How is the Dutch government preparing for less revenue from fuel taxes?

Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: macroeconomist and expert strategist Charles Kalshoven on how the Dutch government should prepare for lower fuel taxes.

We are going to be switching to electric cars en masse. There are currently over 427,000 fully electric passenger cars and over 256,000 plug-in hybrids (cars that have both a fuel engine on board and an electric motor coupled to a battery pack) on Dutch roads, according to the Netherlands Enterprise Agency. The growth in the proportion of electric passenger vehicles has advantages. These cars do not emit exhaust fumes, like fuel-engine cars do. But on the other hand; the government misses out on more and more fuel taxes with the increase in the number of  EV drivers.

It is a development that is happening in other countries as well, leading to the question worldwide: how are governments preparing for less revenue from fuel taxes? In the U.S. state of Texas, they have already taken measures. Owners of electric cars there, because they do not fill up with fuel, will be charged $200 a year, starting September 1. Should we take similar measures in the Netherlands? “No,” Kalshoven says firmly, “It is an unwise measure. It is smarter to tax usage.”

9 Billion

Kalshoven immediately takes the sting out of the discussion at the beginning of the interview. “The Dutch government collects 9 billion euros annually in fuel taxes. Of course, that’s not nothing, but on close inspection this is only 1 percent of the gross domestic product (GDP).” Kalshoven’s point is that we shouldn’t overdo it either. “Besides, those excise taxes won’t disappear overnight either. The internal combustion engine is still going to be around for a while. It is getting phased out slowly.”

Kalshoven therefore advocates not panicking. But he also says that it is a fact that the Netherlands will have to make do with less excise revenue in the future. “If you want to solve this within the transport domain, there are a few options. One of them: you tax electric driving. Not through an annual extra tax, as in Texas, but, for example, through road pricing. The advantage of this is that you distribute it more fairly. The frequent user pays more.”

Adverse effects

According to APG’s macroeconomist, fairness is an important aspect when levying taxes. “Suppose you start taxing the electricity you use to charge your battery, and you have a beautiful house in Amersfoort that happens to have a south-facing roof. Then you can fill up the battery very cheaply with solar panels, tax-free. But if you have an apartment, it becomes more difficult. That feels a bit skewed.”

Kalshoven, incidentally, is well aware that EV drivers also contribute. “They may not emit exhaust fumes, but those cars also lead to particulate matter, and to traffic jams. Those are adverse effects. In addition, those cars are often a lot heavier than cars with combustion engines. They therefore put an extra burden on the road network. So from that point of view, you could say; you want to price those external effects. Also because electricity is sometimes so cheap that it doesn't really deter people from driving a lot of miles. Perhaps the solution is not an excise tax on electricity, but a higher road tax, linked to road use. That kind of measure might encourage energy conservation, but could also discourage motorists from switching to electric. But it’s smarter than the Texas measure: that may inhibit the purchase of EVs, but not the nuisance caused by road use.”

Another option to compensate for the loss of excise revenue, in Kalshoven’s view, is to increase the fuel tax. “You have excellent arguments for that. There are simply adverse environmental effects from driving a car with an internal combustion engine. By making the fuel more expensive, you encourage people to get out of the gasoline or diesel car and speed up the energy transition. Of course, you can only start doing this when EVs become a lot cheaper and thus a real alternative.”

Distorting the economy

In addition to fairness, efficiency is an important principle in taxation, Kalshoven argues. You would want taxes to disrupt the economy as little as possible. “If it were implemented to the extreme, people would not pay taxes on their wages, but would be charged a fixed amount per year, say 15,000 euros. Of course, most people would not consider that very fair – it’s the opposite of a progressive tax system. But it removes a distortion in the labor market: the difference disappears between what an employer pays and an employee receives net. Anyway, it’s pure theory, of course. Besides, sometimes you do want to influence behavior. Take excise taxes on tobacco, and the same goes for excise taxes on fuel. You want people to smoke less and switch to more sustainable mobility. But a side note to that is that by imposing ever higher excise taxes, you erode their foundation."

Which then brings Kalshoven to the topic of inheritance tax. “This is a tax that is not popular, but it is very efficient. After all, everyone dies. Moreover, it does not distort the economy. Also, from the point of view of inequality, it is not a bad idea to take something away from huge estates, which otherwise perpetuate inequality. You’re actually better off bringing in a lot of money that way, so you don’t have to tax labor or other things as heavily.”