Finanzwissenschaftliches Forschungsinstitut an der Universität zu KölnFiFo Institute for Public Economics, University of Cologne

Transferring Taxes to the Union

The Case of European Road Transport Fuel Taxes

Michael Thöne Managing Director FiFo Köln

Paper presented at the HLG “Own Resources”,

Brussels, 22 March 2016

Transfer tax rights to the European Union?

Michael Thöne 2

Overview

1. Why transport fuel taxes?2. Transfer of the tax – Partial or full?3. The price to be paid – On compensation

1. Why transport fuel taxes?

Michael Thöne 3

Example of horizontal tax competition:The Spatial Range of „Luxembourg fuels”

Michael Thöne 4

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08

-1.

Gasoline tax rates – level and dynamics

Michael Thöne 5

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Gasoline tax rate (in €/1000 l; as of 1/1/2015)

Change of real tax burden 2009-2015

Diesel tax rates – level and dynamics

Michael Thöne 6

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20

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20

15

(in

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Diesel tax rate (in €/1000 l; as of 1/1/2015)

Change of real tax burden 2009-2015

Tax rate ratios gasoline / diesel

• Purely fossil diesel produces 2.64 kilograms of carbon dioxide per litre; gasoline on average produces 2.33 kilograms CO2 per litre. The ratio which is neutral in respect to climate change is 0.88.

Michael Thöne 7

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Diesel taxes are way too low.

European value added of common fuel taxes

Status quo

• Jumbled tax structure in EU.

•Diesel taxes are way too low.

•Tax harmonisation progressively fails.

•Tax competition is bound to further increase (due to low oil prices).

Environmental taxation

•Taxes: Market-based instruments of the ‘polluter pays-principle’ (Art 191, 2 TFEU).

•Ambitious EU reduction targets for CO2 in transport sector.

•OECD (2015): Governments under-utilise taxes as a tool to curb emissions.

European added value

• Climate change is a global ‘common bad’ CO2-oriented tax to be allocated to highest government level available, i.e. the EU.

• Curbing inefficient tax competition: European fuels tax reduces number of ‘competitive borders’ from 71 to 33.

Michael Thöne 8

2. Transfer of the tax - Partial or full?

Section 2 is „ added value“; it is not covered in the underlying paper.

Michael Thöne 9

Transferring the tax

No additional taxes: EU and MS spending budgets are given.

• Reform discussion for revenues based on purely structural arguments

Transfer of an existing tax to the EU must be compensated.

• Parallel reductions of customary own resources. (Refunds, if necessary.)

Partial transfer of fuel taxes

• MS reduce their individual tax rates by the same percentage (e.g. 40 %)

• EU fills this gap with own tax rates. Revenue neutrality on the European level, not in every single MS.

Full transfer of fuel taxes

• MS forego the right to tax transport fuels.

• EU determines tax rates and receives full revenue.

• Equivalent in many respects: EU determines tax rates and shares revenue with MS.

Michael Thöne 10

Partial or full transfer?

• Despite its obvious merits, the full transfer-model is not considered a realistic perspective for the short-term. The change from the current system would be too radical.

• Nevertheless, we do use a full transfer-model to analyse compensation, as it is more straightforward. Compensation issues of partial transfer are fairly proportional.

Michael Thöne 11

A quick assessementNational tax Partial transfer

to EU

Full transfer

to EU

Efficiency of climate policy low medium high

Horizontal tax competition high dampened EU-borders

Vertical tax competition none potential problem none

Income distribution (EU-wide) diversified mixed uniform

Transparency high mixed high

Simplicity uncomplicated uncomplicated uncomplicated

Accountability national mixed EU

Compensation (→ political transaction costs) not easy challenging

© Michael Thöne (2016).

3. The price to be paid – On Compensation

Michael Thöne 12

Asymmetric compensation under unanimity

Transfer to the central level is only beneficial with harmoni-sation of tax rates.

