Analysis
22 Feb 17

Mobility taxation is the way forward

All agree that global efforts are necessary to get greener air and greener vehicles. All agree as well that taxation is necessary in order for governments to balance their budgets. So, company car taxation will not escape.

With the continuous improvements made by car manufacturers in order to decrease CO2 emissions of their vehicles as well as with the rising number of alternative powertrains on the roads, governments need to find new tax measures to ensure continuous streams of revenue.

Adverse effects of subsidizing green vehicles

The adverse effect of the policy carried out so far to promote and sustain the acquisition and the use of alternative powertrains is that over subsidization of these has led to an actual decrease of revenues and in some countries (e.g. Norway) this already led to the need to reduce the incentives.

A trend that also appeared the last few years is that more and more taxation is directly linked to the use made of a vehicle rather than to the actual inherent characteristics of the vehicle itself. Besides the obvious forms of taxation directly linked to CO2 emissions (e.g. road taxes, benefit in kind taxation), also other forms now pop-up, such as forms of “vignette” taxation linked to getting into city centers (e.g. in low emission zones).

This has not stopped people from buying new cars though. Western European car sales hit their highest level in 2016 since 2007. Question is what caused these increased sales?

On the one hand the economy is getting out of its slump, but also the so-called ‘sailing ship effect’ could be an explanation, according to certain economists. This principle states that at the moment of the introduction of a new technology to a market (e.g. steam boats) you can also notice an acceleration in the innovation of an incumbent technology (e.g. sailing ships), meaning that progress in old technology revitalizes, when faced with the risk of being replaced by newer ones.

We indeed have seen that car technologies have tremendously progressed in the past years compared to their previous normal development pace. Although this of course means that the more traditional cars have become cleaner, they also make it possible for buyers to choose for such “old technology” as it is still cheaper than buying new technology, considering that taxation does not necessary follow this innovation trend as quickly as it possibly should.

Although that sales of alternative powertrains also gradually increase (+4,7% during the first three calendar quarters of 2016), the overall increase of new registrations was much higher (+8%) and alternative powertrains still only make up for +/- 4% of total (new) car registrations.

The above economic analysis could also find support in the rather disappointing latest sales figures of car manufacturer Tesla, which was apparently not able to match their intended sales budget (even though other suppliers of EV’s, e.g. Renault-Nissan, do very well).

Getting foreign road users to chip in…

As increasing taxes on your population knows its limits and does not always lead to the desired effect, also more and more countries are thinking about expanding the sometimes already existing forms of toll charges to passenger cars (so including foreign drivers).

The most notorious plan in this respect is probably the one of German Transport Minister, Alexander Dobrindt, who wants to impose a toll charge for the use of the German Autobahns. The initial plan would only have imposed an actual charge on foreign drivers (as German residents would be able to claim a tax credit for the actual charges they paid). However, this plan was stopped by the European Commission as being “discriminatory”.

However, in November of last year the Commission and Germany came to an agreement on an adjusted plan. German residents would no longer receive a direct tax credit, taking into account the actual charges paid, but instead overall annual car taxes would be reduced (only relevant for German residents of course) and this combined with the toll system being shifted to allow rewards for environmentally-friendly cars (which would also benefit foreign drivers), made it acceptable for Europe.

Although some other EU Member States keep shouting that such plans are discriminatory (e.g. the Netherlands also do not want some form of toll charge to be introduced by Flanders on passenger cars), these charges will be introduced in other countries, certainly if Germany is able to implement such a system.

Welcome to Mobility Taxation

Governments will also need to consider another trend that we see and that is that more and more the offering is no longer focused on selling the “product” (i.e. the vehicle) but on the use of it instead.

Even though certain offerings (e.g. Uber) certainly disrupted the market, the more traditional providers are also offering now their won “mobility solutions” rather than a car only solution.

If this would imply that in the future fewer vehicles would be sold (and thus tax revenues could decrease), which is at the moment certainly not supported by the registration figures, introducing other forms of “mobility taxation” will certainly become very high on the agenda. Some countries already consider this, albeit on a very limited and rather reluctant scale (e.g. Belgium will introduce a specific tax system for a “mobility budget” granted by employers to their employees), but this will most likely be the future.

Therefore, have no doubts, taxation will continue to become more and more complex in Europe and governments will have a hard time figuring out how to combine taxation and promotion of alternative powertrains or other alternative forms of mobility.

With the support of BDO

Authored by: Erwin Boumans