JC Finance, Public Expenditure and Reform
Correspondence Item 2014/850
Blackwater Motors and Audi Cork
Submission To Joint Committee On Finance, Public Expenditure
and Reform On Vehicle Registration Tax and Motor Tax Reform
June 2014
Index
Page
Introduction
2
Previous Submissions On VRT Reform
3
Common Myths About The Motor Business
5
Car Dealerships and Their Current Financial Position
9
Why VRT is an Inefficient Method Of Taxation
10
Social Regressive Nature of High Car Taxes
11
Car Price Elasticity
12
Reform The Existing Road Tax System
13
How to Reform VRT
15
Conclusions
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Blackwater Motors and Audi Cork
Submission On VRT and Road Tax Reform June 2014
Introduction
This submission is made by Denis Murphy, Managing Director of Blackwater Motors
and Audi Cork, retail car dealerships based in Cork. Blackwater Motors operate three
Volkswagen dealerships in Cork City, Fermoy and Skibbereen, Co. Cork while Audi
Cork operates one Audi dealership in Cork City. The combined operations of all four
dealerships employ over 140 people.
We read recently the desire of the chairman of the joint committee on Finance, Deputy
Ciaran Lynch, for businesses and other interested parties to make budget and taxation
submissions direct to the committee in advance of October’s budget. It’s encouraging to
know that your committee is looking for budget submissions. We are encouraged to know
that public representatives who are not all government deputies and who do not have any
false loyalty to the Department Of Finance will consider budget submissions. I don’t
know if this has ever happened in previous years but shouldn’t it be common practice that
submissions are made through your committee and not direct to either the Minister For
Finance or direct to the Department Of Finance. This would guarantee transparency but
as we know transparency is very low on the Government’s list of priorities.
We are making this submission on the reform of VRT and annual motor tax. The average
family car in Ireland average price €22,000 is taxed over €7,000 through the mixture of
Vat and VRT. The main argument in this submission is that taxation on cars is
excessively high which is havening a significantly negative effect on both the new and
used car market and is a socially regressive an inefficient method of taxation. VRT has
more of an impact on people on lower incomes as VRT is built into the value of car for
its useful life. It’s a mistake to call it a registration tax as residual VRT exists on every
car in Ireland expressed at the same % rate as its expressed on a new car. Everyone who
own a car in Ireland (1.9m people) paid VRT and most are unaware that they pay this tax.
The general belief is that it’s the person who buys the car first pays but this is not the
reality.
We can reduce VRT on both new and used car, reduce annual road tax while at the same
time create more jobs and generate more taxation revenue. This can be accomplished by
stimulating demand through reduced taxation and the excess demand over and above
current demand will more than compensate from the loss of revenue from the reduction in
VRT . This has been proven by eminent economists in UCC. This idea is not fantasy and
it doesn’t take a rocket scientist to see how this reform will benefit the economy as a
whole. This is not a new idea but one which our government seem very afraid to take.
The Government are prepared to take the opposite decision increase taxation and reduce
revenue without any fear even though this strategy has proven over and over again to be
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Submission On VRT and Road Tax Reform June 2014
riskier than the reduced taxation option. The Department of Finance’s mantra appears to
be to increase taxes for the sake of increasing rates of tax without any sophisticated and
comprehensive analysis of the effects of increasing these rates of tax. We have already
seen this government increase Vat and VRT without increasing overall tax revenues from
these sources of taxation. The Department Of Finance does not appear to have analysed
what effect reducing taxation rates would have on the overall income generated from
these sources of taxation. We hear minister after minister talking about stimulating
demand in the local economy while at the same time increasing the very taxes that
inevitably depress demand. It’s really depressing to hear these ministers talk one way and
act in the exact opposite way. It’s as if words are everything and actions mean nothing
except that in the world that we inhabit, actions mean more than words. It appears that
this practice of saying one thing and do the exact opposite is endemic within politics and
the administration of our state, most of the institutions of state are not fit for purpose
especially the Department Of Finance. The decades of weak and directionless leadership,
inability to make a decision, procrastination, protecting the status quo, protecting elites
within the public and private sector, protecting banks at the expense of every other
section of society, afraid of new ideas and more afraid of putting new ideas into practice
has lead the country to where it is today. Unfortunately the current government has done
everything within its power to maintain the status quo and keep repeating the tried and
failed policies of the part decades. We believe that the operation of VRT and the system
that supports it demonstrates in one small way the ineffective management of our
economy. Unfortunately for us all, this mismanagement is common in every single sector
of our economy and society in general and it’s time to change and maybe reform of VRT
and annual road tax represents a low risk opportunity to begin this change.
You have very recent direct examples of how tax reductions work to generate demand,
the car scrappage scheme in 2010 and 2011 and the reduction in the rate of Vat in the
tourism and hospitality sectors. These very recent examples prove the point that you can
reduce taxation while generating more taxation income while employing more people. It
could be that the governments fear is misplaced, you should consider reversing this high
taxation policy which depresses demand, VRT reform offers a means to achieve this.
