Inside Labor’s plan to tax EVs

As he wrapped his much-hyped Economic Reform Roundtable back on August 21, Treasurer Jim Chalmers said he was possessed by a “sense of urgency” to get reforms happening. Key among them, a new tax on electric vehicles.

He described it euphemistically as a “road user charge”, although the road users to which it would apply would all be EV owners.

Such a tax, Chalmers said, was “an idea whose time has come”. He said he would meet with state and territory treasurers just a couple of weeks later, on September 5, to work through options and “accelerate” policy development.

It’s not hard to see why the treasurer might want to hasten planning for an EV tax. Fuel excise, levied on petrol and diesel, currently raises about $25 billion a year for the government. Since EVs don’t use petrol or diesel, their owners don’t pay the excise. As they proliferate, they are knocking an increasingly large hole in revenue.

Levying a charge on EVs for using the roads would help fill that hole.

Collecting a road user charge (RUC) is not so simple, though, compared with collecting fuel excise, which is paid to the government every time a car owner fills the tank. The further people drive and the bigger their cars, the more often they fill the tank and the more excise they pay.

Implementing a user charge would require government to come up with some other means of determining how far individuals drove their cars, and ideally would factor in the size of those cars, as heavier vehicles do more damage to roads. Then there is the problem posed by hybrid vehicles, which run sometimes on battery power and sometimes on fossil fuel. Does the government impose a road user charge as well as fuel excise, and if so, what adjustment should be made to the rate?

Past efforts at levying an RUC also have imposed onerous compliance requirements on EV owners. When Victoria brought in one in 2021, says Tennant Reed, director of climate change and energy at the Australian Industry Group, “people had to take photos of their odometer twice a year and send them to the state revenue. People didn’t like that.” A couple of years later, the High Court found the scheme to be unconstitutional.

The bottom line is that while it is easy to say road user charging is “an idea whose time has come”, there are myriad complications in realising that idea. As was obvious when Jim Chalmers met with his state and territory counterparts in September.

The meeting ended not with a plan but with an aspiration for a plan. An anodyne statement promised “reforms to the treatment of electric vehicles [that] will ensure more equitable treatment across vehicle types and provide certainty to support investment”.

There was no agreed model, no timeline – no sense, really, that anything had advanced.

Since then, as one transport industry source puts it, “we’ve heard, basically, crickets”.

No big surprise there, given the history. Back in December 2023, Chalmers referred the design of a road user charge to national cabinet. Nothing came of it.

Undeterred, in February, at a dinner with business leaders, the treasurer nominated the imposition of a road user charge for electric vehicles as a tax reform priority – which, The Australian Financial Review reported, raised “industry hopes it will be dealt with swiftly should Labor win a second term in government”.

The other side of politics is, if anything, even more eager to end the excise-free ride for EV owners. In April the Coalition’s then spokesperson for transport, Bridget McKenzie, told the ABC’s Insiders it was a “pretty simple concept of equity” that “everyone who uses our roads should contribute to making sure they’re maintained to the proper standard,” she said.

It’s not quite correct, though, to say we have heard “crickets” since the treasurers’ meeting. We have heard quite a lot from Chalmers’ cabinet colleague, Minister for Climate Change and Energy Chris Bowen. And he is very resistant to the idea.

The day after the treasurers’ meeting, when Bowen was asked about it at a media conference, he adamantly – and repetitively – insisted that a new tax on EVs was not coming any time soon.

There was, he said, “a lot of work to do”, and “many models to consider” first.

“It’s not imminent. It’s not something that’s going to happen overnight. There’s … a lot of water to go under the bridge,” he said. “There’s a lot more further work to do between governments.”

Bowen conceded there would eventually have to be a road user charge, but said he was “not going to start predicting” when it might happen.

He was asked if it would be years. He left the question hanging.

Just as it’s easy to see why the treasurer would want to tax EVs, it’s easy to see why the climate change minister would be resistant.

In the 12 months to March this year, according to the government’s latest quarterly greenhouse gas inventory, the transport sector accounted for 22.4 per cent of Australia’s total emissions, or just shy of 100 million tonnes.

That made it the second-biggest source of climate pollution after electricity generation.

Worse, while the emissions from electricity – and indeed every other sector of the economy – fell slightly over the year, those from transport increased, as they have done consistently for years.

Since 2005, the base year used by the government in setting its climate targets, Australia’s total emissions have fallen about 28 per cent. Those from transport have gone up more than 20 per cent. Some projections suggest it could be the biggest source of emissions within five years.

If Australia is to have any hope of meeting its climate targets – 43 per cent emissions reduction by 2030, and 62 to 70 per cent by 2035 – it needs to cut transport emissions drastically. That requires the rapid uptake of EVs.

Logically, slapping a new tax on them will be a disincentive.

Equally logically, the government will at some point have to address the problem of falling revenue. It’s a question of balancing priorities.

Energy experts draw a parallel between the uptake of EVs and that of rooftop solar panels. Initially, government subsidised solar installations and provided generous incentives for home owners who fed power back into the electricity grid.

As the cost of solar panels fell and the price of grid electricity rose, solar became an attractive proposition even without government incentives.

Now close to one-third of Australian homes have solar on their roofs, and the number is growing fast even as feed-in tariffs have been wound back.

Likewise, says Tennant Reed, “over time the value proposition to a driver of going EV becomes so great, and growing so rapidly”, that people will not need government encouragement to buy them. He does not suggest we have yet reached that point.

