'Urgent need' to introduce road duty for EVs and local congestion charges

There is a strong case for introducing per-mile Road Duty for electric vehicles and local congestion charges, states a new report on reforming vehicle taxes.

Fuel Duty is the UK’s main motoring tax, raising £25bn in 2022-23, reports The Economy 2030 Inquiry. “This contribution, however, is already in decline,” it notes. “Receipts likely peaked in 2019, and the increasing prevalence of EVs means an annual shortfall of £10 billion is expected by the early 2030s.”

The Economy 2030 Inquiry is a collaboration between the Resolution Foundation and the Centre for Economic Performance at the London School of Economics, funded by the Nuffield Foundation.

There is an urgent need to replace Fuel Duty, the inquiry found. There are many ways that an electric driving tax could be implemented, but “sufficient public support and political deliverability are fundamental”, says the report. “For that reason, while some argue for mile-by-mile variation in road pricing in response to congestion, we don’t support this.”

Instead, the inquiry calls for a system as straightforward as Fuel Duty. “We therefore recommend a national per-mile ‘Road Duty’ which – based on typical Fuel Duty costs – would be around 6 pence per mile (plus VAT) for a typical electric car. Such a scheme would be easy to understand and receive relatively high acceptance as a fair, like-for-like replacement while ensuring that EVs remain cheaper to drive than non-EVs.”

There are four key choices to consider beyond this basic vision, states the report:

1) Using an in-vehicle system that makes use of the cell network, milometers and Global Positioning System (GPS) to periodically report taxable miles driven each month – allowing accurate direct debits (ideally using existing VED payment arrangements). 

2) Fuel Duty should continue to be used, rather than switching non-EVs to a per-mile charge (which would not target carbon emissions as accurately as Fuel Duty does and would not be as simple to collect). 

3) Coupling a simple Road Duty approach based on GPS with locally-determined Congestion Charges which have the benefit of not needing expensive infrastructure. This could be extended to fossil-fuelled vehicles that are technologically ready for per-mile charges, as they still cause congestion and it would not be desirable to exempt them from local Congestion Charge 

4) The Government should be aiming to begin charging Road Duty on compatible EVs by 2027 – by which point one in every six miles driven are expected to be electric, and the missing tax revenue will top £3bn.

The inquiry proposes reforms to Vehicle Excise Duty by taxing new cars according to weight. “Because VED is not the mechanism with which to drive EV uptake – here, it is regulation that is doing the heavy lifting – the system should be reformed to reduce the numbers of heavy cars on the road.”

Also, VAT on public chargers should be cut to avoid penalising those who cannot charge at home, says the report. 

Jonny Marshall, senior economist at the Resolution Foundation, said: “The switch from fossil-fuel-powered cars to EVs is a key part of Britain’s net zero transition, and it’s happening quicker than most people expected. This is good news for the planet and motorists as EVs are cleaner and cheaper to run.

“But unless we modernise road taxation to reflect the cars that are on our streets today and in the future, we risk putting more even pressure on the public finances and our crowded roads.

“We need a new GPS-based ‘Road Duty’ for EVs to offset falling Fuel Duty revenues, and ensure that the Net Zero transition doesn’t leave poorer drivers in older cars bearing the burden of vehicle taxation.

“VAT rates on those using public chargers should also be reduced to the same level enjoyed by those, generally richer households, lucky enough to charge at home.

“Our tax system needs to keep pace with the Electric Vehicle transition, in a way that protects low- and middle-income households.”

https://economy2030.resolutionfoundation.org/wp-content/uploads/2023/06/Where-rubber-hits-the-road.pdf