Car Registration Tax (RT) in Malta is a hefty sum of money to pay. It costs the Maltese motorist more than the RT’s nominative amount as it has repercussions on the financial, economic, health and safety aspects.
The amount of vehicle registration tax is dictated by a complex schedule published in the “Motor Vehicles Registration Tax Act (Laws of Malta, Chapter 368)”. The tax imposed on new private passenger cars is a percentage of the CIF (Cost, Insurance and Freight) at importation, and the tax rate increases with increasing engine capacity.
It is possible to estimate the CIF, registration tax and the amount of VAT paid from the retail price of the vehicle if the percentage profit mark-up of the dealer is known. This mark-up is a commercial secret but tends to be higher for the larger, or luxury or sports models. In ‘table 1’ the retail price of a ‘virtual’ vehicle is chosen to represent an engine category on which the amount of registration tax paid is calculated based on a speculated but reasonable profit mark-up.
Financial Costs
The Tax – The RT and the18 per cent VAT on RT is money accrued from income on which income tax has already been paid and would be easily equivalent to six or seven months’ wages.
Finance – Vehicle finance may consist of a personal bank loan at 5.5 per cent interest or hire purchase with around eight per cent interest. In effect, the buyer is paying interest on a loan that is financing a tax, hard earned cash that is not being used to acquire asset value of the purchased vehicle. This is more relevant in the context of the European single market. In the case of a five-year loan, the added costs are equivalent to 17 per cent to 25 per cent of RT (plus VAT).
Car Insurance – The insured value of a new vehicle is based on its retail price that includes RT and VAT on RT. Insurance premiums will also cover the cost of taxation on the vehicle. This added cost stems directly from the imposed RT. Insurance premiums are also based on the cover required by the owner, no-claim discounts and the age of drivers. In the worst case scenario (with no discounts) with maximum cover, the basic annual premium for a driver over 24 can come to nearly eight per cent of the car’s retail price! It can be as high as 16 per cent when the driver is under 21. In the best case scenario, annual premiums will be closer to two per cent of the car’s retail price. Since RT and VAT on RT constitute roughly 25 per cent to 34 per cent of the retail price of the vehicle, it follows that this portion of the insurance premium is wasted in covering the tax. Over five years, this “excess cost” amounts to between three per cent and 13 per cent of the retail price of the vehicle. If viewed as a percentage of RT plus its VAT, these extra expenses can reach 12 per cent to 52 per cent for small engine categories and 8.8 per cent to 38 per cent for larger engine categories. These extra insurance costs are carried over to not-so-old vehicles, the high price of new vehicles having a knock on effect on the newer used cars.
The last column of table 1 illustrates the extra costs incurred locally as a consequence of RT in a best case situation (driver over 24, 60 per cent no-claim discount, bank loan at 5.5 per cent) and a worst case situation (driver under 21, no discounts, hire purchase arraignment at eight per cent interest).
Car maintenance – Old vehicles become money pits as maintenance costs start spiraling. The high price of new vehicles and the knock on effect on the price of newer used cars leaves many with no option but to repair and patch up when something breaks down. In civilised States with civilised vehicle taxation laws, scrapping the old vehicle instead of repair becomes a better option, and improves the vehicle fleet average age and emissions.
Economic Costs
National trade deficit implications – Positive economic implications of RT: Car imports are paid for by currency leaving the country. RT increases the cost of cars acting as a fiscal tool restricting the amount and value of imported vehicles. Removal of RT would lower the purchase price. The amount and value of car imports would be expected to rise, negatively affecting the trade deficit. If RT is removed, it would be fair to assume that the maximum increase in the value of private passenger car imports would be of similar magnitude to the amount of RT that would have been due. Lm16 million would be a good estimate.
