Higher taxes for larger cars under review as €1.5bn in revenue lost in electric-vehicle switch

The Republic may need to introduce higher taxes for larger, heavier cars to help make up for about €1.5 billion in lost revenue per year as motorists switch to electric vehicles, Government officials have said.

While such a move would have the biggest impact on SUV drivers, congestion charges are also an option to be considered by officials as they grapple with how to replace the tax stream from cars that run on fossil fuels.

Newly published Tax Strategy Group papers also highlight EU proposals for the gradual extension of electricity tax to residential customers as part of possible options for replacing fossil fuel tax revenues.

[ Cost of tax credits for low-paid workers and increased social welfare laid out in Government papers ]

[ Cliff Taylor: Tax Strategy Group papers notable for what’s left out as much as what is included ]

Meanwhile, officials are weighing up a VAT cut for home building in a move that could boost supply and reduce house prices. However, they suggest the measure could cost the State €400 million annually and question whether builders would pass on the reduction to home buyers.

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The introduction of refundable income tax credits — a system that would mostly benefit low-paid workers — with the likely cost of such a scheme put at an estimated €1 billion is also examined in the papers.

The Tax Strategy Group’s findings are closely watched as they are considered an indicator of policies under discussion ahead of the budget.

The paper on Climate Action and Tax outlines how the State has committed to a 51 per cent reduction in greenhouse gas emissions by 2030.

Regarding loss of revenue from taxes relating to vehicles that run on fossil fuels, the officials say that medium-term options may include road-user charging or congestion charges.

They also note calls for a shift towards weight-based taxation for cars — a system already in place in Norway, Belgium and the Netherlands.

Irish motor tax is based on emissions, which generally correlate to vehicle weight.

“Therefore within the existing tax system the larger more pollutant cars are those which are already subject to the highest rates of tax,” say officials. But they add it is “likely that in the medium to longer term, vehicle taxes may shift to a weight-based vehicle tax or surcharge in order to protect the vehicle tax base”.

The document also sets out options for extending electricity tax to domestic residential customers as well as the impact of increases in the rate. This tax is applied at a rate of €1 per megawatt hour for business and some non-business uses. The current yield is low with just €3.5 million in revenue last year.

[ The Irish Times view on the Tax Strategy Group papers: difficult choices ahead ]

There is a blanket relief for all household users and electricity produced from renewable sources.

A proposed revision of an EU Energy Tax Directive involves changes to taxation of electricity including a gradual removal of the exemption for residential electricity users with an optional exemption for vulnerable households.

The paper states: “Electricity taxation may provide a contribution to the alternative revenue streams, which may be required to replace fossil fuel revenues in the future.”

The Government has legislated for an increase in carbon tax every year until it reaches €100 per tonne in 2030.

The cost of a 60-litre fill of petrol and diesel is set to rise by €1.28 and €1.48, respectively, in October. Filling a 900-litre kerosene tank will cost €19.40 more from next May.