Budget Statement 2010 (P.179/2009): comments.

STATES OF JERSEY

BUDGET STATEMENT 2010 (P.179/2009): COMMENTS

Presented to the States on 7th December 2009 by the Environment Scrutiny Panel

STATES GREFFE

2009   Price code: B  P.179 Com.(2)

COMMENTS

Background

The  Panel's  involvement  with  these  environmental  tax  proposals  stems  from  the Treasury and Resources Green Paper, States environmental initiatives – what should we do and how should we pay for it?' earlier this year. Members had a number of reservations about the proposals outlined in the consultation. Some of the issues were addressed during a constructive dialogue with the Minister for Treasury and Resources at a public hearing on 11th November; however the Panel still has a number of concerns.

Members were conscious that available evidence pointed towards the environmental tax proposals being primarily a revenue-raising exercise. The Minister confirmed at the hearing that his proposals were a direct response to the States' decision to spend £2 million on environmental matters.

Panel concerns

The Panel has already raised concerns about the possible problems associated with this approach to funding environmental initiatives in its comment on Senator Le Main's amendment. It sees a real danger of an ad hoc' approach to environmental funding developing, which could have serious consequences both for the environment and the taxpayer. The primary concerns are –

1. that competing demands for funding under an environmental' banner could rapidly become unmanageable if departments are allowed simply to bid for new funding for projects without having to meet any specific environmental criteria;
2. that if future policy were to determine that environmental initiatives should rely more heavily on environmental taxation for their funding, the demand for funding could drive taxes to unacceptable levels; alternatively a shortage of funds could tend to stifle worthwhile environmental initiatives before they get off the ground.

In respect of point 1, the Panel sees clear warning signs that these difficulties are just around the corner. As an example, it is noted that all of the initiatives put forward by Transport  and  Technical  Services  for  environmental'  funding  this  year  were originally part of mainstream departmental planning; they appear to have dropped out of department budgets and been reinstated as environmental priorities to qualify for the new funding stream. Of these, some items (e.g. pedestrian safety improvements, real-time information bus signs) have only indirect direct links to the environment, through the revised Sustainable Transport initiative. This raises the question of what should be considered the core' business of the department, and what could reasonably be termed environmental.

Senator Le Main's amendment amply illustrates point 2. He suggests an annual tax that would raise substantially more than the £2 million proposed in the Minister's proposition, with a view to establishing a pot' of available funding which could be drawn on for a whole range of unspecified initiatives in addition to the Hoppa' bus service. None of these initiatives are costed, and the Panel notes that the Senator

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referred to the ability to increase the taxes at any time in future if more money was needed.

The Minister also indicated that higher taxes could be on the way, referring to the abolition  of  V.R.D.  (vehicle  registration  duty)  having  deprived  the  Treasury  of £5 million  worth  of  revenue,  which  might  have  otherwise  have  been  directed  to environmental spending. The Panel has some issues with this figure. States accounts appear to indicate that in 5 years of operation, VRD raised an average of just under £3.3 million per annum, even allowing for a windfall in 2007 when an adjustment to the way figures were calculated raised the sum by £1 million to £5.8 million. Clearly, 2007 was a very good year for VRD, but the 2008 budget made allowance for a fall in revenue of just £4 million to account for the loss of VRD income; one might therefore ask whether the expectations for new taxes are rather excessive, especially in light of the global economic downturn.