We commissioned (as part of a previous submission) three Economists from University
College Cork, Mr. Robert Butler MEconSc, Mr. Seamus Coffey MEconSc and Dr.
Edward Shinnick to calculate the effects on the demand for new cars that the reform of
VRT will have on the market and the consequent effect on exchequer revenues. They
concluded that every 1% reduction in taxation will increase sales by 1.6% which is more
than enough to give us the flexibility to reform VRT and annual road tax.
Previous Submissions on VRT and Annual Road Tax Reform
This is the fourth submission we have made on reform of VRT, the first in 2009 to the
commission for taxation which agreed with our submission at that time that VRT should
be abolished, the second to the Department of Finance in 2009 following the collapse in
the new car market in that year and the third in 2012 prior to the increase in VRT in the
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2013 budget. We warned in our 2012 submission that any increase in VRT in the 2013
budget would decrease sales of new and used cars and would result in a loss to the
exchequer rather than the €50m, they hoped to raise from the increase. We also warned
that the increase would cost jobs and unfortunately both predictions came through with a
reduction in the new car market in 2013 and more of our staff lost their jobs. (We lost
€105m instead of raising an additional €50m, a variation of €155m on what the
Department of Finance predicted, (usual accuracy from the Department Of Finance). The
government pressed ahead with its goal of increasing taxes irrespective of the
consequences. We have had six years of tax increases and cuts with no appreciable
benefit to the domestic economy in which 100% of our revenue is earned. We believe
that the time has come to take a new approach to the needs of the country to increase total
income rather than increasing rates of taxation. VRT reform represents an opportunity to
change the tried and failed methods of raising income through increased taxation.
Since the latest increase in VAT and VRT in 2012 and 2013, new car registrations have
fallen by a combined 17% a loss of 15,000 units which in turn translates into a loss of
€105m in total tax revenue over what the exchequer got from VAT and VRT in 2011. We
wouldn’t have to have “medical car probity” or citizens with disabled children being
forced onto the streets if this government didn’t increase VAT and VRT in 2012. If it
had made the €1,250 VRT reduction which existed during the scrappage scheme
permanent, it would have generated an additional €105m. We as a nation could have done
a lot with €105m especially in these troubled times. Instead, they reverted to type mainly
spurred on by the Department of Finance and increased taxes for the sake of increasing
taxes. We spent much time and expense in making our third submission and we requested
an opportunity to make our point direct to the Department Of Finance, we never even got
the courtesy of even a reply to our submission. When what we predicted would happen
actually happened, we get silence from the minister and the department, no accountability
for a bad decision.
We did make representations to all Cork politicians in the Dail and true to form, it was
the opposition deputies who replied while the government politicians made the weak and
impotent argument that the cabinet makes the decision and that they cannot exert any
influence on these decisions. The last time I looked we lived in a democracy and the
cabinet was responsible to the Dail. The whip system prevents cabinet accountability and
if the cabinet was held responsible in the Dail, maybe we would not be where we are
today, we will never know. It’s not as if we have the most brilliant and articulate beings
within our cabinet that their decisions are infallible and must be obeyed. What is wrong
with a representative of any political party disagreeing with the executive and arguing
this difference in the Dail and try to get the executive to change or amend its decision.
Isn’t this what you were elected to do. VRT reform could begin a general process of
badly needed reform of the administration of our state including the Dail.
We believe that the case for reform is sound and will benefit the industry, the consumer,
employment numbers and exchequer revenues. The European Commission, The
Commission for Taxation, Consumer Groups and the Industry has called for the abolition
of VRT. The timing for abolition could not be better as the financial consequences from
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Submission On VRT and Road Tax Reform June 2014
the abolition of VRT can be controlled without the catastrophic consequences suffered by
the industry from the previous reform of VRT in July 2008. The time has come and it’s
now time for the Dail, through your committee to act decisively and reform VRT.
We are not members of the SIMI so this submission is a direct submission on the specific
effects of VRT in the car retail sector and not a combined industry submission.
Common Myths About The Motor Business Which Must Be Dispelled
Before Any Reasoned Decision Can Be made on VRT Reform.
Further reform of VRT cannot be considered without first evaluating the results of the
previous reform of VRT rates and bands implemented on 1st July 2008. This reform
destroyed a once profitable industry overnight and contributed to an unprecedented
collapse in the new car market in 2009 which has continued ever since. It made the
coming recession significantly worse for car dealers, many of whom unfortunately didn’t
survive.
There has been many misleading commentary on the causes of this collapse but the only
authoritative analysis is the independent report prepared by the eminent Peter Bacon on
the causes of the collapse. This report is the definitive analysis of what happened post
July 2008. We can forward a copy of this report if you have an interest in reading it. The
need for VRT reform which is needed now is as a direct result of bad decision making,
really bad or no research and bad timing in 2008. We have to learn from the mistakes
made in 2008, we cannot repeat the mistakes made in 2008, if we do then the
consequences for car retailers will be catastrophic.
