Traffic congestion will continue until we're game to tax it

The governments of NSW and Victoria lost zero time in rejecting the Grattan Institute’s proposal that all state governments introduce “congestion charging” in their capital cities. But don’t imagine this unpopular idea will go away. It will keep coming back until we buy it.

Australians and their political leaders have a record of trembling on the brink for decades before belatedly accepting the inevitability of upgrades to the tax system. Take value-added tax.

A full quarter century passed between the first official report recommending a VAT – which the Whitlam government rejected at the same time it made the report public - and its introduction by John Howard in 2000, rebadged as the more euphemistic goods and services tax.

Economists had lots of fancy economic-efficiency arguments for changing to a broad-based, single-rate tax on consumer spending but, in the end, it was quite pragmatic, revenue-protecting arguments that won the day.

The High Court had ruled various state government indirect taxes to be unconstitutional, and the growth in collections from the federal government’s ramshackle wholesale sales tax was falling further and further behind the growth of the economy, as more of every consumer dollar was being spent on (untaxed) services rather than goods.

An eventual move to charging motorists directly for using the roads could also be prompted by the declining effectiveness of the present tax system. As ever more of our car fleet moves from petrol-powered to electricity-powered, receipts from the nation’s main tax on motoring – the federal excise on petroleum – will wither away.

But that’s not an argument used in the Grattan Institute’s report – written by Marion Terrill – advocating a move to congestion charging. Indeed, Terrill makes it clear she’s not talking about a general road user charge – that is, charging that covers the cost of building new roads and maybe also the costs of wear and tear to roads, accidents and so forth. (Even though such a general charge for road use may well be what we end up with.)

No, Terrill is only on about charges designed to reduce excessive congestion.

So why might we get charges directed solely at reducing congestion? Because all of us hate it so much and because, even if it doesn’t increase in coming years as cities get ever bigger, you can be sure we’ll all believe it’s got a lot worse.

And, finally, because congestion charging is the most certain – and the cheapest – way to actually reduce congestion, not just promise to.

State politicians have gone for decades claiming to be reducing congestion by spending billions on new freeways (and a lot fewer billions on expanding public transport), but it hasn’t happened.

Why not? Partly because our cities keep getting bigger, but mainly because, in Terrill’s words, “most city-dwellers find car travel more appealing and convenient than other means of travel”.

Initially, a new freeway is much faster than the roads it replaces, but that just attracts more people who’d prefer to travel by car. They keep flooding in until the congestion increases the delay to the point where it’s about as bad as it was before.

By contrast, we know that congestion charging really works. You’d still have to build more freeways and railways as the city grew, but many fewer.

Terrill argues that congestion charges could be introduced in three stages. First is “cordon charging” where drivers pay to cross a boundary into a designated zone, such as a CBD. Next “corridor charging,” where drivers pay to drive along an urban freeway or arterial road. Then network-wide, distance-based charging, where drivers pay to drive within a designated network or area, on a per-kilometre basis.

She says there are three reasons why now’s the time to get started. First, many people say that congestion charging couldn’t be introduced without a big improvement in public transport. Well, that’s just what we’re getting.

In recent elections, the winning party promised spending on public transport of $72 billion in Victoria, $42 billion in NSW and $13 billion federally.

Specifically, Melbourne is getting the Suburban Rail Loop and the Airport Rail Link. Sydney’s getting Metro West, Metro City and rail to Western Sydney Airport.

Second, the technology for congestion charging is getting cheaper and better all the time. Third, there’s now enough global experience - not just Singapore, London and Stockholm, but also Malta, Gothenburg and Milan, with Jakarta and New York on the way - to show that congestion charging works and that, despite initial opposition, is soon accepted as a big improvement.

Terrill says that, in Sydney’s morning peak, for example, up to 21 per cent of trips are for “socialising, recreation or shopping”. A congestion charge wouldn’t raise much revenue. It wouldn’t have to be high to deter enough people to reduce road use in key parts of the city during peak hours. And remember, such charges are designed to be avoided.

It’s true that motorists with lots of money could easily afford to pay the charge, whereas people on modest incomes couldn’t. But the claim that a charge would be unfair is exaggerated.

If the charge was imposed on cars entering the CBD, only 3 per cent of Melbourne households would pay it on a typical day. And not many of those would be poor. The median income of full-time workers driving to work in the CBD is $1980 a week in Melbourne (and $2450 a week in Sydney). Sound poor to you?

