The next government should focus on radical tax reform and implement a steep hike in motor fuel taxes, according to the Finnish Innovation Fund Sitra.
The public research and innovation body, which is directly overseen by the Parliament, issued a paper on Friday calling for significant reforms to the current tax regime if Finland wants to meet its stated target of halving traffic emissions by the year 2030.
While the details of the organisation’s proposals won’t be ready for months, economist Saara Tamminen provided a rough outline of what’s in store on Friday. One proposal that is likely to stir up controversy is the idea of a significant increase in taxes at the pump. On the other hand, Sitra will also advance the idea of completely eliminating taxes on low-emission vehicles.
“To put it directly, we are in the middle of a climate crisis. We need to cut emissions very quickly. Especially with respect to traffic, we haven’t really seen much emissions reduction,” Tamminen argued.
Tamminen is the author of the Sitra paper, which reviewed a large body of research on the impact of taxation on emissions. At the same time, the Ministry of Transport and Communications is also looking for ways to reduce emissions.
No real drop in emissions in 30 years
Motorists hand over billions of euros in taxes to the state every year. Much of it goes towards government spending, but a portion is also earmarked for reducing vehicle emissions.
While on paper Finland appears to have made great progress in using taxation to dampen emissions, the reality is quite different. According to figures from Statistics Finland, domestic emissions have not really declined since the 1990s – over a period of 30 years.
Since 2000, decision-makers have adjusted vehicle taxes several times to favour low-emission vehicles, however Finland's vehicle stock has continued to age steadily. Policy makers have also bumped up petrol taxes frequently, but that hasn’t stopped motorists from racking up increasing numbers of kilometres on the road either.
Task for new administration
Tamminen reasoned that fuel tax increases have been too low, so people have not cut down on their driving in spite of higher prices at the pump.
At the same time, taxes account for a very high proportion of the price motorists pay for petrol. According to Tamminen, one reason that drivers have been able to fork out more for petrol is the steady rise in wages.
The economist called for petrol and diesel taxes to be tied to the index of wages and salaries, so that taxes will keep pace with salary increases.
Tamminen stressed that the kind of tax overhaul that Sitra is proposing should be carefully planned and its impact should be precisely modelled. The agency will complete its recommendations by early next year.
She noted that decision-makers typically prefer not to jack up taxes close to an election for fear of a backlash when voters go to the polls. As such, proposals should be implemented as soon as a new administration takes office.