Is taxation being effectively used to promote public transport in Europe?: Fid-Bau Portal

Is taxation being effectively used to promote public transport in Europe?

Barros, Victor / Cruz, Carlos Oliveira / Júdice, Tomás / Sarmento, Joaquim Miranda

Abstract Public transport is a pivotal utility in increasing the long-term sustainability of cities. Consequently, there has been a growing interest in promoting a sustainable modal shift that reduces dependence on private vehicle use. This strategy has involved several specific actions, among them employing price differentiation between the two substitutes considered in this research – public transport and private cars. Governments can influence fares in different ways. However, fiscal policy governing applicable taxes is one that is often neglected in the literature. This paper investigates the relationship between the market share of public transport and taxation – in particular, value added tax (VAT), which is levied on three main products: public transport fares, fuel, and vehicle ownership. The results show that taxes matter, but not all taxes are determinant. A lower VAT rate on public transport fares and a higher tax rate on vehicle ownership can lead to an increase in public transport's market share. Taxing car utilization through VAT on fuel does appear to be significant.

Highlights • Taxes matter in promoting the use of public transport. • The normal VAT rate decreases public transport's market share. • Taxes on ownership are more effective in shifting demand than taxes on usage. • An increase in tax on fuel is relatively inelastic in relation to the use of public transport. • Ownership-related taxes do indeed have a positive effect on increasing public transport use.