Wednesday, 2 March 2011

Low taxation of company cars: a perverse incentive to pollute?

As residents of Brussels know all too well, this is a car city. Sure, there's an efficient metro system – but it has only two lines and doesn't cover large swathes of the city's more affluent areas, which are instead covered by glacially slow trams and buses. The city is small enough to be easily covered by bike, but the extremely poor quality of the roads, the hilly terrain and the lack of cycle lanes often make cycling here more of a nuisance than it's worth (take it from a cyclist). That leaves only driving by car, an activity I would say the vast majority of my friends here are engaged in.

I myself have never owned a car, having always lived in large cities with good public transport systems. I still don't own a car in Brussels, but after living here a year I can say I've never before felt such temptation to get one. Not necessarily because I have difficulty getting around here. Despite its flaws I find the public transport to be sufficient for my needs, and when it's not I go by bike. But I feel like a bit of an oddity sometimes for getting around the city by metro, tram and bike. Peer pressure? Car envy? I'm not sure, but the fact that most of my friends drive is making me suddenly want a set of wheels. By contrast, none of my friends in London or New York had cars.

But if the Brussels public transport system is sufficient, why do all of these white collar workers I'm friends with – many of whom are only in Brussels temporarily – have cars? The answer is simple – Belgium pays them to have one.

Belgium has one of the highest income tax rates in the world – 50% for someone making an average salary, up to 80% for someone making more. I've just recently been switched over from a British to a Belgian contract, and let me tell you paying 50% tax is a big adjustment after having paid 26% income tax in the UK. To get around this astronomical tax rate, employers here take advantage of the country's byzantine system of tax credits and loop-holes, giving their employees benefits which are not taxed. These include tax-free lunch vouchers, which I've written about before. The most common such benefit is for Belgian employers to give their workers company cars. Not only is the car itself given completely tax-free, but if the employer then also pays for all of the worker's fuel use, that is tax-free as well.

Belgium is the Oprah country - everybody gets a car. It's the only way employers can make up for the fact that they have to pay workers such a low salary because the tax rate is so high. Where I come from, only the most high-paid big cheeses get a company car – it's a huge honor to have one. But here, it seems like even secretaries get a company car.

So employees have come to expect a car from their employer. And since they can get any car they want for free, they choose the most expensive and most fuel-intensive cars. But who cares about fuel efficiency if the company is paying for the fuel? In fact as long as the fuel is free, you might as well drive that car as often as possible to get the maximum benefit.  And because so many people are driving their free cars, nobody is riding the metro. So the city doesn't make adequate investment in public transportation. This makes the public transportation poor, which in turn motivates people to drive instead of using it. If people don't use it, it doesn't receive investment. And thus the city is caught in a vicious circle that practically mandates car use and discourages public transport.

Belgium is hardly alone in Europe in offering a perverse incentive to pollute, but it is among the worst offenders. On Monday the European Commission's tax department held a workshop in cooperation with green groups to discuss the results of a study that examined company car tax policy across the EU and its effects on the environment. The study's results are pretty shocking. EU countries lose €54 billion each year in lost revenue from tax breaks for company cars – 0.5% of EU GDP.

Tax subsidies for these vehicles are largely the norm within the EU, but the extent varies widely. Poland and the UK have among the lowest subsidies for company cars, while in Belgium and Estonia the value of a company car is not taxed at all. In the United States, by contrast, company cars are always taxed as direct income at the market value of the car. No European country has a system that strict for taxing a company car benefit.

About half the new car fleet in the EU each year are sold as company cars. Of course, this doesn't only count regular cars given to white collar workers but also municipal vehicles such as mail delivery vans, garbage trucks and police cars. These types of vehicles are of course not the problem. Its difficult to determine which of these vehicles are only being operated for business purposes and which are being operated for both business and private use, since both types of driving have the same tax classification. But mail vans aren't the problem here. The report notes that it is the private use of company cars which is driving up emissions, and in certain countries the private use of company cars far outweighs business use. In Belgium 68% of customer car use is for non-business purposes – and that is out of the entire amount including municipal vehicles like police cars! 'Non-business purposes' included commuting to and from work.

Considering Brussels is home to the EU, which is in theory trying hard to reduce Europe's emissions, it seems obscene that a system of company car taxation exists here that encourages unnecessary driving. From what commission representatives were saying on Monday, it seems they may be leaning toward doing something about it. An upcoming white paper on transport to be released by the commission at the end of this month is expected to highlight the issue as a problem.

But the EU executive will run up against some pretty steep resistance if they try to end these tax subsidies. They are enormously beneficial to the auto industry, particularly in Germany. And as is the case with all benefits, employees who have become accustomed to being given cars won't take too kindly to having them taken away. In Belgium for instance, what would happen if the EU suddenly passed a directive that said member states have to end all subsidies for company cars? Employers would have to drop the benefit, but at the same time they would have difficulty increasing their employees' salaries to make up for it because of the crippling tax rate. Those employees probably wouldn’t be too happy if they were suddenly forced to use a public transportation system that's been woefully under invested in – especially if they're not going to be compensated for the loss of that car benefit.

It's a tricky line to walk. For my part, I'll continue to resist the urge to get a car. God knows on my journalist's salary, after paying half of my income to the Belgian government, such a purchase would be out of the realm of possibility anyway. So I'll just keep biking through the potholes.

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