Unfortunately and sadly, there was much spin and misinformation about the collapse in
the new car market in 2009 and the direct effect that the badly researched and mistimed
VRT reform had on the industry and the market. In keeping with the culture within the
Department Of Finance, the decision was defended even though the resulting collapse
was there to see physically in car dealerships and in the registration statistics. We are
compelled here to directly address and dispel the critical myths surrounding the VRT
reform in July 2008. We cannot move forward unless we dispel these myths as we cannot
trust the Department of Finance to use these myths again to defend the indefensible.
1. The VRT and Motor Tax changes implemented in July 2008 changed
consumer behavior and resulted in a switch to more fuel efficient vehicles.
This statement is not true even though consumers have in fact switched to more
fuel efficient vehicles. However, this change would have happened irrespective of
VRT reform in 2008.
At the time these changes were announced in the Spring of 2008, it was evident to
everyone except the government at the time that these changes would lead to
significant reductions in the prices of new diesel cars and consequently significant
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reductions in the tax take from the sale of new cars. In 2008 manufacturers were
already in the process of reducing significantly the CO2 emissions from their cars.
The European Commission introduced the Clean Air For Europe Regulations
(“CAFÉ Regulations”) requiring manufacturers to reduce their average CO2
emissions to 120gm by 2012 and to 95gm by 2020. There were concerns about
peak oil and the ever increasing price of fuel which combined with global
warming concerns shifted consumer demands to more fuel efficient less CO2
producing vehicles. Consumer sentiment had shifted towards low emission, more
fuel efficient vehicles and manufacturers reacted accordingly.
Our own manufacturers Volkswagen and Audi introduced blue motion
technologies, diesel particle filters, start stop technologies, enhanced engine
management systems and new emission control and management systems all of
which resulted in significantly reduced CO2 emissions on our vehicles. These cars
were launched in 2008 and we had cars about to be launched with even more
improvements in CO2 emissions. The government in 2008 made the decisions
oblivious to changing technologies which were coming in 2008 and future years.
When the changes were announced and we looked at the emissions on the new
technology cars which were already available for sale and which were coming
soon, it became very clear that the government had made a major miscalculation
and most cars would move to category A and B emission categories. These
changes in reality started the demise of VRT revenues to the level which now
exists where over 90% of the cars sold are category A and B cars. In reality the
changes resulted in diesel cars reducing to the same price as the equivalent petrol
car and the prices of premium branded vehicles reduced in price significantly
more that the volume branded vehicles. Consumers switched the equivalent diesel
models and more premium branded cars were sold
Consumers would have changed their behavior anyway due to the response of
manufacturers to the CAFÉ regulations and consumer demand. The VRT changes
in 2008 accelerated these changes but in the process destroyed forever VRT
revenues and fatally damaged a viable industry.
2. Cars are the major cause of CO2 emissions in Ireland
This is another myth. The environmental protection agency calculates the amount
of CO2 emissions from various sections of the economy. However, they do not
publish the emissions from cars separately, they are included in the transport
sector. In 2007 immediately prior to the introduction of the VRT changes, cars
accounted for approximately 10% of the CO2 emissions in Ireland. Cars still
accounted for approximately 10% of CO2 emissions in Ireland in every year from
2008 to 2010. CO2 emissions from cars reduced by 14% from 2009 to 2011 but
this is mainly due to reduced driving caused by the recession and the rise in petrol
and diesel prices since 2008. There hasn’t been enough CO2 friendly vehicles
sold since 2008 to have a significant CO2 impact. The vast majority of Ireland’s
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car fleet is made up of pre CO2 friendly vehicles. (The CO2 figures obtained
directly from the EPA).
The VRT changes were announced as a means to reduce CO2 emissions in the
country as a whole and given the general commentary at the time, we would have
been forgiven if we thought that cars are the major contributor of CO2 emissions
in Ireland. This myth is so prevalent that every time global warming is shown on
the news, we always get an image of a car exhaust. It would be more
representative to show a cow grazing in a field. The reality is a long way from the
perception.
Even though at the time cars accounted for 10% of greenhouse gas emissions in
Ireland, the VRT reform ignored the fact that it is the use of transport which
causes the emissions not the actual means of transport itself. If the rationale for
the reform of VRT was CO2 reduction, we should have taxed the use of the
transport rather than the means of transport. Why should the person who uses the
car to drive to mass on a Sunday pay the same CO2 taxation as the person
covering 30,000 Kms per annum. This is a blatantly unfair method of taxation and
unfair methods of taxation are never sustainable.
Another question needed to be asked as to why there was such an emphasis on
taxing car emissions (Cars account for just over 10% of the total greenhouse gas
emissions in Ireland) while there is a notable reluctance to apply similar taxation
to all other sectors of the economy where emissions arise. In fact emissions from
home heating account for more greenhouse gasses than cars.
