Estonian employers: Presenting car tax as environmental tax not credible

TALLINN - The Estonian Employers' Confederation believes that both the purpose of the proposed car tax and its inevitable need for implementation are unclear, and that presenting the car tax as an environmental tax without measurable environmental goals is not credible.

CEO of the Employers' Confederation Arto Aas underscored in his response to the Ministry of Finance that Estonian entrepreneurs and consumers are already facing several cost-increasing and inflation-boosting tax hikes. Concurrently, Estonia's economy has been declining for five consecutive quarters, unemployment is rising, and the competitiveness of companies in export markets is under severe pressure.

"Tax revenues for the 2023 state budget are nearly a billion euros higher than previously forecasted. In this context, the purpose of introducing a new tax is highly questionable," Aas said in a press release. Employers believe the government should first proceed with cost cuts and state reform. If the coalition decides to introduce the car tax, the government must, according to the confederation, commit to investing the additional tax revenue in the development of public transport and roads.

However, the purpose of the new tax remains unclear in the employers' view.

"Is the goal to protect the environment, limit car use, raise additional funds for the state budget, or redistribute revenues?" Aas asked. "We can't effectively meet multiple goals at once, and that's the biggest weakness of the proposed options," he noted.

Furthermore, the employers see contradictions in the tax development intention. For example, the tax presented to the public as an environmental tax lacks environmental metrics. They are also concerned that, as a result of the tax, tax revenues may decrease as the proportion of economical vehicles increases and the number of cars decreases. This would, according to the confederation, lead to the taxation of even more vehicles in the future.

"The goal and incentive for taxpayers, however, should be that by acting in an environmentally friendly way, their tax burden decreases," Aas explained. However, he believes there is a risk that the new tax will be casually raised for budgetary reasons.

Employers do not approve of introducing new taxes. If the government still proceeds with the car tax, the confederation believes it is necessary to further analyze and communicate the bill's compliance with the set goals and assure taxpayers that by making environmentally friendly choices, their tax burden related to transportation costs decreases. Of the presented alternatives, employers believe a narrower model focusing more on reducing carbon dioxide emissions is more in line with these objectives.

The confederation also points out that there is currently no impact analysis confirming the tax's suitability, and there are no environmental metrics to evaluate its environmental impact. Without these analyses and metrics, employers believe presenting the tax as an environmental tax is not credible.

Employers further suggest that the issue of car proliferation is only a problem in Tallinn and Harju County.

"Estonia's scattered settlement and people's need for mobility make the design of a national motor vehicle tax extremely difficult. When introducing the tax, the additional tax revenues must be invested in public transport and roads," Aas emphasized.

Additionally, the confederation believes the tax impact should be assessed in conjunction with tax changes planned in the European Union raising the minimum fuel excise duty rates and expanding emissions trading to the transport sector.

In Mid-July, the Ministry of Finance sent on a round of approvals a document of legislative intent, based on which a motor vehicle tax would be imposed on most vehicles in Estonia.

Two possible models for calculating the tax have been proposed in the legislative intent. The first model is based on the broader global and local environmental impact of the motor vehicle during its production, use and disposal, whereas the second model more narrowly focuses only on carbon dioxide emissions during vehicle use.

The ministry wishes to pay special attention to vehicles with suspended registration, or junk cars, when introducing the motor vehicle tax, setting a two-year transition period for taxing them. There are nearly 300,000 such vehicles in Estonia, and this number is on the rise.

According to the plan, the vehicle tax would come into effect from July 1 of next year and the annual tax would be paid for the first time in August 2024 for half a year.