Counting ‘tax expenditures’ is not simple. On the face of it, if a low rate of tax is charged on a specific item, or its usage for a specific purpose or by a specific group, this looks like a handout and attracts suspicion. There is a loss of potential revenue as against whatever is the standard rate of tax.

The Government’s Commission on Taxation and Welfare, which reported last month, has a lot to say about tax expenditures since there are dozens in the Irish tax code, including some where the revenue foregone is measured in the hundreds of millions.

The commission is not too keen on tax expenditures and recommended that several of them should be discontinued or watered down.

Examples are age-related reliefs from liability to PRSI and certain income tax deductibility rules relating to pension contributions.

Readers of the Irish Farmers Journal will be familiar with the argument that the lower rate of excise on green diesel is a tax expenditure, a non-transparent subsidy to the agricultural sector.

The total of levies on road users, at current rates of charge, is in the right ballpark

Even though the Central Statistics Office has been counting the revenue foregone as a tax expenditure in its regular reporting, there are reasons for taking a different view.

The excise duty on auto fuel should be seen as part of the overall tax-gathering from motorists and other road users, contributing to the very substantial public cost of building, maintaining and policing the nation’s road system.

There are also externalities to be charged for, including carbon emissions and adverse impacts on air quality.

In the aggregate, the revenue from vehicle purchase taxes, annual licence fees, fuel taxes and road tolls adds up to €6bn or thereabouts, which equates very roughly to the direct costs and the externalities. That is to say the total of levies on road users, at current rates of charge, is in the right ballpark.

The low rate of excise on green diesel reflects the reality that agricultural tractors do not use the road system very much, any more than dumper trucks on building sites or stationary engines do.

Recommendation

The commission’s recommendation in full is: “The commission supports the principle that embedded tax fossil fuel subsidies should be reduced on a phased basis over time, with the aim of ensuring that the taxation of fuel reflects the amount of carbon emitted. Those most environmentally harmful tax fossil fuel subsidies should be prioritised for removal along with those for which viable alternatives exist. Government should publish a roadmap by 2023 setting out ambitious targets for the elimination of subsidies by 2030.”

Since green diesel already incurs the carbon charge (so it should – all fuels in all uses should suffer a carbon charge to cover the emissions), this way of putting things precludes charging users of off-road diesel, or kerosene for home heating, anything extra by way of a user charge for roads they do not use, or use very little.

The commission report and the briefing papers prepared by its secretariat contain a discussion of the methodology in use to measure tax expenditures, but stops short of a specific reprimand to those who have classified as such the full ‘discount’ on green diesel.

The reprimand is, however, implicit and should be welcomed by the farm organisations.

The apparent discount is not a subsidy to farming, it is a reflection of the reality that road user charges are collected, in part, through higher rates of fuel taxes, and non-users should not pay.

Hole in tax revenue

Since the Government’s intention is that the car fleet should eventually convert to electric traction, there will be a large hole in tax revenue where tax on petrol and diesel used to be. If heavy trucks can also be decarbonised, the hole would grow to as much as €3bn per annum.

There are alternative, and anyway better, ways to collect user charges from road traffic. In Ireland only around €400m per annum comes from road tolls, which are levied opportunistically on newer sections.

Use-related charges

The commission feels that use-related charging will be feasible when vehicles become digitally connected so that usage patterns by location and time of day could be easily captured.

This would open the way to congestion charging, which would do more than close the revenue gap, it would encourage a more efficient pattern of road use and would be a powerful weapon in combatting congestion, especially in urban areas.

There would be a bonus for climate policy too – cities and towns choked with crawling traffic have higher emissions so long as vehicles use fossil fuels at all, as well as low-level emissions which damage air quality and human health.

Even with an all-electric fleet and decarbonised electricity, congestion charging is fairer – those using crowded roads at busy times impose heavy delay costs on everyone else and should be penalised.