:

State Tax Review

Submission

Raising revenue cheaply and equitably to fund infrastructure

April2015 One of the factors constraining economic growth is the State's infrastructure. While steps have been taken to improve this with recent and rail construction, there is always more that can be done. The challenge is finding the money when the option of increasing debt is economically and politically unpalatable. Adoption of this proposal will deliver a regular and consistent flow of funds which can be dedicated to infrastructure development.

This proposal provides one of the few mechanisms which will allow the Government to meet its prime objective, namely,

"Our tax system needs to provide enough revenue to deliver high quality services and infrastructure to the community, now and into the future. "1

THE PROPOSAL

It is proposed that the State levy tolls on the , the Southern Expressway, the and the Expressway. Toll have a 'bad name' in the minds of taxpayers and to date the Government has stated it will not introduce tolls. This negative view appears to be based on general feelings that toll roads are inequitable. A major issue, therefore, is whether these feelings of inequity are supported by fact.

In the eastern states, major roads are constructed by the private sector with the construction cost dictating the level of tolls. is in a different position in that it already has several road systems which lend themselves to being tolled. Accordingly, the Government can set the tolls having regard to equity and fairness, the cost of alternative transport and the amount they wish to raise. Funds raised would be used to construct new or enhance existing infrastructure.

THRESHOLD ISSUE

Before looking at the numbers, there is the threshold issue of whether the imposition of tolls can be justified to the State's taxpayers. Is it possible to allay their fears and concerns by explanation and education? Do the positive aspects outweigh the negative? As will be seen later in this proposal, the potential revenue that can be raised and the economic development it could fund, suggests careful evaluation oftoll roads by Government is warranted.

The Concerns with toll roads

Concerns and comments raised about toll roads include:-

• The provision of a road system is the responsibility of the Government, similar to health and education. • Tolls are just 'another tax grab'.

1 State Tax Review Overview P13 (emphasis added} liPage • Tolls are a regressive form of taxation. • Why should some pay for the road they use while others use different roads and pay nothing? • Depending on the use to which the toll revenue is put, toll road users subsidise non­ toll road users.

While these concerns are understandable, they can be allayed by careful and constructive explanation of the complex issues that are present. The concerns are discussed below and where appropriate, will be considered in the context of the Southern Expressway.

• The provision of a road system is the responsibility of the Government

The inference behind this is that Government build roads without somehow accessing taxpayer generated funds. Clearly, that is not the case although historically there has been no explicit State taxation to fund roads.

It may equally be said that the provision of public transport is the responsibility of Government. Trains, trams and buses are provided throughout the broad metropolitan area, but to travel on them, the user has to pay a toll (fare).

In the context of those living south of the city, Government has met the responsibility of providing a road system by way of the Main South Road, which has been progressively widened over the years. However, the increasing congestion on that road led to the construction of the Southern Expressway, which is currently toll free. If tolls are now levied, is equity maintained?

The World Bank Group considered this in the context of a new toll road and asked the question "Is it necessary to have a parallel free road?" The report stated

"... if the road is provided simply to add capacity in a constrained area, for example, then leaving the existing road network un-to/led should be appropriate. "2

One reason stated for this was so the less well off or indeed anyone not prepared to pay the toll, continued to have access to a road network, thus preserving social equity. The fact the Southern Expressway is already in existence does not alter the conclusion reached. Because a parallel un-tolled road exists, if tolls are now levied on the Expressway, social equity has been preserved.

2 The World Bank Group- http://www.worldbank.org/transport/roads/toll_rds.htm

21Page • Tolls are just another 'tax grab'.

This argument would have greatest strength if the toll revenue 'disappeared' into and became part of, General Revenue. It will be important that toll revenue is quarantined from other Government Revenue and is expended in a clear and transparent manner that delivers benefits to those who pay the tolls and the State more broadly. How this can be achieved is detailed later in this proposal.

• Tolls are regressive

This is true, but where alternative modes of transport are available, as is the case with the Southern Expressway, the argument carries far Jess weight. Further, the proposed level of tolls (matched to public transport fares) means they are no more regressive than those fares. It should also be noted that Metro operates with a standard fare regardless of distance travelled. It costs the same to travel to the city centre from an inner Adelaide suburb as it does from Seaford. Accordingly, those who live closer to the city are cross subsidising those who live further out. This reduces the regressive nature of public transport fares and by extension, the proposed toll.

With the use of e-tags, it is a simple matter to adjust the level of toll payable by those the Government believe will be unduly impacted by the payment of the full toll, a step which would further reduce any regression.

• Other rood users do not pay tolls

While this is true, it is incorrect to look at it in isolation. The following are relevant:-

)> Expressways deliver congestion free motoring over long distances. By their very nature, they are hugely expensive to construct. There is no comparison between the cost of one kilometre of expressway and one kilometre of main road. Provided the toll on the expressway is fair when compared to the cost of alternative means of transport, it is reasonable that a toll be charged as the road delivers higher speed and safer travel than the standard road system.