Member States will anticipate such changes in the asymmetric compensations demanded:

If a new tax structure would lead to losses of national tax revenues, the historic revenue serves as the benchmark for the compensation claim.

Argument: “We are not accepting any losses compared to the status quo.”

If a new tax structure would lead to gains of tax revenues raised within a Member State, this new revenue would serve as the benchmark for compensation.

Argument: “The new revenue is the ‘true’ revenue we should have received all along if we had not been impeded by tax competition, harmonisation failure etc.”

Michael Thöne 13

Starting point: Excise tax revenues vs. total own resources

Michael Thöne 14

14

0%

80

%

17

7%

14

0%

17

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11

0%

73

%

19

5%

10

6%

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%

88

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0

5.000

10.000

15.000

20.000

25.000

30.000

35.000

AT BE BG CY CZ DE DK EE ES FI FR GR HU IE IT LT LU LV MT NL PL PT RO SE SI SK UK

EUR

mill

ion

Gasoline + Diesel, excise revenue (EUR million)

Total own resources (EUR million)

Fuel excises in per cent of OR

Calculation 1 – Compensation of status quo

• Fuel taxes (2013): 167.4 bn EUR; total OR (2013): 139.7 bn EUR net refunds.

• Crooked, but revenue-neutral: Our Benchmark for further calculations.Michael Thöne 15

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Refunds from EU-Budget to MS

Remaining OR due

Calculation 2: Smoothing tax rates separately.Asymmetric compensation

• The increase of compensation amounts to EUR 15.8 billion, i.e. more than 11% of the EU budget.

Michael Thöne 16

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Remaining OR due

Calculation 3: Asymmetric compensation for a CO2-neutral tax structure

• Here, the increase of compensation amounts to EUR 18.1 billion (more than 13% of the EU budget).

Michael Thöne 17

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Refunds from EU-Budget to MS

Remaining OR due

Conclusion

Revenue-neutral reallocation of tax rights to the EU in an

environment of pre-existing and distorted taxes may not be

possible.

Allocating tax rights to the EU level may not lead to revenue

increases on the European level, but for the Member States.

Identifying taxes which might be transferred to the central level for

reasons of efficiency, transparency and accountability

is a necessary, but not a sufficient condition for a revenue reform.

Against the background of substantial additional revenues

needed to establish a tax right for the European level, the

desirability of such a reform decreases.

Michael Thöne 18

Michael Thöne

Finanzwissenschaftliches Forschungsinstitut an der Universität zu KölnFiFo Institute for Public Economics, University of Cologne

Thank you

Continuing the dialogue:

thoene@fifo-koeln.de

www.fifo-koeln.de

Sources

Final version: M. Thöne (2016), Transferring Taxes to the Union. The Case of European Road Transport Fuel Taxes. In: T. Büttner and M. Thöne (eds.), The Future of EU-Finances, MohrSiebeck ISBN 978---16-154645-3. Publication: September 2016. https://www.mohr.de/buch/the-future-of-eu-finances-9783161546563

Preliminary versions:

M. Thöne (2016), Transferring Taxes to the Union. The Case of European Road Transport Fuel Taxes. In: T. Büttner and M. Thöne (eds.), The Future of EU-Finances, Working Papers for the Brussel Symposium on 16 January 2016, Cologne.http://www.bundesfinanzministerium.de/Content/EN/Downloads/2016-01-14-final-report-future-eu-finances.pdf?__blob=publicationFile&v=4

M. Thöne (2016), Übertragung von Steuern auf die Union: Das Beispiel europäischer Kraftstoffsteuern. In: T. Büttner und M. Thöne (Hrsg.), The Zukunft der EU-Finanzen. Arbeitspapiere im Rahmen des BMF-Forschungsvorhabens fe 1/14, FiFo-Bericht Nr. 22, Köln. http://www.fifo-koeln.org/images/stories/fifo-bericht%2022.pdf