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BITRE | Working paper 74

The major indirect source of road revenue, fuel excise, has relatively low collection

costs of around 2 per cent of the revenue generated. Unlike congestion charges

(in principle) indirect road-use charges do not provide the accurate price signals.

However, the efficiency gain from the more targeted charges needs to be offset

against the cost of implementing a scheme and the fact that the charges will

still only be a rough approximation (very rough in some cases) of the external

congestion cost.

The actual impact of revenue offsetting other motoring charges is an empirical question:

how much the reduction of other taxes and charges would lead to an increase in road

use during congested periods. First, the group that pays the congestion charge will

only be a very small subset of the group that receives the reduction in registration

fees. Second, unlike the congestion charge which is a variable charge imposed at

point of use, the registration charge is a fixed annual fee that does not vary with

vehicle kilometres driven. So while a reduction in registration fees may encourage a

higher level of vehicle ownership, it may not lead to an increase in vehicle kilometres

driven on the congestion road.

Similarly, the theoretical foundations of the objections to returning revenue to road

users are not strong. Implicit in the objections is the view that, even if the congestion

externality is internalised and price signals facing motorists accurately reflect

those facing the community, road use should still be discouraged. However, from a

community-welfare perspective, achieving an efficient level of congestion should be

the aim. Charges should be calibrated with this in mind. If reducing other motoring

taxes or charges increased the demand for road use then, as long as road users are

bearing the social cost of road use, the level of road use is efficient from a community

perspective. In other words, a general aim of reducing road use, with no level of use

too low, has no foundation in economics.

The crucial point to keep in mind when determining whether revenue raised from

congestion charging should be used to offset other taxes (for either economic or

political reasons) is that, while undercharging of road users is undesirable from the

community’s point of view, overcharging is equally undesirable. A failure to use some

part of the revenue to reduce other motoring taxes could lead to overcharging for

road use.

Offsetting other road-user charges

A congestion charge may be justified because it serves (in theory) to internalise the

major urban external cost of road use. However, the introduction of such a charging

system may require a review of existing road-use taxes and charges to ensure that

road users are not bearing an inefficiently high revenue raising burden. In many cases,

fixed charges (such as registration charges) have served as an imperfect method of

recouping variable costs of road use. If congestion charging assumes this role, then

there could be a strong economic case for reducing registration charges and other

fixed or variable charges. This would be in line with much of the reform literature,

which emphasises the shift from fixed costs of motoring to variable costs once the

technology makes it feasible to implement point-of-use charging.

Other taxes, apart from those associated with motoring, could also be offset. For

instance, property taxes could be reduced in the local area. This could result in a

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