Agriculture and energy production are the two greatest producers of greenhouse
gases in Ireland. If we as a nation are serious about controlling greenhouse gas
emissions why don’t we tax agriculture and energy. We know that we pay for one
of the most expensive energy systems in Europe so any additional taxation could
have a dramatic negative impact on the economy. Agriculture is one of the
industries which we hope will drive us out of recession so any additional taxation
in this sector could also have a dramatic negative impact on the economy. The
decision was made in 2008 not to apply CO2 taxes across the board, so we can
only conclude that the government at that time were only concerned about 10% of
the problem not the other 90%. This has a familiar ring.
Why cars ? we can only conclude that the reason why these changes were made in
2008 was a political decision to satisfy the anti-car agenda of the green party. In
fairness to the green party, they have never hidden their anti-car agenda and the
Government at the time adopted this measure to cater to the green agenda with
catastrophic consequences for tax revenues and the survival of a sector of the
economy. We all know it wasn’t the only catastrophic decision that this
Government took at that time and we are still suffering from the consequences of
these decisions six years later. The fact that worries our industry is that there
appears to be an anti-car culture within the Department of Finance which prevents
reasoned decisions being made. Every contact with them and every suggestion
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Submission On VRT and Road Tax Reform June 2014
made to them appears to us to get clouded by an anti-car agenda. How else can we
explain the decisions they took in 2008 (they were warned in advance) and the
decisions they took to increase VAT and VRT in 2012 and 2013 at a time when it
was proven to them that this act would decrease tax revenues rather than
increasing them. How else can you explain the increase in the charge for special
number plates from €300 to €1,000. Many customers went for special plates when
they were €300 but no one get them now. How else can you explain the refusal to
allow citizens to re-register their used car in their own County for a small fee, say
€200 ( we will discuss this later as it has a major impact on the valuation of used
cars). Every time a proposition is made to this Department, they reject it, no
reasons given for the rejection and implement the far riskier policy of increasing
tax rates with the inevitable failure to generate any additional tax revenue. It’s as
if they deliberately set out to destroy our industry and damage the 1.9m people
who own cars in the state.
The attempts later on to hide and confuse the real basis for that decision were
morally objectionable and sickening to those of us who bore the significant
financial consequences of that decision and in particular those people (there were
many) who lost their jobs as a direct consequence of a government decision.
The anti-car lobby should also consider the fact that Ireland has the worst public
transport system in Europe and that our people need cars to go to work, school
and socialize.
3. The changes to the VRT system in 2008 did not have a significant financial
impact on car dealerships and did not cause the collapse in the new car
market in 2009 which has continued ever since.
This is another myth which must be dispelled. The VRT changes implemented in
July 2008 resulted in a significant decrease in the prices of new cars. Used car
prices are pegged against the new car price of any particular model. As new car
prices fell, there was a corresponding decrease in the values of used cars. The
prices of used cars fell in the market from February 2008 to February 2009 by an
average of over €5,000 or 22%. Used car values were lower than at any time from
2000 to 2008. This resulted in the average transaction price (difference between
the price of a new car and the trade in value) increasing by 31.6% in early 2009.
This had an enormous negative effect on the new car market in 2009.
The VRT changes implemented in July of 2008, were implemented at a time
when used car stocks at Irish dealerships were at their highest levels ever. It also
coincided with the devaluation of sterling which, in turn, had a significant
depreciating effect on used car values in the Irish market. We experienced a
situation whereby used car stocks which were at their highest levels ever in July
2008 depreciated by an average of 22% overnight. Car dealers were facing
significant losses which resulted in many car dealership closures. Those car
dealers like ourselves who survived the collapse in used car values in 2008 had to
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Submission On VRT and Road Tax Reform June 2014
use up all of their cash reserves to cover the losses on used cars. We were faced
with a complete decimation of our cash reserves at the worst possible time where
our bankers were looking to cancel or restrict severely our working capital
facilities and the last thing any bank wished to fund was used cars. The VRT
changes in July 2008 decimated our balance sheets, our ability to trade using our
own resources, forced reliance on banks which wanted nothing to do with us. The
term “the perfect storm” has been used to described what happened to our
businesses in July 2008 to March 2009. We couldn’t sell new cars, we lost
millions disposing of our used car stocks and our bankers wanted nothing to do
with us.
Car Dealerships and Their Current Financial Position
The current strength of car dealerships is critical to the reform of VRT. We have
shown above how the previous reform and reductions in VRT had such a serious
negative financial impact on car dealerships. Our cash resources have been
depleted and we are struggling to survive on the current level of the new car
market. There is no investment in staff, training, tooling, equipment and premises.
We are into our sixth year of recession and we begin every year with the hope that
this will be the last year of recession but unfortunately, 2014 will be another very
difficult year and the recession will go into a seventh year before we can hope for
a year of sustainable recovery. It is very difficult to operate and manage any
business in a recession but our business in a labour intensive people business and
surviving the last six years of recession and starting a seventh and more than
likely an eight is exhausting and demoralizing for both management and staff in
these car dealerships.
