Keen Eyes for Economic Trends: Vehicle Tax Focus Shifting from Ownership to Use

SATO Motohiro
Faculty Fellow, RIETI

The government is considering many proposals with the goal of taking "all possible measures to control the economic fluctuation caused by a last-minute rise in demand and a subsequent fall and smooth out the demand, thereby stabilizing economic activities" (Basic Policy on Economic and Fiscal Management and Reform 2018) when the consumption tax rate increases in October next year. One possibility is to reduce vehicle taxes, including automobile tax.

It has been decided that the automobile acquisition tax will be abolished when the consumption tax hike occurs, and a new environmental performance discount, which does not benefit cars that do not fulfill fuel economy standards, will be applied at the purchase stage (whereas electric vehicles incur no tax). The automobile industry and others have persistently called for a reduction in automobile tax as the consumption tax hike burden would otherwise be too great.

However, because automobile tax, which is a local tax, earns as much as 1.5 trillion yen per annum, a reduction would impact local finances. With that in mind, the government will essentially increase the motor vehicle tonnage tax, which is a national tax, when eco-car discounts end their implementation period in March next year, and it is considering proposals for securing more local revenue such as by raising the amount allocated to local governments (currently 40%).

In Japan, while the automobile acquisition tax applies only at the stage of purchasing an automobile, the automobile tax, the light automobile tax, and the automobile tonnage tax apply to vehicle ownership. Of these taxes, automobile tax is calculated based on total emissions, and amounts to a figure ranging from 29,500 yen to 111,000 yen per passenger car for private use, depending on the total volume of emissions. On the other hand, the light vehicle tax is a set amount of 10,800 yen per passenger car for private use.

The total emissions referred to above are calculated according to the size of the engine. The automobile tax was introduced in 1940, and at the time, tax was assessed based on what was visible. However, if the environmental impact of automobiles and the benefit gained from using the roads are to be taxed, there should be another basis for tax assessment, such as volume of carbon dioxide (CO2) emissions.

Furthermore, until now, light automobiles have been given special treatment when it comes to tax. Light automobiles have been referred to as the transport of the masses, but the attitude that so-called ordinary automobiles are a luxury even when they are not high-end vehicles, is becoming less prevalent. The idea of taxing according to engine size and the distinction between ordinary automobiles and light automobiles are both out of touch with modern society and current policy requirements.

So, what should we do? I think we should shift away from taxation based on ownership and towards taxation based on use. Japan's taxation of ownership is considered to be high in comparison to Europe, but taxation of usage is low. This is due to the increase in fuel tax in Europe, which was implemented as part of European environmental policy. If the premise is accepted that "vehicle tax = environmental measure," then there is also scope to increase both the gasoline tax and the diesel oil delivery tax in Japan.


On the other hand, from the perspective of "vehicle tax = the cost of using the roads," it would be a good idea to collect road usage fees. Until now, it has been considered difficult from a technical perspective to collect fees for use of ordinary roads. However, this difficulty is gradually being overcome through the proliferation of information and communication technology, etc. In London, UK, there are cameras placed around the perimeter of the area of the city center that incurs an entry fee. The cameras record the number plates of vehicles that enter the area, and fees are charged accordingly.

The government and the ruling party say they will drastically revise the automotive tax regime from FY2020, based on new economic conditions such as the proliferation of electric vehicles and car sharing. A paradigm shift is needed in relation to vehicle tax.

>> Original text in Japanese

* Translated by RIETI.

December 15, 2018 Weekly Toyo Keizai

March 6, 2019

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