When electric vehicles were expensive relative to internal combustion engine (ICE) vehicles, when consumers worried about the limited range and refuelling options of EVs, governments saw the need for various incentives to encourage buyers.

EV prices have come down sharply, however, to the point where they are close to parity with ICE vehicles. Consumer concerns about range and recharging remain, but bigger batteries and more charging points have mitigated them.

The running costs of electric cars also are vastly lower than those of ICE vehicles. According to Transport for NSW, EV owners pay 40 per cent less for maintenance – because EVs have many fewer moving parts – than the owners of petrol and diesel engined cars.

They also pay 70 per cent less for fuel, in large measure because they are not paying 51.6 cents per litre in excise. The annual cost to government revenue, according to Reed, is currently about $150 million.

Which is not a lot, relative to the total fuel excise taken in by the government, says Aman Gaur, head of legal, policy and advocacy at the Electric Vehicle Council.

“EVs only make up about 2 per cent of vehicles. Fuel excise is in no danger of being whittled away any time soon,” he says.

He argues that any reform of the tax regime applying to Australia’s vehicle fleet should begin elsewhere, such as with the fuel tax rebate, which gives back some $10.8 billion of excise revenue, mostly to miners and farmers for the off-road use of vehicles. The rationale for this is that they are not using public roads, so should not have to contribute to the cost of building and maintaining them.

This rebate, Gaur says, ignores the other costs associated with the burning of that fuel, such as to climate and to human health.

He also cites the luxury car tax (LCT) exemption that encourages people to buy high-emitting utes – also cited by Rod Campbell, research director at The Australia Institute.

LCT is levied at a rate of 33 per cent, with most vehicles costing more than $80,567. There is a broad exemption, Campbell says, for utes, provided it “can carry twice the weight in payload that it can carry in people”.

Supposedly, this is to ease the burden on tradespeople who use their utes for work. There is no requirement, however, to demonstrate if their vehicle was purchased for commercial or personal use. A report by Campbell last year suggested the exemption is massively rorted.

“According to our research there’s 1.94 million tradies in Australia and there are 3.1 million utes on our roads,” says Campbell.

The buyer of a huge, gas-guzzling RAM 1500, valued at $249,950 before on-road costs, avoids more than $50,000 in tax.

The institute put the cost to government revenue of the “ute loophole” at $250 million. That’s a lot more than is lost to EVs in fuel excise, and actually works counter to the government’s aim of reducing transport sector emissions.

The point is that a lot of other measures could be taken to address the inconsistencies in the way the transport sector runs, other than simply taxing EVs.

“The current system is over-complicated and inefficient,” says Reed. “Ideally this would be an opportunity to reform the whole thing.”

Instead of limiting its focus to electric vehicles, he says, the government should apply “a universal road user charge, with distance and mass being the two most important variables in the equation”.

Determining distance should not be difficult, given current technology, he says. Many modern vehicles already record and transmit operational data. It would just be a matter of getting access to that data from carmakers. Alternatively, cars could be fitted with “something equivalent to the tags people already use for toll roads”.

The third component of a new tax regime, says Reed, would be an additional charge for emissions.

Under his model, that fee would be pegged to the carbon price established under the government’s safeguard mechanism, and “would translate to a cost per litre that is about one-fifth of the current fuel excise”.

One might argue about the size of the tax on emissions, but it could be adjusted relative to the other two elements, mass and distance, so “it need not cost drivers any more than the current system does”.

Reed finds it frustrating that Chalmers’ round table “only focused on the EV bit of the equation”, and on the narrow issue of revenue.

That was the focus of the Victorian government, too, before the High Court knocked out its RUC on the grounds that only the federal government could impose fuel excise.

Meanwhile, New South Wales already has legislation in place for its own road user charge, which is scheduled to begin on July 1, 2027, or when EVs make up 30 per cent of new car sales – whichever comes first.

Presumably, if either of those trigger points is reached, and the state government tries to impose the tax, there will be another legal challenge and the NSW law also will be struck down.

Nonetheless, it serves as a model for what the Commonwealth might do. Australia’s peak motoring body, the AAA, thinks it should be the template.

If Australia is to hit its current emissions reduction target, says Gaur, EVs will have to make up over 50 per cent of all new car sales by 2030. Currently, they account for about 12 per cent of sales.

According to his organisation, to hit the more ambitious 2035 target of 62-70 per cent reduction in emissions, we will need about five million EVs on the road – a 20-fold increase. A momentous shift in buyer behaviour will be required to get to that goal, and government policy will be crucial.

Gaur points to New Zealand as an example of the consequences of getting it wrong. “They introduced an EV-only tax two years ago – within one quarter [three months] EV sales, which were about 45 per cent of new car sales, fell to 15 per cent.”

It should, he suggests, serve as a salutary lesson to Jim Chalmers not to get carried away with his “sense of urgency” about road user charging.

Another industry insider reckons Chalmers was laying the urgency on for the media following a round table that didn’t produce much in the way of “announceables”, and that the anodyne language of the subsequent treasurers’ meeting indicated an intent to hasten slowly.

“Reforms should be designed to not deter the continued take‑up of electric vehicles,” said the communiqué.

The insider translates that as meaning any concrete proposal is a fair way off.

“To paraphrase Saint Augustine: they are saying, ‘Lord let me tax EVs, but not yet.’ ” 

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