Fuel tax is a dying revenue source

Insights Newsletter
8 December, 2023

New Zealand is a long, narrow country with a very low population density. Air transport is expensive and passenger rail almost non-existent. As a result, our cities, towns, and rural communities rely heavily on our local and national road network.  

To pay for this network, New Zealand relies materially on a tax on the petrol we put in our cars, known as the Fuel Excise Duty (FED). Traditionally, this has been a low-cost funding tool. Nearly every vehicle in New Zealand uses petrol. The tax is simple to collect, the revenue generated scaled with road use, and it increased with the consumer’s road use.  

Today it has become inefficient. As fuel technology has improved, the link between petrol consumed and road use has become increasingly tenuous. Newer cars are vastly more fuel efficient than the cars of only a decade ago. Hybrid cars are even more so. One practical result is that the link between the number of potholes generated and FED revenue to repair them is increasingly detached.  

The solution should not be to increase the FED. This would only increase the inaccuracy of FED as measure of road use, punishing those with inefficient (older) vehicles. It would also fail to adequately capture the impact of the hybrid vehicles that make up 4% of New Zealand’s fleet.  

So, like any good tool, once made rusted, warped, and obsolete by the passage of time, the FED must be set down, and a replacement found in the policy-makers toolkit.  

Fortunately, alternatives are close to hand. 

After all, not all vehicles use petrol. Heavy vehicles such as trucks (and a minority of light vehicles) use diesel. There is no diesel excise duty. Instead, diesel vehicles (and soon electric vehicles also) pay a road user charge (RUC). RUC works by charging a vehicle for its weight and distance travelled.  

These factors – distance travelled and vehicle weight – are good indicators of a vehicle’s impact on our road network compared to the failing petrol tax-by-proxy system. This impact on our roads generates the need for maintenance, and signals demand for expansion. 

A universal RUC applied to all vehicles on New Zealand’s roads, is a useful starting point for a solution to the problems with the FED. The new Transport Minister, Simeon Brown, has been a staunch advocate of an expanded RUC model in the lead up to the election. Hopefully, New Zealand will soon set down FED, and find a better tool for paying for our roads.  

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