Need for full debate on environmental funding

The Panel believes that there is confusion about the direction in which we are heading with funding for environmental matters. It was uncomfortable with headline questions in the Treasury's Green Paper which seemed to suggest that environmental initiatives may only be supported in future if additional, dedicated taxes were raised to pay for them. Panel members are concerned at the lack of clarity in this area. They strongly believe  that  environmental  initiatives  should  not  have  to  rely  on  dedicated environmental taxation for their funding. Given the apparent ease (see above) with which existing departmental work programmes can be shifted from one budget to another, the Panel notes that a much bigger proportion of the existing work of both Transport  and Technical Services  and  the  Planning  and  Environment  Department could easily be described as environmental'. With this in mind it believes that there is an urgent need for informed debate to determine a transparent policy on environmental funding  before  we  go  any  further  down  this  road.  Members  consider  that  the Minister's forthcoming review of fiscal policy presents a significant opportunity to investigate the possible benefits of structured environmental tax reform, as opposed to the present situation where we appear to be operating increasingly on a pay as you go' basis.

Environment Tax, or Emission Tax?

In discussion with the Panel, the Minister agreed that his proposals did not represent pure environmental taxes, but were a step in that direction. An important element of environmental taxation is the aim of changing behaviour away from activities which harm the environment, towards more acceptable or beneficial outcomes. The Panel has concerns about a negative perception which could arise from directly linking taxation (not generally a welcome concept) with the environment, which needs the support of the public if it is to be preserved and indeed enhanced. Members were therefore pleased that the Minister agreed to re-label the proposals as emission or pollution taxes, rather than environmental taxes, to send a clearer signal to the public about the reason for the tax and the behaviour it seeks to change.

Specific Tax proposals – Fuel Duty versus Vehicle Emission Duty

The Panel believes that the proposed increase in fuel duty could be considered as a reasonable user pays' measure to provide compensation for potential environmental damage caused by vehicle emissions, but only for as long as the additional revenue

raised is applied strictly to specific funding of environmental initiatives. The majority of responses to both the 2007 and 2009 environmental tax consultations showed that respondents were in favour of increased fuel duty, rather than new taxes, as the fairest way of raising revenue for environmental purposes. As an increase in prices might encourage motorists to use less fuel, it could also be considered to have a beneficial impact on behaviour, albeit perhaps a marginal one.

However, the Minister plans to use the increased fuel duty only as a stop-gap until next September, at which point it is intended –

• to continue raising additional revenue from increased fuel duties, but divert this back into general reserves;
• to introduce Vehicle Emissions Duty (VED) to replace the revenue lost' to environmental  causes  from  diverting  the  increased  fuel  duty  back  into reserves.

This approach appears to expose motorists to an unacceptable duplication of taxes. Unless the interim fuel duty increase is reversed at the point when VED is introduced, taxpayers will rightly see its continuation as an additional stealth tax, particularly as there will no longer be any guarantee as to what the additional funds would be spent on.

The  Minister explained that  his proposals are  partly  intended to  encourage  those thinking of buying a new car to consider the environmental impact of their choice of vehicle. The  Panel  agrees  that  such  a  mechanism  is  justifiable  on  environmental grounds, and will return to this point in more detail below.

The proposals in more detail

The proposed VED bands do not follow the U.K. model for Vehicle Excise Duty, (which has a larger number of bands, with a narrower spread between each, albeit not all charged at different rates at present). The Jersey proposals are of course very different to the U.K., being intended (in this original proposition at least) as a one-off tax on first purchase or importation. In the U.K. the duty is levied on an annual basis, although it should be noted that when the equivalent Jersey annual road tax was dropped  many  years  ago,  fuel  duty  was  increased  to  compensate  for  the  loss  of revenue; so this is effectively still being paid by motorists.

Comparison – Jersey proposals with U.K. Vehicle Excise Duty

Jersey  U.K.

£  £

Up to 100g./km. 101 – 120g.

121 – 150g. 151 – 165g.

166 – 185g. 186 – 225g.

226 – 250g. 251 – 300g. More than 300g.

0  0 0  35

40  120 – 125 120  150 180  175 300  215 600  405 1,000  405 1,250  405

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P.179/2009 Com.(2)

It  will  be  seen  that  the Jersey  proposals  favour  a  wider  range  of  cars  with  low emissions  before  a  tax is  applied,  but  rapidly  overtake  the  U.K.  once  mid-range vehicles and above are considered, rising to a level 3 times as high as the U.K. for cars with the highest emissions. The differences may be explained by the fact that this is meant as a one-off payment. However, the Panel still finds the scale of charges hard to justify on environmental grounds.

