Select Committee on Environmental Audit Eighth Report


The Government's progress in shifting the burden of taxation from 'goods' to 'bads'

The environmental tax measure

11. In our reports we have urged the Government to adopt the Environmental Tax Measure developed by the Office for National Statistics and to use it to assess its progress against its commitment to shift the burden of taxation from 'goods' to 'bads'.[9] It did not do so in the Budget 1999. The Government said that the Budget would shift the burden, through cuts in taxes on employment, smaller cars, clean fuels and providing incentives for energy efficiency.[10] But Ms Hewitt did not offer the Committee an estimate of the overall impact of the initiatives in the Budget on the Environmental Tax Measure.[11]

12. The Office for National Statistic's Environmental Tax Measure has been developed using the definition of environmental taxes adopted by the Organisation for Economic Cooperation and Development (OECD) and the Statistical Office of the European Communities (Eurostat). Despite this there remain differences between the Office for National Statistics' UK figure and that reported by Eurostat. The Office for National Statistics has told us that it is satisfied that the taxes which it includes as environmental taxes are the main taxes which have a significant environmental impact and include all those for which the primary objective is environmental. It is in the process of agreeing its approach with the OECD and Eurostat.[12]

13. The Office for National Statistics set out for us the limitations of the Measure. These are principally that the measure does not include revenues from taxes which have a significant, but indirect, environmental impact nor address the effects of taxes structured to achieve environmental goals (such as duty differentials in favour of less polluting fuels); and that the Measure does not distinguish high revenues resulting from high rates of tax from those resulting from high rates of pollution subject to tax.[13]

14. The Government's response to the Committee's report on the Pre-Budget Report 1998 said that it does not consider it is clear that "an increase in environmental tax revenue is necessarily a good thing for the environment" and that "there is no "correct" burden of taxation that should be raised by environmental taxes". The Government concluded that it is not therefore appropriate to publish the Measure in all its economic documents.[14] We accept that there is no "correct" burden of environmental tax. However we believe that the UK is currently proceeding along an environmentally unsustainable path and that environmental costs are still not sufficiently taken into account in economic decisions. We therefore consider that an increase in environmental tax is justified and support the Government's commitment to achieve this whilst reducing the burden of other taxes, thereby achieving a shift in the balance of taxation from 'goods' to 'bads'. As a result, although we accept the limitations on the use of the Environmental Tax Measure, we consider it none-the-less has value as one means of auditing the Government's performance in moving the economy onto a more sustainable path and we welcome the obvious efforts being put by the Office for National Statistics into making it comparable at an international level.

15. The last published figures for the Measure show that 9.1 per cent of total taxes and social security contributions came from environmental taxes in 1997 and that this proportion had been pretty stable over the previous four years, with real increases in revenues from fuel duty and VAT on fuel duty and the introduction of the landfill tax compensating for relatively lower revenues from vehicle excise duty and the fossil fuel levy.[15] The Office for National Statistics used Eurostat tables to report to us that in 1996 the United Kingdom raised a lower proportion of its tax revenue from environmental taxes than in five other European countries, Denmark, Spain, Ireland, the Netherlands and Portugal, although it cautioned that the figures for each country may not be directly comparable due to inconsistency in coverage and calculation.[16]

16. We expect to continue to monitor changes in the Environmental Tax Measure, and once again urge the Government to follow the lead of the international community in including it in its analyses.

Efficiency of the tax system as a whole

17. In our report on the Pre-Budget Report 1998 we concluded that there was no evidence that the Government is addressing the merits of environmental taxation in the context of improving the efficiency and effectiveness of the tax system as a whole.[17] This view was echoed by the Environment Agency in its memorandum to the Committee following the Budget 1999. It said that the Government should move on from examining individual taxes to the opportunity to carry out a fundamental review of the system. Treating each individual tax measure as a separate item and subjecting it to the "test of good taxation" in its view introduces obstacles and acts against the Government pursuing a longer term strategic aim.[18]