The car dealership business model is very simple, labour intensive, low margins,
on sales where volume is the key to profitability. Operating margins in the
industry are low overall. The average return on turnover (across Europe) ranges
from 1% to 1.5%. Following the collapse in used car values in 2008, every car
dealership in the country lost money. This was followed by a collapse in the new
car market in 2009 where every car dealer lost money in 2009. The scrappage
scheme of 2010 and 2011 stabilised the industry at the 90,000 unit market which
ensured that car dealerships returned to profitability. It appears that 90,000 unit
market is the minimum required for car dealers to turn a profit. However the level
of profitability achieved at this level are subsistence levels, it enables us to
continue in existence, it didn’t allow for investment in staff, training, tooling and
equipment. There is little or no new investment in the industry at this time. We
have stabilized since the perfect storm days of 2008 and 2009 but we are not in a
position to make the investments we need to make to safeguard our businesses
and our staff.
Credit facilities from our bankers have been reduced and withdrawn over the 6
year period of this recession. The two main banks view our sector as risky
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irrespective of the financial performance of individual companies within the
sector. They accordingly refuse to lend to our sector even for items such as new
plant and equipment which every business needs to replace to maintain and
improve competitiveness. It’s difficult to sit and listen to bankers refusal to lend
even small no risk amounts for plant when we as a nation bailed them out and
they continue with the “spin” that they are meeting their lending targets. It’s even
more frustrating to listen to Government ministers repeating the spin that the
banks are meeting their lending targets. The only source of new investment is
what we generate in profit and we need more sales to get to the profitability levels
where we can reinvest in our business through additional staff, increased pay, new
plant, etc.etc. The current VRT and Road tax system prevents us from generating
income for ourselves, our staff and the exchequer. We believe that it’s the
Governments responsibility to look responsibly at taxation blocks in the economy
which prevent growth and limit the opportunity to develop our businesses even
further. VRT is a block to growth and should be reformed and reformed
immediately.
We are facing a very difficult year again in 2014. There is a law of diminishing
returns and we have reached it with taxation on cars be it VRT or VAT. It is time
to consider new alternatives in revenue generation and one which could be used
as an example across the rest of the economy and get the country away from the
devastating and exhausting effects of increased taxation and reduced spending.
Taxation for the sake of taxation and austerity for the sake of austerity, we are like
junkies who see nothing else except the next fix of tax increases and austerity.
The reform of VRT could offer the government another solution to generating
revenue. Reduce taxation but generate more revenue from additional volumes
while contributing to the growth of the domestic economy.
Why VRT is an Inefficient Method of Taxation and in particular
the hidden social regressive nature of this tax.
The argument against VRT was made extensively in the Bacon report on the
collapse in the new car market in 2009. The Bacon report will be referred to
extensively during this section. We can supply a copy if required.
VRT is an inefficient method of taxation. The costs which this tax places on the
economy from distorting consumers decisions, reducing consumer welfare,
restricting growth in the sector, increasing costs of doing business in the sector,
reducing new car ownership and the corresponding costs associated with an
ageing vehicle fleet, distorting trade and competition. The reform of VRT should
consider eliminating all of these costs in the economy. The Bacon Report
calculated that VRT reductions would leverage the economy by 8 to 10 times, the
elimination of these costs cannot be ignored in an economy which is striving for
efficiency and in the words of the troika seeking to make the “consumer king”.
VRT makes peasants out of Irish consumers.
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Ireland is the most expensive country in Europe (apart from Denmark which is
considered an outlier) in which to buy a new car. This is due to high levels of
VRT and VAT. Car taxes in Ireland at 3.2 times higher than taxes applied to cars
in the UK. This comparison is significant as the UK car market is the only
comparable market to the Irish Market due to right hand drive.
Car ownership rates in Ireland are considerable lower than the European average.
The collapse in the new car market since 2009 means that car ownership rates will
remain low while the age of the national car fleet will increase. Car ownership is
greater in cars which have low car taxes and lower in countries with high car
taxes. Ireland falls outside the car ownership rates for countries even with high car
taxes. The Bacon report concluded that the true reason as to why Ireland lags so
far behind average car ownership rates in Ireland is taxation.
The social effects of these excessive levels of taxation can be very unfair and
socially regressive. High registration taxes distort consumer decision making
regarding ownership thereby decreasing consumer welfare. Remember the earlier
point that residual VRT remains on every one of the 1.9m cars in the state. The
European Commission have also pointed out that car registration taxes reduce
trade thereby making it more difficult if not impossible for consumers to avail of
the full benefits of the EU internal market as they are effectively national markets
in many cases.
There may also be deadweight losses from high levels of car taxation and they can
have socially regressive effects. For example a study of vehicle property taxes in
the US found that for every 1% increase in tax it lowered vehicle ownership by
5%. Furthermore, it was found that higher and lower income families reacted
differently to taxation, the study concluded that there were regressive social
effects i.e. lower income households were disproportionately affected by
increases in car taxation. Overall the study found that the existing tax had a
deadweight loss of 25% i.e. it cost $1.25 to raise $1 in taxes. The study in
question had a tax rate of 2.1%. It is general accepted that deadweight loss of
taxes rises at a rate equal to the square of that tax. Thus a tax rate 0f 3.2% which
was also assessed in the study had a deadweight loss of 42%. We would have to
conclude based on this study that the deadweight loss in VRT is extremely high.
