Taxes on Transport – Smarter Instruments for More Efficient Transport Systems

How the transport system is used largely depends on the taxes and fees facing the users. Hence, pricing has a greater impact on accessibility and economic efficiency compared to, for instance, investments in new infrastructure. This is shown by economists Maria Börjesson and Jacob Lundberg in their SNS report Taxes on Transport – Smarter Instruments for More Efficient Transport Systems.

This report analyzes how to design taxes and fees in the transport sector to better reflect the costs generated by transport. It covers the main taxes and fees – fuel taxes, vehicle taxes, congestion taxes, railway track charges, shipping charges, parking charges, VAT and taxes related to company cars – while placing these in a broader institutional and economic context, taking the EU legal framework into account. The report presents 18 concrete reform proposals, which combined are estimated to offer a net contribution of SEK 10–20 billion annually to the state treasury.

The fundamental principle is that taxes and charges should primarily correspond to the external costs generated by traffic – congestion, noise, emissions, accidents and wear – no more, no less. The analysis is based on a review of scientific literature as well as public statistics on transport, tax revenues and public expenditure.

Main results

Significant differences in terms of cost recovery between various modes of transport

Public expenditure in the transport sector amounts to SEK 153 billion annually, while the tax revenues amount to SEK 81 billion. The level of cost recovery differs widely: road transport generates larger revenues in relation to public expenditure, railways are largely financed by public funds, while the relationship is more balanced when it comes to shipping and aviation. Aviation is the only mode of transport paying for its own marginal social costs.

Fuel taxes at a historic low

Inflation-adjusted fuel taxes are currently at a more than 30-year low. The Swedish tax rate is now about SEK 1 per liter below the EU average. These taxes are important for internalizing costs related to the climate but are a blunt instrument when it comes to local externalities such as congestion, air pollution and noise. The price of fossil fuels cannot remain at current levels if Sweden is to meet its climate goals. Furthermore, EU ETS II will also include road transport in a common European regulation.

The distortions of the fuel tax structure

It is hard to justify the current structure, where the diesel tax is lower than the petrol tax per liter, despite the fact that diesel has a higher energy content and generates more CO2 emissions per liter. Diesel cars, but not petrol cars, can handle high blends of biofuel, which makes abolishing the diesel surcharge in the vehicle tax particularly important with regard to the climate transition.

Limited fiscal impact of electrification

The transformation of the vehicle fleet erodes the fuel tax base, but a large part of this process has already occurred. The remaining fiscal impact will be limited in relation to public finances as a whole and does not represent a strong argument for maintaining or raising transport taxes purely for fiscal reasons.

Insufficient data makes it difficult to determine the optimal congestion tax

Congestion taxes in Stockholm and Gothenburg have resulted in improved accessibility. At the same time, a congestion tax that is too high is counterproductive. There is currently insufficient data for calculating optimal tax rates, and the methods need further development. In addition, the related administrative costs amount to 4 percent of tax revenues in Stockholm and 11 percent in Gothenburg, which is significantly more than for virtually all other kinds of taxes. Proposals for more comprehensive road charges, such as kilometer taxes for light vehicles, must be weighed against the administrative costs.

Heavy traffic and railways do not bear their marginal costs

Heavy road traffic causes higher external costs in terms of road wear and safety risks compared to light traffic, which serves as a good argument for distance-based charges. When it comes to railways, high fixed costs and local capacity constraints make pricing quite complex. The report does not argue that railways should generally bear their full costs, but that track charges should be used to a greater extent where they contribute to a better use of the available capacity.

Conclusions and policy implications

• The marginal cost principle should be the main approach: taxes and charges should correspond to the external costs caused by driving an extra kilometer or making an additional call to port, while taking into account practical constraints, administrative costs and the EU legal framework.
• Entirely fiscal transport taxes should be rejected. Transport should be subject to VAT, but taxes and charges should otherwise only be levied if justified by an external cost.
• EU ETS II should replace the biofuel blending obligation as a climate policy instrument for road traffic. This would be more cost-effective while also linking Swedish road traffic emissions to the common European regulation.
• The VAT system should be more uniform and less distortive, including by raising the VAT on passenger transport. The commuting tax deduction is considered reasonably designed, as work trips can be seen as a cost for earning income.
• In terms of aviation, the related policy instruments are largely shaped by international and EU frameworks, which limit the national scope of action. The self-financing principle –the sector itself pays for the costs of airports and air traffic control – appears to be working well. The report does not advocate reintroducing the air passenger tax.
• Taken together, these reforms are expected to make a net contribution of SEK 10–20 billion annually to the state treasury, while also improving accessibility and contributing to Sweden achieving its climate goals.

Reform proposals

• Increase the VAT on passenger transport to 25 percent.
• Work toward an EU agreement applying VAT to international passenger transport.
• Allow a total VAT deduction on car purchases made by firms.
• Increase the diesel tax in relation to the petrol tax so that the fuels are taxed equally in relation to their energy content.
• Abolish the division of fuel taxes into carbon dioxide and energy taxes while replacing these with a more uniform structure.
• Increase fuel taxes, which include EU ETS II, instead of the biofuel blending obligation so that they better cover the social costs of road traffic.
• Lower the vehicle tax to compensate for the higher fuel taxes but retain the malus on new cars.
• Abolish the diesel surcharge in the vehicle tax.
• Design the congestion charge more accurately by using better methods.
• Introduce a distance-based Eurovignette fee for heavy traffic corresponding to its marginal social cost.
• Abolish subsidized residential parking.
• Strengthen the legislation to clearly indicate that parking fees cannot be higher than what is justified by scarcity.
• Increase on-street parking fees in central locations and reduce them in locations where there is no shortage of space.
• Abolish the advantageous fringe benefit taxation of environmentally friendly cars.
• Tax older company cars in relation to the true market value.
• Commission an inquiry into the purpose and level of the motor insurance tax.
• Increase railway track charges and differentiate these to a greater extent, taking into account both congestion and wear and tear on the track.
• Move toward more marginal cost pricing in shipping.

About the report

The report is part of the SNS Infra research project, which analyzes how Sweden can maintain, streamline and expand its physical and digital infrastructures. This project highlights issues related to governance, financing, operation and safety, as well as the division of risks and responsibilities between public and private actors. A key point of departure is that market and regulatory failures – not least in the form of incorrect incentives and a lack of coordination – risk leading to insufficient maintenance and infrastructures being either too great or too limited in scope.

About the authors

Maria Börjesson is a professor of economics at the Swedish National Road and Transport Research Institute and an adjunct professor at Linköping University.

Jacob Lundberg has a PhD in economics and works at the Research Institute of Industrial Economics.