KOTI - Korea Transport institute

Eighty percent of the revenue from the transportation‧energy‧environment tax, which is based on levies on gasoline and diesel, goes to the Special Account for Transport Facilities, which is aimed at facilitating the expansion of roads, railroad, airports and harbors, and at ensuring the efficient management and operation of these facilities. The tax, however, is slated to be abolished on Jan.1,2016 with the enforcement of the law providing for its removal. The National Assembly in 2009 passed the law which it asserted was causing fiscal rigidity and complexity of the fuel tax scheme. Its enforcement has since been delayed twice.
Predictions are that revenues from the transport tax, which consists of mainly fuel levies, will be on a downward slide because of steady reduction in fuel consumption. The use of gasoline or diesel is likely to decrease due to increase in the use of environment-friendly transport modes such as hybrid cars and electric vehicles. Another contributing factor will be progress in automobile technologies and the resultant enhancement in fuel efficiency. The circulation of adulterated gasoline and related tax evasion are also cited as social problems related to the transport tax revenue scheme that relies on levies on gasoline and diesel.
As for budget, the government envisaged the need to invest 185 trillion won over a 10-year period beginning in 2011 for the implementation of the National Transport Network Plan (also refereed to as the National Intermodal Transportation Plan). A number of studies predicted that the project would cost 16~27 trillion won a year. Depending on its policies, the government may be able to save budget on new construction projects. However, it would not be able to avoid an increase in the maintenance budget for the aging infrastructure. Research for this paper found that the yearly maintenance budget is likely to reach about 14 trillion won in 2030, even without including the life cycle- based replacement costs. Should such costs be taken into account, the budget would soar to 23 trillion won a year. A simulation showed that the budget relevant to the national transport network projects will reach the lowest level at 21 trillion won in 2020. However, it was forecasted to rise again after that due to increases in
the maintenance costs, regardless of efforts to cut new construction costs every year.

This paper makes the following policy suggestions in order to help address the problems related to the transport/energy/environment tax and to cope with expected changes such as increased use of eco-friendly vehicles and rises in infrastructure maintenance costs:
First, the government should act in a more prudent manner in deciding whether to abolish the transport/energy/environment tax on Jan. 1, 2016 as slated. The decision to get rid of the tax was made out of the need to resolve rigidity in state fiscal operations as well as the complexity of the fuel tax imposition scheme. However, the abolition may seriously constrain efforts to develop a diversity of measures aimed at meeting the growing need to secure transport SOC investment funds. The fuel levy-based transport tax policy cannot be an option for satisfying the need to secure huge amounts of budget needed for the maintenance of the aging transport infrastructure, as fuel tax revenues are predicted to keep decreasing in the future. It would be desirable to conduct more in-depth studies on restructuring the current transport tax revenue system before making final decisions on the fate of the transport/energy/environment tax.
Second, there is a need to look closely into the efficiency of transport infrastructure investments. It is necessary to assess the economic effects created through the construction of transport infrastructure during the years when Korea was achieving phenomenal economic growth. At the same time, the extent to which the infrastructure build-up contributed to ensuring the citizens’ basic transport rights must be evaluated as well. Lately, the news media have been carrying articles on the alleged low level of credibility of transport demand predictions. However, this should not be the reason for underestimating the efficiency of past investments in transport infrastructure. Now is the time to exert efforts to create a new paradigm for transport infrastructure investment. The endeavors should be based on thorough investigation of the changes made in the relevant circumstances since the era when the nation achieved economic growth at astounding rates. It is essential to formulate new goals and strategies concerning the level of transport infrastructure the nation should achieve. They should serve as the basis for improving the transport tax system as a way to secure sufficient resources to fund transport infrastructure projects.

Third, it is necessary to promote a pilot project for the implementation of the pay-per-kilometer driving tax system, which is rated as an alternative to the transport‧energy‧environment tax. Through the pilot project, the new scheme's technological aspects and policy effects should be thoroughly investigated. Through U.S. and European case studies, the implementation of the new driving tax scheme was found to have led to increases in tax revenue. Thus, it has been proposed as an option that would help make up for shortfalls in transport infrastructure funding and attain favorable effects in terms of transportation policy. Relevant studies point out, however, that there is a need to build a consensus among the citizens and devise some institutional measures in terms of privacy protection. In the United States, 18 states are about to implement the new driving tax system on a pilot basis.

In Korea, the National Assembly has enacted a law calling for the abolition of the transport‧energy‧environment tax. Its enforcement has been postponed twice. Finally, however, the tax is set to be repealed on Jan. 1, 2016. At this juncture, this paper proposes that a thorough investigation of the nation's transport tax policies be implemented before pushing for a relevant tax reform