Should motor tax be scrapped?

After a while it became known as the 520d issue. The problem was that when the carbon-emissions-based motor-tax system was introduced, in 2008, the government was already behind the times. It thought it was setting the bar so high that only the most frugal of cars would qualify for the lowest tax bands and that most of us would still end up paying more or less the same every year for our discs. The Departments of Finance, of the Environment and of Local Government hadn't counted on the BMW 520d, a luxury car that sneaked into the lowest of tax bands. Cue howls of protest.

In spite of a rejig that saw the lower bands expanded, and the rules tightened up a bit, the motor-tax system retains a glaring inequality: someone buying a pre-2008 car will, in general, pay far, far more for a year’s tax than someone buying a new car.

About eight in 10 of us believe motor tax should be scrapped in favour of an alternative such as extra duty on fuel, so that we would pay the Government according to how much we used our vehicles, according to research by taxback.com, a company that offers tax-refund services.

For a BMW 525d you'll pay €1,494 a year in motor tax for a 2007 model but just €570 for a 2008 model

Barry Flanagan, a Taxback director, says: "The emissions-based motor-tax bands might bring cost efficiencies for drivers of newer cars, but drivers who are just outside the cut-off point are perhaps understandably frustrated by having to pay up to three times more tax than for a model just a year or two newer."

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The company gives two examples. Buy a 2007 Volkswagen Polo 1.2 and you’ll pay €330 a year in motor tax, versus €180 if you buy the same model registered a year later. For a BMW 525d you’ll pay €1,494 a year in motor tax for a 2007 model but just €570 for a 2008 model.

“In effect,” Flanagan says, “the current tax system rewards those with higher incomes, as they can afford post-2008 cars, and penalises lower income earners. Almost a quarter of respondents said that they believe motor tax should be scrapped completely, in favour of tax increases on fuel, so those who use their car pay more.

“The merits of this are not altogether difficult to see. The situation as it stands means that a person who commutes by public transport during the week, only uses a car on weekends and clocks just 3,000km per year pays the same motor tax as a person with the same car but who uses it seven days a week, racking up 60,000km per year.”

The Department of Transport, which has just taken on responsibility for running the motor-tax system, declines to comment on the research, saying instead: "Any changes to motor-tax rates or wider changes to the structure of charging for motor tax have always taken place in a budgetary context and would be in consultation with the Department of Finance and others."

The Department of Finance has also declined to comment.

But Denis Naughten, the Minister for Climate Action and Environment, is happy to discuss the issue briefly. His response is, essentially, that drivers have to work within the system. "If people are sensible about how they drive, how they maintain their cars, and if they get regular services, then this will result in lower emissions, and it should be reflected in the level of motor tax each individual would have to pay."

So it seems that if you’re on a lower income, and can afford only an older car, that’s entirely your problem. The motor-tax system is clearly being used as both carrot and stick to incentivise lower-emissions driving.

A pay-as-you-go system could 'replace falling fuel duties and has the added benefit of discouraging road travel and reducing congestion in gridlocked urban areas'

Environmental concerns could easily be accommodated in a more equitable tax system, according to Flanagan. "Our national climate-change commitments do require action, and action across Europe on this issue is increasingly being taken in the form of taxation measures and schemes to incentivise the ownership and use of lower carbon vehicles," he says. "Ireland dropped 28 places in the 2018 Climate Change Performance Index, to 49th out of 59 countries. So there does seem to be a need to balance environmental concerns while ensuring that motor-taxation policies are equitable and affordable for Irish motorists."

Heaping additional taxes on fuel would hardly benefit lower-income drivers, and although it might redress the balance between those buying new and used vehicles, it would be unfair on those living in rural areas, who generally have no option but to use their cars, and on the haulage industry.

It also ignores a much bigger problem on the horizon: how to balance Government revenue as more and more of us drive electric cars. The combined income from fuel duty and VAT on petrol and diesel amounted to almost €3 billion in 2016. So what’s going to replace that when our motoring energy comes from electrons, not hydrocarbons?

A pay-per-kilometre system is probably the answer. According to Philip Summerton of Cambridge Econometrics, it "offers an option to replace falling fuel duties and has the added benefit of discouraging road travel and reducing congestion in gridlocked urban areas".

Despite concerns about privacy and the potential for incorrectly calculated levies, such a pay-as-you-go system is very likely the future – and it probably makes tinkering with the current system a moot point. Why change now when we’ll have to change again in 10 years?

By then the question of older cars being more highly taxed could well be pretty small beer.