Taxes on vehicles and motor fuel play important roles both as sources of tax revenue and as policy instruments. First, fuel and vehicle taxes are often attractive fiscal instruments due to the comparatively low price elasticity of both car use and ownership. Second, the externalities of motorized traffic motivate pigouvian taxes on car use, such as carbon taxes and congestion charges. While taxes on car ownership and purchases are usually purely fiscal instruments, they are also increasingly motivated with climate policy arguments, for example subsidies for alternative-fuel cars.
The objective of the project was to analyse distributional effects of four car-related tax instruments: an increase of the fuel tax, a new kilometre tax, an increased CO2-differentiated vehicle ownership tax, and a CO2-differentiated purchase tax on new cars. Distributional effects are analysed with respect to income, lifecycle category and several spatial dimensions.
Taxes on cars and fuel are important both as fiscal and policy instruments. However, their distributional effects are often viewed as constraints on their design. There are widespread concerns that taxes on cars and fuel may have unwanted distributional effects, such as being regressive or hurting remote or rural areas more than urban areas. We analyse four tax instruments: an increase in fuel tax, a new kilometre tax, an increased CO2-differentiated vehicle tax, and a new CO2-differentiated purchase tax on new cars. The analysis is based on Swedish administrative registers containing all private cars in Sweden 2011.
Our results show that all analysed tax instruments are progressive over most of the income distribution. If the lowest and highest income outliers are included, they are just barely regressive. However, there is considerable variation within income groups and types of location (large cities, small cities, rural areas). In rural areas and in low income groups, the share of individuals who suffer substantial welfare losses is much higher than in large cities and high income groups. This may explain the common assertion that car taxes hurt rural people and the poor disproportionately: even if car taxes are progressive on average, the share who suffer substantial welfare losses are much higher in lower income groups and rural areas.
If the tax instruments are meant solely as corrective taxes, we argue that distributional concerns are actually not very relevant (except for considering transition costs when people adapt to changes in transport costs), since prices are (for good reasons) usually independent of income; problems with inequitable income and wealth distributions are normally handled by tax and welfare systems.
If the purpose is fiscal, however, distributional concerns are very relevant: it is difficult to see why poor or rural people should contribute more than proportionately to public tax revenues. In reality, fuel and vehicle taxes usually have both fiscal and corrective purposes, and figuring out the relative importance of these purposes may be nearly impossible; at least, different analysts can apparently reach different conclusions regarding to what extent current taxes can be motivated by “corrective taxation” arguments.