)> Given expressways are constructed to move commuters longer distances, those who benefit from expressways generally Jive further from the city centre. The decision to live further from the city would be driven, in part at least, by lower housing prices. This, in turn, means lower taxes in the

3IPage form of stamp duty calculated on purchase price and lower property taxes generally. Arguably, therefore, those who drive on un-tolled roads closer to the city have contributed greater taxation in other forms.

>- If the only road available is tolled and there are no alternative means of transport, trains for example, then it may be creditable to argue that users of the toll road are disadvantaged when compared to others who use un-tolled roads. Those who live south ofthe city before the construction of the Southern Expressway had only the Main South Road available to them. Buses used the same road with the same congestion. This congestion was relieved firstly, by all taxpayers, regardless of where they lived, meeting the cost of constructing the single direction expressway and more recently, the dual expressway. At the same time, all taxpayers have met the cost of extending the train line to Seaford.

)> Commuters thus now have a choice of three modes of transport. If the Expressway was tolled, they are not obligated to pay tolls as the Main South Road remains available to them as does the train. The latter does require the payment of a fare (toll) but paying for public transport seems to have general acceptance, provided the fares are reasonable.

)> If the imposition of tolls does cause people to move from the roads to public transport, a further benefit is achieved.

• Depending on the use to which the toll revenue is put, toll road users subsidise non-toll road users.

This proposal envisages the tolls being used to fund further infrastructure to support economic activity and jobs. All taxpayers should benefit from this but is it correct to say toll road users will be subsidising non-toll road users? The following are relevant:-

)> The Southern Expressway has been constructed by all taxpayers for the benefit of those who use the Expressway. At present, all those who don't use the Expressway have subsidised those who do. The duplication project alone cost approximately $400 million.3

3 Dept of Planning, Transport and lnfrastructure,http://dpti.sa.gov.au/southern_expressway_duplication/faqs

41Page >- As noted above, those who live closer to the city pay higher taxes than those who live further away, so they have contributed more tax revenue per capita to the construction cost of the Expressway, than those who live further away and use the Expressway.

>- The construction of the Expressway has brought considerable benefit to those who use it; a benefit denied those who endure congestion every day. The cost has been borne by the State as a whole even though a relatively small proportion ofthe population benefits.

>- A fundamental economic principle is that the user should pay and the collection of tolls on the Southern Expressway meets that principle. At the same time it will allow the State to construct other infrastructure for the benefit of all.

In summary, those who use the Expressway have been provided with a significant benefit with the substantial cost of that benefit met by others. Non toll road users have subsided toll road users. It is reasonable that those who have benefited should now make a contribution to that cost, with the contribution used to benefit other taxpayers.

This analysis has focused on the Southern Expressway. With some slight variations, it can equally be applied to the other road systems that this proposal has identified as being suitable for conversion to toll roads.

THE FINANCIAL MODEL

In determining the amount of toll revenue that could be raised, the following assumptions have been made.

Road Systems

The four systems noted above have been selected as they have limited entry and exit points which, in turn, will limit the infrastructure costs of converting them to toll roads. There are other roads that could also be converted such as the South Road Super Way. Alternatively, Government could decide to apply tolls to a lesser number of road systems.

Infrastructure Costs

There will be some costs in converting the road systems to toll roads although they should not be significant. The use of e-tags and installation of e-readers at entry and exit points would be the main cost. No work has been done to quantify this and the Model simply assumes a cost of $5 million per road system. This cost is then amortised over 30 years.

SIPage Toll Rates

Cars

Government can set these at any level it wishes. However, in the interests of fairness and recognising issues such as ability to pay, it is logical for the tolls to be set having regard to public transport fares. The standard Metro fare is $3.39 so the Model has applied a toll of $4.00. There are two exceptions.

The first is the toll for vehicles travelling from Murray Bridge to the city on the South Eastern Freeway. A private bus operator provides the service from Murray Bridge to Mount Barker and the fare for this has been added to the standard Metro fare for the balance of the journey to Adelaide, to arrive at a broadly equivalent toll of $17.

The second is the which is relatively short at 5.5 kilometres. The toll has been set at $2.50.

Trucks

Tolls on heavy vehicles have been set at double that applying to cars.

Vehicle Numbers

The Model uses the vehicle numbers from the Department of Planning, Transport and Infrastructure Traffic Volumes schedules, available from the Department's website.4

Leakage

Experience in the eastern states suggests there will be some leakage of vehicles to alternate un-to lied roads or to public transport. No work has been done to determine what this factor may be under this proposal but given the tolls are low, the Model assumes 3% for cars and 1% for trucks.