Negative economic implications of RT: Old vehicles have less efficient engine technology and poor aerodynamics. Advancing technology has been improving fuel efficiency for the same engine category by 12 per cent every decade. Cars over 12 years old also consume at least 18 per cent more fuel than when they were run in. The cost of major mechanical repairs also increases substantially after the 12th year. High RT is a disincentive for the replacement of older, inefficient and more polluting vehicles. If the oldest 70,000 vehicles in Malta had been replaced over a five-year period, the amount saved from the national fuel bill today could have been Lm5 million annually. Several million liri could also have been saved from diminished importation of replacement parts for age related mechanical failures in older vehicles.
The extra costs and expenses incurred by the Maltese motorist effectively reduce spending power with a consequent proportionate decrease in commerce in other sectors.
Health and Safety Costs
Air Quality – High RT decreases affordability of both new and used vehicles, increasing the number of years these vehicles are kept in use. High vehicle taxation at importation/registration and low GDP per capita are the primary causes of an aged passenger car fleet. Malta has both factors conspiring to give a high average age of 11.7 years (2003). Old vehicles are more polluting by virtue of their old engine technology but also as a consequence of decreasing efficiency with age and concurrent increase in noxious emissions. We tend to find better urban air quality in cities with either fewer vehicles (with efficient public transport) or less average age of the car fleet. Athens, for example, is notorious for its bad air quality. This is a result of topographical features in the land, poor city planning and a high passenger car average age of over 10 years brought about by high car registration taxes. Air quality studies in this European city have shown an improvement in air quality when, between 1991 and 1993, the Greek government authorised a scrap incentive programme for older vehicles, which led to a reduction in the average age of the car fleet for that period. Restricting vehicle renewal with high taxation and an unpopular, polluting public transport has a negative effect on cardio-respiratory health of susceptible local inhabitants.
Protection from injury – RT is applied on the CIF, which includes the price of structural safety features and standard or optional safety aids. All manner of safety enhancing technology comes at a price. Charging the full RT rate on these components is a disincentive for buyers to have vehicles equipped with safety features. Seat belts, seat belt tensioners, multiple air-bags, ABS breaking, ESP (electronic stability programme), vehicle body shell strengthening and designs meant to reduce injury to the pedestrian may well account for up to a quarter of the CIF of the vehicle. High RT is causing potential buyers to go for cheaper less equipped cars or simply opting not to ask for the safety options because in most cases the uninformed cannot appreciate their benefits, or simply that the extra costs involved out price the client’s budget.
To illustrate the effect on occupant safety from improving technology, compare what happens to 1975 red VW Golf Mk I and a black 2005 Golf MK V model in a EuroNCAP crash test at 64km/h. In which vehicle do you think would our country’s legislators opt to be in case of a frontal impact? Current vehicle taxation laws are a testimony to the fact that there is more concern for government revenue than for the safety and welfare of road users.
Prevention of incidents – Older vehicles are inherently at higher risk of being involved in a traffic incident and that the incident will be more serious. In fact, insurance companies tend to load the premium by 15 per cent if the vehicle is over 10 years old. Older vehicles have greater design faults stemming from the limitations of the technology of the time and have greater systems deterioration. These increase the risks to occupants and pedestrians.
I had written on alternative ways of taxing road vehicles (TMIS, 1 January 2006) that are in line with EU recommendations for the abolition of Registration Tax. Such a change will improve the average age of the local passenger car fleet, road safety, energy saving and emission issues. Malta will have to increase fuel taxation by 2010 so government revenue from fuel will increase.
There are also indications that taxation on fuel for marine and aviation use will have to be implemented. Life and limb on the road is being held to ransom not only because of the stupidity and irresponsibility of some drivers but also because of fiscal policies that are meant to prevent a mere Lm10 million net of foreign currency from leaving the country.
If the trade balance has been the objective in maintaining fiscal control on vehicle imports, there should be none of this concern once EU funds start entering the country. The exchequer may take its pound of flesh but not without giving due regard to the costs created by the current vehicle taxation system.
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