Lower taxes for everyone, but there’s still more that can be done

With the suspension of the road tax on the first car (or motorbike), Giorgia Meloni has found her way out of the excise duty quagmire. Road tax is a levy that is hardly consistent with an environmentally-oriented motoring tax system; therefore, its abolition makes sense, even if the way the government has devised it presents problems. This does not necessarily mean it is the best possible use of resources (€2.3 billion): it probably isn’t. But it does have the merit of bringing to the fore a genuinely political issue that both the majority and the opposition should take seriously: what to tax and by how much; how to spend and where.

The first issue on which commentators have focused is the temporary nature of the relief. It is a real limitation, but it must be put into the right perspective. The cut has been introduced as part of the emergency measures to tackle the energy crisis.

At the same time, the government has announced a gradual return to the standard level of excise duty on diesel. In this respect, its temporary nature is a defining feature. Meloni, however, has gone a step further, announcing that the reform will become permanent under the Budget Bill. It is on this basis that it deserves to be assessed – assuming, that is, that Minister Giancarlo Giorgetti manages to secure the necessary resources.

Let’s start from the beginning. Road tax is a levy on the ownership of a motor vehicle – which allows Meloni to link it to the debate on wealth tax. Like any tax, its primary function is to generate revenue. Over time, however, a second purpose has been added to its design: to steer consumer choices towards more sustainable vehicles. Cars, in fact, generate various negative externalities, linked in particular to climate-changing emissions and local pollutants. In this sense, the road tax has a Pigouvian slant: it is intended to correct a ‘market failure’. The amount payable increases with the vehicle’s power output, which can be regarded as an indirect measure of both fuel consumption and the owner’s ability to pay, whilst it decreases as the environmental class improves (with reductions or exemptions for hybrid or electric vehicles).

The problem is that this is a rather crude tool. The environmental externalities of a car depend primarily on its use, not simply on ownership. If the aim is to tax pollution, the most intuitive solution is to do so in relation to how much (and what type of) fuel the car consumes. Road tax does the opposite: it taxes ownership regardless of use.

The road tax could also play another role: correcting consumers’ ‘short-sightedness’. Those buying a car are very mindful of the immediate outlay, but may be less sensitive to the running costs they will face in the future. A road tax may therefore encourage people to choose more efficient vehicles. In practice, however, this cognitive bias has limited effects: several studies show that an increase in road tax contributes only marginally to improving the environmental performance of new registrations. And even if it did work, it has no effect on usage. This leads to a simple conclusion: for the same level of revenue, excise duties are better than road tax from an environmental perspective. The former tax fuel consumption and thus incorporate into the price a signal consistent with the relevant externalities; the latter is levied on ownership, regardless of how intensively the asset is used.

This point is particularly important because the entire discussion stems, in the immediate term, from the simultaneous decision to abandon the temporary reduction in excise duties. If the availability of petroleum products is lower than we would like and, consequently, filling up becomes more expensive, reducing excise duties dampens the price signal precisely when it would be most useful to let that signal guide consumption. Shifting the emergency measure from excise duties to road tax offers relief to motorists, whilst preserving the incentive to save.

If, however, we look beyond the emergency, the situation changes. Given its modest environmental benefit, the road tax entails questionable economic consequences. In particular, it places a greater burden on those who use their cars infrequently: two people with very different annual mileage may pay the same tax, even though one generates far greater fuel consumption and emissions than the other. Furthermore, the incentive system based on environmental class risks penalising those who cannot afford to replace their car. This argument is the mirror image of the one regarding the greater efficiency of excise duties. However, the government intervened last year precisely to adjust fuel taxation in an environmentally friendly manner, permanently aligning excise duties on diesel with those on petrol. The abolition of road tax appears – perhaps even beyond the government’s original intentions – to be the final step in that process, resulting in a more consistent system of car taxation.