Examples (based on a theoretical annual mileage of 6,000) –

• A – a car producing 120g./km. would emit 1.15 tonnes of CO2 and be exempt Carbon cost – FREE
• B – a car producing 150g./km. would emit 1.44 tonnes of CO2 and be taxed £40 Carbon cost – £27 per tonne
• C – a car producing 225g./km. would emit 2.16 tonnes of CO2 and be taxed £300 Carbon cost – £138 per tonne
• D – a car producing 250g./km. would emit 2.4 tonnes of CO2 and be taxed £600 Carbon cost – £250 per tonne
• E – a car producing 300g./km. would emit 2.88 tonnes of CO2 and be taxed £1,000 Carbon cost – £347 per tonne.

While there is clearly a good argument for an incentive to encourage people to select a vehicle with lower emissions, the proposed charges seem somewhat disproportionate. The carbon emission figures demonstrate clearly that even the smallest and most environmentally friendly cars have a significant carbon footprint; to exempt them from paying any tax at all therefore seems illogical. (The same can be said of hybrid, battery-powered and other alternative-fuelled vehicles, which still have significant manufacturing  and  disposal  impacts.)  While  accepting  that  we  need  to  persuade people into making greener choices, it must be recognised that any car is bad for the environment. If the aim is to reduce the harm, it is suggested that a more logical approach would be to increase the number of steps in the scale and include all new cars (no category of vehicles to be exempt). A modified scale with more bands, placed closer together between the lower end and the mid-range (as in the U.K. model) with smaller increments of tax between each band would enable the tax to be applied more equitably; it can be seen from the above that a relatively small difference in emissions between cars C and D (+25g./km., or 0.24 tonnes of CO2 per year) would attract £300 of additional tax. Realistically, that difference in CO2 may be no more than car A' might produce through sitting in rush-hour traffic every day. More consideration of proportionality with the actual carbon cost would also seem appropriate, although relatively higher levels of tax for those who choose to purchase the most polluting vehicles might still be justified.

The Panel notes that there is no specific consideration in this proposition of the case of larger commercial vehicles. It feels that there may be an argument on environmental grounds for reviewing the tax contribution made by operators of heavy goods and other large commercial vehicles, perhaps based on specific emission tests.

Summary

As it stands, the proposed tax would be rather better at raising cash than saving the planet: the Panel would prefer to see a tax that did both. Panel members are concerned that the steadily growing tax burden will place an increasing number of families in a position where they are unable to meet everyday living costs. However, if the House agrees that more taxes must be raised to pay for environmental measures, the Panel believes that –

• an  informed  debate  is  needed  on  the  principles  to  be  followed  regarding funding  for  environmental  initiatives,  to  determine  whether  hypothecated taxes, mainstream funding or a combination of both is the best way forward (this may reasonably be expected to follow the Minister's review of fiscal policy);
• urgent  steps  are  needed  to  establish  a  clear  agenda  and  priorities  for environmental spending;
• a mechanism is needed to ensure that in future, all departmental spending on projects  which  draw  from  an  environmental  budget  complies  with  the priorities defined in the above agenda;
• an increase in fuel duty as an interim measure is an appropriate source of environmental funding; the increase should be reversed if VED is introduced, unless  it  is  agreed  that  sums  raised  will  continue  to  be  applied  only  to environmental initiatives;
• consideration  should  be  given  to  amending  the  VED  scales  as  discussed above, prior to introduction, to include all cars and take more account of actual carbon cost;
• the  potential  for  wider  environmental  tax  reform  should  be  thoroughly investigated as part of the Minister's forthcoming review of fiscal policy.

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