But if you’re still not convinced by Terrill’s arguments, here’s a more radical proposal. The economists’ Coase Theorem implies it shouldn’t matter whether you impose the charge on workers required to start work in the CBD during peak hour or on their employer doing the requiring.

After all, workers have little or no ability to change the time they must start or leave work, but their bosses do.

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Brave minister wants us to think about road user charges

If you're searching for a politician with courage, smarts and foresight, meet Paul Fletcher, Malcolm Turnbull's Urban Infrastructure Minister. He's so unlike your typical gutless pollie he reminds me of Paul Keating.

Fletcher gave a speech last month in which he raised issues from which most politicians would run a kilometre. He thinks heavy vehicles – trucks weighing more than 4.5 tonnes – should pay road-use charges that more accurately reflect the huge damage they do to our roads. That's brave.

But he thinks ordinary drivers should also be paying a road-user charge. That's not brave, it's outrageous.

Fletcher, however, has his own arguments to persuade us it's really quite sensible.

He says he's worried about how the federal government will be able to maintain its contribution to building and maintaining the nation's roads when the move to more efficient cars causes its revenue from fuel excise to fall away.

He reminds us that, whatever the price of petrol, it's almost 40¢ a litre higher than it needs to be, thanks to the federal government's fuel excise.

This means, of course, that how much tax you pay is partly a function of your vehicle's fuel efficiency. So someone driving a 12-year-old Holden Commodore pays 4.5¢ a kilometre, whereas someone in a six-year-old Renault Megane pays 3.5¢.

But get this: someone with a late-model Toyota Prius hybrid pays just 1.5¢ a kilometre and someone who's paid $125,000 for one of the new all-electric Teslas pays exactly … nothing.

See the problem? As we all do the right thing and move to more environmentally friendly driving, the government's excise revenue will be going down, not up.

Today, electric vehicles make up only about half a per cent of our vehicles, but projections put that up to 30 per cent within 20 years.

Then how will we pay for our roads?

Fletcher's answer is that we need to move to funding them more directly by a user charge – say, one based on the number of kilometres you drive.

He stresses this isn't an argument for motorists to pay more. They already pay a lot more than federal excise to drive their cars, including state rego fees and stamp duty.

Indeed, if you pull together all the taxes and charges we pay that are in any way associated with cars and trucks – including under GST and the fringe benefits tax – you can get to a total of about $30 billion a year, of which fuel excise accounts for only about a third.

This compares with total spending on building, maintaining and operating roads – federal, state and local – of about $25 billion a year.

So Fletcher's idea is to rationalise this mish-mash of taxes and charges and replace them with a road-user charge that would be much more visible.

But this is where he reminds me of Keating, who often used wrong but more appealing arguments to persuade us to accept needed but unpleasant measures.

Fletcher has picked up a long-standing piece of motoring organisation propaganda – that every cent of tax paid by motorists should go back into roads – and given it the status of a self-evident fiscal truth.

The truth is there's never been any link – legal or informal – between the taxes and charges on petrol and cars, and the amount governments spend on roads.

Nor should there be. Governments have to pay for 101 services we demand of them apart from roads. So they have to raise a lot of revenue, which they do by taxing a wide range of activities and things, not just one or two.

What they tax tends to be what we're used to them taxing, since we have such knee-jerk opposition to anything we can condemn as a "new tax".

The feds' spending on roads is equivalent to only about two-thirds of what they raise from fuel excise. So should excise receipts decline in the future, this will be a problem for the whole budget, not for road spending in particular.

Fletcher is right to think that user charges would be an improvement because their greater visibility would encourage us to be more economical in our use of roads.

That's particularly true of heavy vehicles, because it's they that do most of the damage to our roads. We don't want goods being moved interstate by road rather than rail because we're charging semi-trailers and B-doubles only a fraction of the cost of the damage they do.

But if the rest of us had to pay a user charge whose purpose was to cover all the remaining costs of roads and to replace all the other taxes and charges, that might be neater and more visible, but it would be a lost opportunity to help us reduce a different, fast-growing cost for city motorists: congestion.

The cost of congestion is the cost I impose on other motorists by driving my car at the same time they do.

And the way to reduce it – as well as the spending needed for new motorways and even public transport – is to replace some of the tax we pay with a user charge that varies by location, time of day and distance travelled.

As Fletcher says, there's a lot more thinking to be done about how we pay for roads.

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