Concessions

It is recognised the Government may have to issue exemptions from tolls to those with very low incomes. The Model assumes 0.5% of users would fall into this category (cars only).

Administration costs

The toll system will largely be automated so these costs should be minimal. The model assumes $100,000 per road system per annum.

Based on these assumptions, the Model shows annual tolls will approximate $315 million.

'Dept of Planning, Transport and Infrastructure, http://dpti.sa.gov.au/traffic_volumes#rnetro

6IPage APPLYING THE REVENUE

If the toll revenue becomes part of General Revenue, it is easy to see how opponents could argue the tolls are just 'another tax grab'. It would be important that Government demonstrate the higher tax burden will be used to improve infrastructure to help the economy grow and with it, more jobs.

By legislation, Government would be required to separately account for toll revenue. Further, there should be a separate pool of funds for each road system with 60% of each pool designated for infrastructure in the areas where the revenue was raised. For example, the revenue raised from the South Eastern Freeway could be used to fund the construction of a road around the , to remove heavy trucks from the Freeway. In this way taxpayers would be able to see the direct benefit flowing from the toll payments which should make the imposition of tolls more palatable. The remaining 40% would go into a central pool to be used on projects which are not specific to an area served by a toll road.

It is recognised that by linking expenditure to the area from where it is raised could lead to sub-optimal resource allocation but it is considered important in terms of gaining taxpayer support.

Greater transparency

To be entirely transparent and to remove all political influence, Government could consider establishing an independent statutory body (Infrastructure SA- ISA) to be responsible for managing the State's investment in infrastructure. The only role of the government of the day would be the appointment of the Chairman and Board. By legislation, the Government would be required to transfer the toll revenue each year to ISA.

Politicians would have no power to designate how the funds should be expended. They would be limited to making submissions to ISA along with local government, community organisations, business and individuals. This will eliminate the potential for corruption and so called "pork barrelling".

ISA would be responsible for designating which projects receive funding, with priority given to those which would produce the largest economic benefit. The management of the projects identified and approved by ISA could remain with the Department of Planning, Transport and Infrastructure.

MEETING THE GENERAL PRINCIPLES

The Government has set out four general principles that should be applied to any Tax Reform.5

5 Tax Reform Discussion Paper P14

71Page Efficiency

"An efficient tax system is one which raises revenue in a way that minimises harm to the economy and avoids penalising some forms of economic activity over others. "6

Tolls would be paid primarily by individuals with the quantum being small relative to their total outgoings. Tolls should not adversely impact the economy as a whole. The imposition of tolls may move some from the roads to public transport which would lead to less traffic congestion, a positive outcome.

Equity

This issue has been dealt with extensively earlier in this proposal.

Simplicity

Once the infrastructure (E-Readers) is in place, tolls " ... are easy and inexpensive to administer and comply with."7

Sustainability

Toll collections will be predictable and should grow broadly in line with population growth.

SUMMARY

Toll roads are viewed adversely by taxpayers, but they present a source of revenue which the Government should not ignore. To gain support for toll roads, Government would have to explain and educate taxpayers on the facts. This should remove the instinctive opposition to tolls because in the context of this proposal, the facts do not support that opposition. The eastern states have had toll roads for many years and anecdotal evidence suggests that from initial resistance, they have now become routine.

Government can control the level of tolls, adjusting them as circumstances dictate, including at the individual taxpayer level, allowing for concessions and exemptions.

Ideally, the funds raised should be used to fund the infrastructure that will deliver the most economic benefit to the State. However, to help gain acceptance of toll roads, it is proposed that 60% of the funds raised from a designated road system, be directed to infrastructure in the area from which the funds are raised. Taxpayers would thus see the tolls they pay being used in a manner that directly benefits them.

To remove political influence from the decisions as to what infrastructure should be built, Government could consider establishing a statutory body, Infrastructure SA, to critically assess proposed projects and determine which of them should be approved. This would

6 ibid 7 ibid PlS

BIPage ensure the funds are largely directed to those projects that deliver the greatest economic benefit.

South Australia has built several major road systems without resorting to tolls for funding. It is now appropriate to use those road systems to generate revenue to fund new infrastructure which will deliver productivity improvements, economic growth and jobs.