This study is about very low tax rates in the US and their disproportionate effect
on lower income households. We do not have any study in Ireland to show how
VRT has a socially regressive effect but we do have a car market which sells
fewer specialist vehicles than other markets. We sell fewer 7 seater vehicles, we
sell fewer estate vehicles, we sell fewer automatic cars (for people without
disabilities but with bad hips, backs, knees etc.), we sell fewer all-wheel drive
vehicles. This would in turn mean that consumers and in particular families are
choosing to purchase cars which are not suitable for their requirements but are
compelled to do so by high taxes on these cars. Example, we have families with
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more than three kids driving 5 seater cars because they can’t afford a 7 seater due
to high rates of VRT. We see this every day in our business.
We also have residual VRT in used cars which distorts the used car market
significantly making used cars more expensive thereby inflicting a tax on people
who can ill afford to pay it. VRT registration tax is misnamed as “vehicle
registration tax”, it is paid on registration but lasts for the life of the vehicle due to
residual VRT in all used cars. VRT is an indiscriminate and unfair method of
taxation which has a disproportionate effect on lower income families.
Car Price Elasticity and Future Market Predictions following the
abolition of VRT
We have three Economists from University College Cork, Mr. Robert Butler
MEcon Sc, Mr. Seamus Coffey MEcon Sc and Dr. Edward Shinnick (we will
refer to them as the economists in this section) to look at the effects of price on
new car market demand. Their report which was completed in 2012 and formed
part of our third submission on VRT reform will be referred to in detail
throughout this section. We didn’t get the report updated for 2014 because we
couldn’t afford it and this is work we believe that the Department of Finance
should be completing not us.
We in the industry have always believed that VRT dampened demand but we
never really knew by how much. The scrappage scheme showed in 2010 and 2011
that a reduction in VRT will stimulate demand with the market recovering to
90,000 units in both years. The market increased from 56,000 units in 2009 to
90,000 units in 2010 and 2011 following the reduction in taxes introduced in the
scrappage scheme. (The market increased by 60% following a 12% reduction in
price). The market fell back 79,000 units in 2012 following the VAT increase and
the cancellation of the scrappage scheme, back again to 74,000 units in 2013
following the increase in VRT. What more evidence do we need, reduce taxation,
volumes increase, increase taxation and volumes decrease. You may ask as to
what is the natural market in Ireland and we use this general rule of thumb there
are 1.9m cars in Ireland and if they are replaced every 12 years this gives and
annual sustainable market of 158,000 units. In good years the market rises above
this figure and in bad years it falls below this figure, we are operating at 50% of
the annual sustainable market. This is the evidence of the market which is proved
economically by the UCC economists below.
The market has recovered so far in 2014, this recovery has not filtered down to
car dealerships. The majority of the increase in the market in 2014 is down to car
rental business and fleet business which does nothing for car dealerships as these
sources of business are controlled by the manufacturers. Car dealerships and our
staff are still in decline six years following the collapse of the car market in 2009.
It’s time to take a new approach to taxation on cars
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Submission On VRT and Road Tax Reform June 2014
The economists have calculated a price variable coefficient of -1.62. “This coefficient represents the elasticity of demand and it measures how responsive
consumer’s demand is to change in price. As the co-efficient reported in their
analysis is greater than 1, it can be taken that cars are an elastic product. In other
words a 1% decrease in the price of a car leads to a 1.6% increase in the number
of cars sold. The results also confirm that over the period 2008 to 2011, Irish
consumers are more likely to buy cheaper cars.” We believe that the scrappage
scheme demonstrates that price reductions have a bigger impact than the -1.62 coefficient . In the first year of the scrappage scheme, the market increased by 60%
following a 12% reduction in price, this equates to volume increase of 5% for
every 1% reduction in price. This we believe shows that price reductions have a
bigger impact in recessionary times and we see this in practice every day,
consumers react quickly to price reductions and value propositions.
The economists have concluded, cars are price elastic, a 1% decrease in price will
lead to a 1.6% increase in sales and Irish consumers buy the cheaper cars. We
believe that the effects are greater in a recession. The variable co-efficient as
calculated by the economists is negative which means that the increase in sales
will be above 1.6% for the cheaper cars and below 1.6% for the most expensive
cars. The fundamental conclusion is that if we reform VRT by reducing this
excessive and inefficient tax, we will see an increase in volumes which will
counteract the loss in revenue from the reduction.