18. The Government's response to the Committee's report on this point was in part disappointing, because it again pointed to the importance of not seeing environmental taxes as an end in themselves, but as an option to be considered alongside other policy instruments for dealing with environmental objectives. However it also described the Budget 1999 decision to recycle the revenues of the Climate Change Levy through employers' National Insurance Contributions as an example of a change that will improve the efficiency of the tax system as a whole.[19]

19. To us, the evidence from the Budget 1999 is promising in two regards with respect to the Government's commitment to achieving a shift in taxation from 'goods' to 'bads'. It showed the Government's desire to reduce employers' National Insurance Contributions for their own sake, in introducing changes to thresholds and rates which overall serve to reduce the tax's revenue take. This shows the Government's recognition that National Insurance Contributions represent an inefficient tax, affecting the labour market. It also showed the Government's willingness to use environmental tax revenues to achieve a shift in the burden of taxation, as opposed to setting the tax at a lower rate and using all of the revenues to reinforce the environmental impact of the tax. The Government's approach was thus a reflection of the view that environmental tax reform can improve the efficiency of the tax system as a whole, even though the Government has not sought to quantify the gains from improved labour market efficiency. As Dr Barker summed it up, the Budget 1999 showed a strategy, but it is a very slow and cautious one compared to what has been happening in other countries.[20]

Green Tax Commission

20. We have argued the case for a Green Tax Commission to take up new tax issues and provide a focal point for research and submissions.[21] And we are pleased to have received support for this proposal from the Environment Agency and non-government organisations.[22] The Government's response to our last report stressed that it had taken an open and consultative approach to its work on environmental tax issues. Whilst it indicated that it will keep the case for a Green Tax Commission under review, it stated that it could not see what a Commission would add to existing arrangements at this stage.[23]

21. Following the Budget 1999 and the progress the Government undoubtedly made against its own agenda for environmental taxes and in shifting the burden of taxation we asked the Economic Secretary whether she saw the process going significantly further. She responded that she suspected the Government would never come to the end of the path of righteousness, and that its focus now is on delivery, with huge programmes of implementation needed to follow up on the in-principle decisions.[24]

22. In evidence to our Committee we once again received calls for Government to appraise the case for further environmental tax measures. These included taxes on fertiliser use, aviation fuel, peat and incineration; and allowances for investment in environmental technology.[25] Friends of the Earth particularly called on the Government to start the debate on future fuel duty rates to apply after the end of the current commitment to the Fuel Duty Escalator in 2002.[26]

23. In the light of this background we would suggest that the role for a Green Tax Commission becomes even more clear. It would be a valuable route to providing an independent assessment of the lessons to be learned from this round of environmental tax reform; to research whether the shift in taxation has gone far enough or whether it should go further; and to make proposals for further measures or changes to existing measures, and in particular the future for fuel duty rates.

Conclusions and recommendations

  24. We welcome the commitments the Government has made to environmental tax measures which now demonstrate its will to deliver against the Statement of Intent on Environmental Taxation. We consider there is likely to be scope for a further round of reform in the next Parliament and that a good way to prepare for that would be to task a Green Tax Commission with reviewing the progress made and making recommendations for the future.

9   Most recently, the Committee's report on the Pre-Budget Report 1998 Op. cit. paragraph 27 Back

10   HM Treasury, 1999 Budget Day Press Notice Number 5 Back

11   QQ80-81 Back

12   Ev p 103 Back

13   Ev p 103 Back

14   Appendix I Government response to (h) Back

15   Economic Trends, No 539, October 1998 Back

16   Ev p 102 Back

17   Op. cit. paragraph 21 Back

18   Ev p 81 Back

19   Appendix I, Government response to (f) Back

20   Q30 Back

21   Op. cit. paragraph 31 Back

22   Ev pp 81 and 110 Back

23   Appendix I, Government response to (i) Back

24   QQ83-84 Back

25   Ev pp 79, 84, 97 and 109 Back

26   Ev p 93 Back

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Prepared 27 July 1999