---oOo---

9JPage PLACING A TOLL ON FOUR EXISTING ADELAIDE ROAD SYSTEMS \ -- 1 . I 1-:------::------+1-+------11 I I ______[___ _ ~~s_~:~mp_tio~------j-----1--- _____T ---t ~-- - I 1 1-~--~-----.. ------~-·--·-----···· - l ~~~------~------,------'------~-~---· l Number of road systems i 4 i I I I I ------·------1 , --·----+-----L__--t----- , I Toi\Rates . -·-·-----·----·----·1 I ------·-·----·-·---,-I I ' --·--·------1-----I SE Freeway I I : , ! ! Mu-~ray Bridge I Adelaide ----lea~~- -r------1-?:0o ---~-----r ·· · ·: 1 1 ------. --·-- ···------·· ------'"-----t----;------··--···· T- ·----"-----·------~ - r------1------I __ rv1[Jrr~y_~~i~~~J\delaicl~-- 1Trucks i 34_00 J _: ------l- I Mt Barker I Adelaide !Cars I · I Mt Barker I Adelaide .. - fTru~-k~-;------8.00 -----r----- I 1 ------;---·-- ___ . ------.----·--1- '' ·---·------·------i-' ------t------,------~------Southern Expressway !Cars . 4.00 , 1 j ' · ------·---!Truck~;------_, ___ --,------. ------,-·--·-----·--

[]_EX Cars f'J Ol"_tll_er Ere_ss_w i3 y ------·-···· :Trucks P9~~i~_er~~e~~s~0~, ==- ~=~;~ars~~~~~=-~==:::::::=·----·------·------·------______-----"------·--' __ 'Trucks ----- . ------~------_j_ ___ ------L_eak~g~f~ctor ,Cars , __ )______" ------·"'"'"" ------·------·-· 1Trucks , • ' I ------"------,------·------______,,,__ __, ______------~-----~·--.---·--- ______,,_) _____ ,____ ------+-- ·--·---+------'-· Concessions --·------·------0.5% --- ... ---"------,------·-··-'-·------·---·---+------'-----·---- 5,000,000 lnfrastructure!_p_~r_ ,;y_~t€!111_ .. ------Amort_isati_o_nrate_pa_ 3.33% . -----1------·-- Adminyer_syste!Tl [l~--- ______,____ _,_ 100,000 ------1------+------+- ----~----· _,_ - ----~------1------+-.--:---~------: --·--·····--- --·--·- _____ ,____ j ______J______i_ __ ---- ; .. _____ ,,_ l ___ ,____ ------ANNUAL TOLLS I i 315,740,344! I ! . i Less_A_d~nistrati-o~ . . ~-- ·······-~---4o-o,ooo:------;----.-~--- --~ 1 . . -----,- -_-_-_· l~_!i:_a~!~~-z~_re_A_~_-.;_;i~------·· L_ ...... · 666;Dao • ---~===---r------.~--===~r=------'---·------1\i!."f_!()~_LR~-\,1~_1'4_1J_E __ P.A_. ___ j __ , 3_1:~,_Ei2_4,3<1:4! _____l ___ _j. i . j I ' i I I ! 1------]-- --- I t· ------,---~--·- ·--·------

1 I I 1 I '

TOTAL, ______REVENUE _ i ' ------··-·

Southern Expressway Vehicles Vehicles 1 , Tolls Tolls per ~~----- ~ ~~ -~ -P~~ day ~~-~ ~ toll.;d ·-;T~II R~t~' - ~ pe~d~y ------_,_ - Annum ·-··------:------;------·· ---.------··-··--·----~------· -·------.. ------~~- _____,_c:_ars ~1,1()~: _____ 1"5~~~-- 256 49,312; 4.00' 197,246 71,994,790 3,600' 36 --~~ 3~~6~[~-~~.Q~~--~-~=:~~~s12_:-_!(),4o6,~8iJ ~-~--~-~-----~----~ - ~----~- -~---.- -~ -- 54,700'

TOTAL REVENUE ' 225,758' 82,401,670 ------~---·-··- -·------

1--~ ·-·- - ~ ------~---~·- ~~-----~·- ---~-~ - --~

------·-··------··-' ------Northern Expressway Vehicles Conces Vehicles ' Tolls Tolls per ------·-·------·--·------_, ___ p.;~-d;;_y : -Le;;_kag.;T--;ions tolled :-Toll Rate_,__per day . Annum ------~------+-~~~ ----c------..... _ --r·---- -~------·:·-.. ·------.. ·-- -.. -~------

, ' : ---- - 'cars . - --i6,6oo1 498, 83, 16)ii9r--4.ooi -- --64~076i ____23;387;74o --+------,------~------r--- ···- ----,------;------·------:------···-··--· )Trucks , 2,500' 25.[ i 2,4751 8.00j 19,8001 7,227,000 ______-:-=-T~ ___ ! 19,100_~---~[_--o-·-- .~~~·--~:--=~~=-=-~ ·------·---·----~ TOTAL REVENUE : , I ! 83,876 30,614,740 ~--·--·------~-- ··------.--~- -·-+------.. :------·--- ·------r-··---·· --- ·--·--·----t-~·- _, _

__ .,__ ------:·-·· ------i I ------·- --·----~--r------·-·· ----·------·- --j ":· ~ort River Expre~~~~_y__[ ___L~hicles _L : Conc;;-\v;;;,;~l~~-+ _ _ I Tolls --1-~T~~~------~------:- i Pe_r_d_