If we see assume an average car with a retail price of €22,000 with VRT at 17%
and VAT at 23%, then this car is taxed €7,154. This is not exactly accurate but
it’s easier to explain in this way as the exact calculation of VRT is difficult to
explain and is likely to confuse. If we cut the 17% VRT rate to 8.5% the
exchequer will lose €1,999 per car. This we believe is as far as the Department of
Finance analysis allows them to go. However, the minimum increase in volume
will equate to 13.6% (8.5% x 1.6 = 13.6%). During previous schemes
manufacturers also realigned their prices and if they contribute another 8.5% price
reduction, we will see a minimum increase in volumes of 27.2% (13.6x2). The
actual volume increase will be greater as proven by the most recent scrappage
scheme. This has already been proven in practice in 2010 and 2011, how much
more evidence do we need to reform this method of taxation. When we factor in
the deadweight cost of raising these taxes and the revenue gained from the Vat on
used cars (see below) and the positive employment benefits, we are in significant
positive territory.
The volumes price elasticity as calculated by the UCC economists and supported
by the recent evidence of the scrappage scheme gives us the evidence we need to
reform VRT while at the same time generating more income for the exchequer.
Once VRT is reformed, the need to import 40,000 used cars from the UK annually
will eventually disappear. This will be a net gain to the exchequer from the VAT
gained on these sales as the VAT on used cars is paid in the exporting country not
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Submission On VRT and Road Tax Reform June 2014
the importing country. This could add another €70m in VAT on used cars. This
VAT is paid to Her Majesty’s Government and it’s difficult to comprehend a
system where Irish people are compelled to pay a substantial amount of tax
annually to our neighbours. We are all friends now but we don’t need to be that
friendly.
We all know it’s time to take a new approach to the management of our economy
and this represents an opportunity for your Committee to make this point and
move away from the taxation for the sake of taxation and austerity for the sake of
austerity we have followed blindly for the last six years. The time has come to
move on.
Reforming The Existing Road Tax System
Road tax in Ireland was always a consistent and reliable source of taxation. The
VRT reform of July 2008 changed all that in the same way as it contributed to a
collapse in the new car market. Tax revenues from road tax will gradually
decrease to miniscule levels under the current system.
The reform of road tax in 2008 introduced another unfair and discriminatory
method of taxation. The system introduced an apartheid system of motor tax as
cars with the same CO2 emissions are taxed differently based on the year they
were registered. The system changed on 1st July 2008 whereby cars registered on
or after 1st July 2008 were taxed based on CO2 and cars registered prior to then
taxed based on the size of the engine. There are 1.9m cars in the country, 1.5m
under the old system of engine size and 400k under the new CO2 system. The
lowest price for a one liter car under the old system is €299 and the highest price
for a 3.0 litre car is €1,809. The corresponding CO2 system calculates road tax
from class A1 €170 to class G €2,350. When you consider that 90% of customers
on the CO2 system buy category A and B vehicles their average road
approximates €200 while the cheapest on the old system is €299. Therefore, you
have someone driving a 14 year old 1.4 car paying €385 per annum while the
equivalent new car driver pays €200. The difference is even more pronounced on
diesel cars as the engine size is higher, you have citizens driving a 14 year old
diesel car paying €710 per annum and the equivalent post 1st July 2008 car paying
€200.
There is an even greater inequity surrounding cars purchased in 2006 and 2007
which have low enough CO2 emissions comparable with post 1st July 2008
registered cars and these cars carry a higher rate of annual road tax. Additionally,
this road tax system impacts the market where cars pre 1st July 2008 suffered a
more than expected depreciation which has continued to this day. Customers
naturally want the low annual road tax cars which increases their value and
decreases the value of the high road tax cars.
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Submission On VRT and Road Tax Reform June 2014
We get a huge amount of commentary about property tax and water charges and
we have a system where cars with a value of €7k or less pay annual road tax in
excess of €700, why is there no commentary about this system. 1.9m people in the
country pay annual road tax and if there are two cars in one family, they are
paying more in road tax than their combined property tax and water charges bill.
We realize that the high rates of road tax was a set off against previous
government decisions to abolish domestic rates and domestic water charge. It was
set at higher rates to compensate for the loss of revenue on domestic charges. We
have now reintroduced the property tax and water rates and we still have very
high motor taxation, no reform here to compensate for the reintroduction of these
domestic charges. We also have the anomaly where another CO2 tax is based on
the means of transport rather than the use of that means of transport.
Previous submissions were made on the ability of citizens to re-register their car
in their County of residence. This refusal to allow this simple facility is having a
significantly depreciating effect on the value of cars. In Cork we find it difficult to
sell, LK, WD, TS registered cars and almost impossible to sell MO,CN,WH etc.
registered cars. I’m sure that these counties have the same difficulties with C
registered cars. These cars suffer excess depreciation over cars with registration
plates we can sell which makes no real sense. We requested that citizens be
allowed to register their used car in their county of residence allowing dealers and
consumers to value the car irrespective of the registration plate. There could be a
charge of say €200 put on this which represents a significant revenue opportunity
for the exchequer as there are hundreds of thousands of changes of ownership
annually (there are no statistics on the numbers of used cars sold annually in
Ireland, another issue but for a different day) . If 100,000 consumers took this
option it would generate €20m annually another cut saved. We never really got an
answer as to why this was rejected, something to do with the Gardai we were told
but again a refusal to consider a revenue generating opportunity and something
many citizens would like to do. We believe that the rejection was based on a
refusal to consider new ideas and the “work” involved in setting this system up, it
appears no one wanted to take on this project and no one in a position of authority
(if such a position exists in the Department Of Finance) could task someone with
starting and completing the required work to get this system operational.