The problem, if anything, lies in the specific approach chosen, which is open to two criticisms. The first concerns the distributional impact. As the tax relief applies only to vehicles with an engine power of less than 80 kW, it excludes numerous cars that are not luxury goods, as well as, of course, company fleets, which, however, benefit from other concessions. In part, this stems from the desire to design a progressive measure, in line with the broader tax reform guidelines implemented by the Meloni government and in contrast to the temporary cut in excise duties, which was a blanket measure.

However, the government could have achieved the same result by adjusting the value of the road tax rather than the group to which it applies. The tax currently has two rates: one for vehicles up to 100 kW and a higher one for those above that threshold, with values varying according to pollution class, as well as a ‘super tax’ for vehicles over 185 kW. While maintaining the same level of revenue, the first rate could have been reduced. In this way, the benefit would have applied to everyone, but would have been proportionally greater for less powerful cars and, presumably, for taxpayers with lower incomes. It would also have avoided the ‘threshold effect’, whereby similar vehicles can find themselves in different tax brackets.

In the long term, the measure could then be extended to road tax on company vehicles, offsetting the loss of revenue by reducing existing tax relief schemes which, incidentally, are classified as environmentally harmful subsidies (EHS). Here too, the principle should be simple: if a form of taxation has a weak environmental justification and is accompanied by tax reliefs that create distorted incentives, it makes more sense to reduce the former and review the latter, rather than retaining both.

The second criticism concerns complexity. It is understandable that Palazzo Chigi would prefer to abolish a tax entirely for a partial (albeit large) group of vehicle owners and taxpayers, rather than reduce it for the benefit of everyone. But this raises the question of whether, once the political value of the abolition has been recognised, it might not be appropriate to aim higher. To limit the financial impact, the government has restricted the benefit to just one vehicle per owner. As Marco Cantamessa noted on X, abolishing a tax makes sense not only in terms of reducing what citizens have to pay, but also in terms of simplifying their lives and cutting the costs associated with collection, assessment and recovery. If the exemption depends not only on the vehicle but also on the taxpayer, the opposite occurs: the tax becomes more complicated just as its revenue is reduced. A fall in revenue may therefore be accompanied by an increase in administrative costs, and consequently a greater proportion of these costs in the total cost of the tax.

For this reason too, if the abolition of road tax has political significance and is not merely a short-term ploy, it would be advisable to consider doing away with it entirely. Complete abolition would cost around 7.5 billion euros; the portion relating to company cars could be financed by making existing tax relief schemes less generous. For the remainder, alternative sources of revenue or spending cuts must be identified. If the government’s aim is to abolish a tax, to send a tangible – albeit belated – signal of its economic policy direction, then the funding can only come from a reduction in spending.

However, the stamp duty has a further distinctive feature: the revenue it generates constitutes a source of income for the regions. It therefore offers an opportunity to address the broader issue of fiscal responsibility within the framework of differentiated autonomy. If a region has a certain amount of resources available to fund public services, it should be free to decide whether to maintain a certain level of taxation or reduce it, but it should also bear the financial and political consequences of that choice. For this reason, as a replacement for the motor vehicle tax, the government could allocate to the regions an equivalent share of the revenue from existing taxes, such as VAT or excise duties, leaving them some discretion to adjust the amount, either upwards or downwards. This would not involve shifting the burden of automatically finding new revenue onto the regions, but rather granting them greater flexibility over the available resources.

In practical terms, the government could reduce central government spending by 7.5 billion euros and channel an equivalent amount of existing tax revenue to the regions. In this way, the abolition of road tax would become more than just a tax cut decided in Rome: it would also be a concrete example of decentralised fiscal responsibility.

In a tax system as confusing as Italy’s, it is debatable whether abolishing road tax is really a priority. But the words of Nobel Prize-winning economist Milton Friedman ring true: “I am in favour of cutting taxes under any circumstances and on any pretext, for any reason, whenever possible”. Meloni and Giorgetti have the opportunity to adopt this same stance not just in words, but in deeds.