secure and used only for its intended purpose, at all times.
• Integrated: the tax should occupy a defined place in the system, to recover a defined share of revenue, and leveraging other parts of the system to minimise the cost to both the government and taxpayers.

In terms of specific good practices, we identified a variety of lenses for exploring the design and operation of different tools. These varied according to whether they helped understand:

• The instrumentality of a tool (i.e. how it worked: e.g. by filing a return or as part of a transaction?),
• The targeting of a tool (i.e. who it taxed or where in the value chain the tax was applied: e.g. a sales tax paid by a purchaser and collected by a retailer, or an excise paid by an importer-producer and collected by the state?), or
• The motivation of the tool (i.e. the rationale or trigger for assigning a tax liability to a person or action: e.g. user pays for costs imposed, or beneficiary pays for the opportunities enjoyed?).

Appreciation of these dimensions enabled the creation of a taxonomy, a method for categorising the vast array of tax tools. Through trial and error we resolved on two Orders of tools (User-pays, and Beneficiary-pays), five families (Input-based, Impact-based, Presence-based, Amenity-based, and Commerce-based), and (with a little forcing – kilowatt hour taxes are properly just another species of fuel tax) 20 genera, to provide a framework that captures, we think, the many individual species of tools.

Given our objective of identifying suitable replacements – or complements – for the fuel tax, we also considered what, if anything, made fuel taxes good to start with? There were five things: it was paid by road users; it was based on actual road use; it applied to all motor vehicles; it applied to all road use; and it could generate considerable, reliable annual revenues.

The logic of our objective meant that we were not being asked to recommend a major redistribution of the tax burden, so a replacement would ideally need to be user-pays and usage-based. This eliminated beneficiary-pays options, including all amenity and general commerce-based tools, i.e. transport-activity-specific sales taxes (e.g. a tire tax, or a sales tax on motor fuel) remained in the mix, but one-off tax levies or special appropriations for transport funding purposes did not.

Of the user-pays tools, ultimately only two genera were eliminated through the short-listing: traditional point-based tolling, and ‘by exception’ charges (e.g. for over-weight permits). These could both still have important roles in any total system, but their revenue yields were too low, either in general or after collection costs, to replace or complement fuel taxes at scale.

Criteria and short-lists are all well and good, but there was also the challenge of finding the evidence to populate the frameworks and support the drawing of conclusions. This was less of a problem than we first feared. There is not only a significant volume of literature on tax tools and road funding approaches, available and in English, but it also covered the full gamut of tools, usually with multiple independent sources. New Zealand has produced a good deal of solid, well-considered pieces on fuel taxes, distance-based charges, tolling, road pricing, and registration fees. The U.S., Australia, the United Kingdom, the European Union, and international bodies like the IRF, OECD, and ITF all had significant bodies of work to draw on. Even relatively new US innovations like kilowatt-hour charges and retail delivery fees had multiple studies, some very thorough, as did the Eurovignette time-based licence schemes from the EU.

Perhaps surprisingly, a common finding, particularly in relation to older and more established tools, was that revenue sufficiency was often a good enough reason to maintain a tax. Issues with evasion, equity, administrative efficiency, the impact of effective marginal tax rates from stacked charges on the distribution of the tax burden, and even with evaluating and being accountable for the use of funds, were commented on only infrequently.

Standard practices commonly fell short of possible good practices.

This was less true for newer tools, like distance-based charges or full road pricing schemes, where cost and complexity often took centre stage in any debate, alongside privacy.

Despite this, we found four recurrent ‘good practice’ themes:

• That tools should have clarity of purpose, function, and expected performance, each tool in itself and in the context of its place in the system.
• That tools should follow logically from established good practices that relate to the different aspects of their performance, like communicating with taxpayers and citizens, how they gather and handle personal and private information and money, and in the design of business processes and taxpayer interfaces.
• That tools should be deliberately tasked to recover fair shares of the cost burden from the various segments of road users and road beneficiaries each is designed to reach.
• That tools should be continuously monitored, regularly evaluated, and recalibrated at need to preserve each’s ability to perform its allocated role within the policy determined performance parameters.

From this all, we were able to further conclude that:

• Distance-based charges are objectively better than the alternatives, but operating costs, the cost of change, and complexity remain significant issues to be addressed.
• Kilowatt hour charges are not a “pay-at-the-pump” solution at all, and come with major costs and caveats.
• Retail delivery fees, area charges, and fixed access charges work, but only as supplements and not on a fuel tax equivalent scale.

Furthermore, we found that:

• Robust, comprehensive cost allocation is the best foundation for monitoring and supporting equity/fairness goals.
• The evidence exists to enable a jurisdiction to implement any tool well, if decision-makers want to.
• No tool stands alone: they should neither be expected to do everything, nor be introduced or removed without adjusting the surrounding tools to maintain fairness.

So, where did this lead us in respect to the brief?

Our conclusion was that distance-based charges are the best alternative to fuel taxes. It offers equivalent revenues at marginally increased administration costs, better equity outcomes, and a more flexible platform upon which to (potentially) develop further road pricing interventions.

However, the reality is that fuel taxes still work well for most jurisdictions. If the cost of smart home metering can be borne, or charge data from the vehicle made securely accessible to the tax collector, then introducing a kilowatt hour road tax as part of a suite of fuel taxes could be an effective way of covering the gap in current tax coverage. However, equity issues would remain, not only unresolved, but on a decaying trajectory as the range of vehicle fuel economies (for otherwise similar vehicles) continued to broaden.

From a pragmatic perspective, we concluded that it would make most sense to pursue a phased transition to distance-based charges, starting with those vehicles not meeting their tax obligations through taxes on liquid fuels. Focusing on these smaller populations of vehicles would close the coverage gap and provide experience with which to improve administrative processes before imposing that transactional burden on drivers of ICE vehicles.

Where vehicle policies are pushing the fleet towards wider and faster uptake of EVs and ZEVs, movement onto distance-based charges would be more on an ‘opt-in’ basis, as people chose to move away from ICE vehicles, and less an imposition made seemingly for its own sake.

And this is the closing point. Across the research we looked at, if the public was asked what they wanted, it was not a more elegant way of paying taxes. They wanted better maintained roads that got them to where they needed to be, safe and on time, every time.

This explains, to some degree, why around the world, tool design and performance often seems to fall short of good practice. But it doesn’t justify it.

New Zealand has historically done well in this area. As the Government looks to modernise the system of road taxes and charges, our study shows that the opportunity – and evidence – exists to do well and do better.

Authors

Peter Carr

Peter is the Director Regulatory with EROAD Ltd. Peter is the outcome owner responsible for EROAD’s Road User Charges products and services, and manages EROAD’s relationships with its Australian and New Zealand policy and regulatory agencies. Prior to joining EROAD, Peter served for 22 years in the New Zealand Public Service across a range of roles in the social and infrastructure sectors.

Nina Elter

Nina is the Founder and CEO of NEWROAD Consulting, bringing 20+ years of experience in transportation and technology. She’s an internationally recognised expert in infrastructure funding initiatives and a regular speaker on transport funding, safety, sustainability, and technology advancements.