As part of any reform of VRT, we must consider a reform of road tax and the
ability to re-register a car in County of residence.
How to Reform VRT In 2015.
Any reform of this tax must combine, VRT, VAT, annual road tax and fuel excise
duties into a more consistent and reliable source of tax revenues. VRT revenues
decreased from €1,406m in 2007 to €365m in 2011 which is a perfect example of
our overreliance on transaction taxes. It has been recommended that our taxation
base should be moved to more reliable and consistent methods of taxation. This is
where we recommend that taxation from cars be raised in the future. Once VRT is
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Submission On VRT and Road Tax Reform June 2014
reformed the national car fleet should increase from 1.9m units to 2.6m units
something in 2021/2022. This represents the opportunity to rebalance the taxation
of cars more towards usage and get away from using the means of transportation
as a base for tax. We are confident that by 2022, the technology will be available
tax transport based on the how efficiently the means of transport actually is and
on how efficiently its actually used. We estimate that annual road tax generates
€700m per annum which is an average of €368 per car which when applied to
2.6m cars is €1b. You can apply the same rule of thumb to fuel taxes, tolls and
other usage taxes. We should begin this reformation of car taxes now.
The biggest impediment to the reform of VRT in 2015 is the immediate reduction
this will have on used car values. The timing of any reform needs to be researched
carefully, as it 2008 it was timed at the worst possible time. In 2008 when the
VRT reductions were implemented, it drove many car dealerships to closure and
it depleted the cash reserves of the remainder.
The best way to reform VRT is commit to abolish VRT according to a pragmatic
timetable that allows for alternative sources of revenue to be generated and that
minimises the disruptive impact of the change on consumers’ decisions. This
means that there is a need for flexibility regarding the precise details of this
option, but the reform should be along the lines of a once-off 25 to 50 per cent
reduction in VRT at end 2014 along with a number of measures, such as a
temporary increase on VAT on new and used cars, rebalancing of annual road tax,
to overcome the main distortions caused by VRT. When new car sales start to
recover towards annual sustainable levels, such that the risk of consumers
deferring their purchases is reduced, the Government should pre-commit to a
programme of reductions in VRT to remove the tax completely over say five
years.
The reform of VRT has to be handled very carefully to avoid the problems created
by the previous reform in 2008. However, the mistakes made in 2008 can for the
template of what to do in 2014/15.
Conclusion
VRT is an inconsistent, inefficient, risky, socially regressive method of taxation
and should be reformed. We believe that this has been proven in practice over and
over again. The European Commission, The Commission for Taxation, Consumer
Groups and the Retail car industry has called for its abolition. The only sector in
favour of VRT appears to be the Department Of Finance who have used it over
and over again as a blunt instrument to increase rates which have resulted
immediately in reducing overall tax revenues. We require way more
sophistication in the analysis of our tax base and how we can expand the tax base
to generate more revenue while at the same time reducing the headline tax rates.
VRT reform represents a low risk means to achieve this and to prove that we
should more to a more sophisticated analysis of the tax base and resulting tax
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Submission On VRT and Road Tax Reform June 2014
rates for the economy as a whole. VRT reform will stimulate a section of the
domestic economy which has gone backwards and become stagnant over the last
six years of recession. This stagnation has damaged everyone involved in this
industry employers and employees alike and you have the power to remove the
major cause of this stagnation.
We have to move beyond increasing taxes for the sake of increasing taxes and
acknowledge the damaging effect that increased taxes have on the domestic
economy. The reform of VRT should offer you the opportunity to reduce a
method of taxation while increasing overall tax revenue. There are so many
options available to lower the tax rates but increase revenue that any downsize
risk can be managed. The reform of VRT when proved successful, could be used
to reduce taxes in other sections of the economy. It should be the easiest of
decisions to reform VRT and we sincerely hope you will recommend to the
Department of Finance that they complete the sophisticated analysis required and
revert to your committee with recommendations on reform which benefit the
consumer, our industry and overall tax revenues.
We all know it’s time to take a new approach to the management of our economy
and this represents an opportunity for your Committee to make this point and
move away from the taxation for the sake of taxation and austerity for the sake of
austerity we have followed blindly for the last six years. The time has come to
move on.
Denis Murphy
Managing Director
Blackwater Motors and Audi Cork
3rd June 2014
denismurphy@blackwatermotors.ie
Tel 1850449500
.
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Blackwater Motors and Audi Cork
Submission On VRT and Road Tax Reform June 2014
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