THE debate about high import duties on motor cars is once again raging and is likely to continue until some reasonable and practical policy is introduced. Traditionally, successive governments have viewed motor cars as ‘luxury’ items and therefore it has been politically easy to tax them. But, as was stated in a previous article, politicians have exempted themselves from this ‘Luxury Tax’. Interestingly, firearms, boats and jewellery attract far less import duties than cars.

The time has come for a more realistic view and to design taxation policies around a new perception of cars. The new tax policy should attempt to spread government’s car-related revenue over the life of the car instead of loading it up front.

Let’s take a practical look at it. Motor vehicles are capital goods with a long life span, typically 10 years. They therefore add to the wealth of our country. They are not short-term consumable items, therefore money spent to acquire them is not money lost.

On the other hand, fuel or food are consumables and once used are lost and cannot be recovered. Jamaica’s largest imports are food and fuel and although cars are very conspicuous they are not our largest imports. We have traditionally had low taxation on food and fuel but high taxation on cars. Low taxation on food encourages imports and discourages local production. Low taxation on fuel discourages conservation.

Our current taxation model for motor vehicles loads the acquisition heavily while going light on its usage.

Taxation on acquisition of a car now averages above 100 per cent, one of the highest in the world. However, on the other hand, taxation on fuel is one of the lowest in the world, and hence a litre of fuel in Jamaica is approximately half what it is in the UK, Europe or Japan. Not many people think of it, but the high tax on cars has to be financed and insured by the consumer; this is where the biggest loss occurs. So we are not only paying double for the car, we are also paying excessive interest to the bank and insurance premiums to insurers. We need to stop looking at cars as luxury items; they are a necessity in the modern world.

Spreading the taxation burden

If we start to look at cars as a necessary part of our lives, we start to see things differently.

Taxation policy should shift the huge burden of taxation from acquisition to usage, thus spreading the tax take over the life of the car. This can be done by reducing the excessive import taxes on cars to normal levels of around 15 per cent while increasing the tax take on fuel, vehicle registration, driver’s licence, vehicle inspection and so on. Vehicle registration, for example, is currently approximately $3,000 per car per year; this is a ridiculously low price to pay to use the country’s most valuable infrastructure, our roads. This only yields about $1.5 billion, per year; no wonder our roads are in the state they are.

Government currently earns an estimated $15 billion from vehicle imports. This figure would be reduced to approximately $3 billion, and would be re-balanced with an approximate $15 increase in fuel tax. Car purchasers would see an approximately $400,000 reduction in car purchase price (based on 1500cc car with CIF US$10,000), an approximately $200,000 reduction in financing cost and 20 per cent reduction of annual insurance cost. A motorist’s fuel bill would increase by less than $2,000 per month (based on 1,000 km per month travelling and 8 km per litre fuel consumption). Government revenue would go up by approximately $15 billion, (based on one billion litre per year consumption), The end result would be a net gain to government of $3 billion. This is the model used in most countries; cellphone companies also use this model very successfully when they sell handsets at a discounted price and make profit from the usage. This approach will save consumers while increasing government’s revenue over the life of the car. It is a win-win for all. Over a 10-year life of a car the largest costs are, financing, insurance and fuel. This new model will significantly reduce financing and insurance costs while marginally increasing fuel costs. There are many advantages to this model over the current one. With the availability of newer, more efficient technology, fuel costs will actually come down.

Advantages of new win/win model

• Increased government revenue

• Encourage greater efficiency in using cars

• Reduce pollution by encouraging conservation practices

• Encourage consumers to buy smaller, more efficient cars

• Encourage energyefficient technologies such as hybrids and electric cars.

• Reduced financing and insurance cost for car owners

• Lower vehicle rental costs for the tourist industry. Consumers who view the 100 per cent duty on cars as ‘extortion’ by government would also view this model as more equitable.

The win-win approach and the Transportation Policy

As part of a broader transportation policy government could apply fuel tax on diesel at a lower rate than gasoline, this will: 1. Encourage the use of the more efficient diesel cars 2. Keep public passenger costs down, and 3. Keep trucking costs down Furthermore, fuel tax should be used to subsidise public passenger transportation, and school children in uniform and with IDs should travel free on all government-owned buses. This would be a great boost to the present thrust for education. Further, registered private taxis and bus owners should be allowed to import the main tools of their trade, vehicles, duty-free every two years, and enjoy lower registration fees. This would be a great incentive to public t r a n s p o r t operators to become and stay legal.

The greatest challenge to introducing this model will be selling it to car owners who will quite likely see it as an immediate depreciation in the value of their cars and an increase in fuel and registration taxes.

One possible approach could be to offer current car owners a tax refund in the form of tradable government bonds. The value of these bonds would be determined based on the initial duty paid and the time the car arrived in Jamaica.

This new approach obviously needs to be carefully analysed by economists and financial analysts to find the optimal balance that will benefit all stakeholders, but the present model we have is seriously in need of overhauling.

The new model is a win-win for all and it is time government takes a serious look at it. The Ministry of Finance and Jamaicans will be the biggest winners.

Andrew Jackson Is the CEO of Jetcon Corporation and past president of the Jamaica Used Car Dealers Association, Link us on Facebook at facebook.com/jetconcars. The views expressed do not reflect those of the JUCDA.