Victoria's tax on electric vehicles and hybrids has been smacked down by the High Court, and it's a wonderful thing.
The tax was introduced in Victoria on July 1, 2021. It was a distance-based levy of 2.8 cents for every kilometre driven by an electric or hydrogen car, or 2.3 cents per kilometre for plug-in hybrid vehicles.
The logic behind the tax was simple.
Households with cars that have internal combustion engines pay about $1200 in fuel taxes each year. Those who own hybrids pay dramatically less. Those who own electric cars pay exactly nothing.
This discrepancy, some argued, was unfair to those who drive combustion engines, and it almost certainly favoured rich people since they are the ones who can afford EVs and hybrids.
It also meant a huge chunk of revenue was missing from government coffers - a gap which is widening as more and more people ditch their Territory for a Tesla.
Sounds logical. So, what was wrong with the tax?
Regardless of whether you're a lawyer, an economist or an environmentalist, the policy was a dud.
Lawyers - which, it turned out, included a majority of the seven justices who sit on the High Court - didn't like it because it fell foul of our constitution.
The constitution bans state governments from imposing duties - a power which resides solely with the Commonwealth government.
The Victorian government hoped that the tax in question wouldn't constitute a "duty" under existing case law. The High Court disagreed.
Economists didn't like the tax because it screwed up the one thing economists care more about that anything: incentives.
Suggesting it's unfair to tax combustion engines and not electric vehicles is backwards logic. It's a bit like introducing a penalty for driving sober because it's unfair that only drunk people face a penalty.
The reason we have the penalty in the first place is because we are actively trying to discourage behaviour. In economics jargon, we want people to internalise the negative externalities (i.e. the negative spillovers) they are imposing on society.
Having a higher tax on combustion engines compared to electric vehicles is sensible economics, and environmentalists love it, too.
Luckily, the scrapping of this tax by the High Court creates an opportunity to get some meaningful reform done in one of the most important and most neglected areas of policy: road pricing.
"Road pricing" might not sound sexy, but if you've recently been stuck in traffic or have bought something online, you definitely care about it.
MORE ADAM TRIGGS:
Our roads are a fundamental input into businesses-to-business transactions. With skyrocketing demand for online shopping, it's also a vital component for end-point sales to consumers, too.
Roads are so important to our economy that even a small change in productivity will have huge benefits that will cascade throughout industries and sectors.
But the sad reality is that Australia's approach to roads is unfair, inefficient, unsustainable and ad hoc.
It's unfair because the amount you pay for the roads through registration fees and other taxes tends to bear little resemblance to how much damage you actually caused to the roads.
It's inefficient because we often create no incentives to drive outside of peak hour times and fail to properly fund road investments.
It's unsustainable because - like in Victoria - we fail to properly distinguish between heavy polluters and zero-polluters.
And it's ad hoc because there is often a tenuous relationship between where we invest in our roads and where that investment is desperately needed - hence the constant traffic jams.
The economics is clear - we shouldn't be taxing road use, we should be taxing road damage.
Heavier trucks travelling longer on roads that aren't built for them tear them up. Trucks should pay more based on how heavy they are, what roads they drive on and how far they travel given that these determine how much damage they do.
Charging based on mass, distance and location has been on the agenda for over 30 years with little progress.
Similarly, cars choosing to drive during peak hours should pay more.
They clog the roads, harming others. Congestion charging would go close to funding road networks on its own.
The money raised should be directly linked to road funding and, to minimise the costs to the public, inefficient taxes like registration fees should be reduced.
All of this is possible thanks to two things.
The first is technology. Earth observation data from satellites and remote sensing and tracking technologies mean that these pricing models are no longer science fiction. In fact, they are already being used in many big cities around the world.
The second thing that makes this possible is the High Court. The High Court has called into question whether states have jurisdiction to impose these sorts of taxes at all, handing responsibility to the federal government. It means that cross-jurisdictional cooperation is no longer desirable, it's essential.
There's an old saying that if you don't know where you're going, any road will get you there. Well, now is the time for the federal government to set a course.
Adam Triggs is a partner at the economics advisory firm, Mandala, a visiting fellow at the ANU Crawford School and a non-resident fellow at the Brookings Institution.
Adam Triggs is a partner at the economics advisory firm, Mandala, a visiting fellow at the ANU Crawford School and a non-resident fellow at the Brookings Institution.
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