Blackwater Motors and Audi Cork

Blackwater Motors and Audi Cork

Submission On VRT and Road Tax Reform June 2014

Blackwater Motors and Audi Cork

Submission To Joint Committee On Finance, Public Expenditure and Reform On Vehicle Registration Tax and Motor Tax Reform

June 2014

IndexPage

Introduction2

Previous Submissions On VRT Reform3

Common Myths About The Motor Business5

Car Dealerships and Their Current Financial Position9

Why VRT is an Inefficient Method Of Taxation10

Social Regressive Nature of High Car Taxes11

Car Price Elasticity12

Reform The Existing Road Tax System13

How to Reform VRT15

Conclusions16

Introduction

This submission is made by Denis Murphy, Managing Director of Blackwater Motors and Audi Cork, retail car dealerships based in Cork. Blackwater Motors operate three Volkswagen dealerships in Cork City, Fermoy and Skibbereen, Co. Cork while Audi Cork operates one Audi dealership in Cork City. The combined operations of all four dealerships employ over 140 people.

We read recently the desire of the chairman of the joint committee on Finance, Deputy Ciaran Lynch, for businesses and other interested parties to make budget and taxation submissions direct to the committee in advance of October’s budget. It’s encouraging to know that your committee is looking for budget submissions. We are encouraged to know that public representatives who are not all government deputies and who do not have any false loyalty to the Department Of Finance will consider budget submissions. I don’t know if this has ever happened in previous years but shouldn’t it be common practice that submissions are made through your committee and not direct to either the Minister For Finance or direct to the Department Of Finance. This would guarantee transparency but as we know transparency is very low on the Government’s list of priorities.

We are making this submission on the reform of VRT and annual motor tax. The average family car in Ireland average price €22,000 is taxed over €7,000 through the mixture of Vat and VRT. The main argument in this submission is that taxation on cars is excessively high which is havening a significantly negative effect on both the new and used car market and is a socially regressive an inefficient method of taxation. VRT has more of an impact on people on lower incomes as VRT is built into the value of car for its useful life. It’s a mistake to call it a registration tax as residual VRT exists on every car in Ireland expressed at the same % rate as its expressed on a new car. Everyone who own a car in Ireland (1.9m people) paid VRT and most are unaware that they pay this tax. The general belief is that it’s the person who buys the car first pays but this is not the reality.

We can reduce VRT on both new and used car, reduce annual road tax while at the same time create more jobs and generate more taxation revenue. This can be accomplished by stimulating demand through reduced taxation and the excess demand over and above current demand will more than compensate from the loss of revenue from the reduction in VRT. This has been proven by eminent economists in UCC. This idea is not fantasy and it doesn’t take a rocket scientist to see how this reform will benefit the economy as a whole.This is not a new idea but one which our government seem very afraid to take. The Government are prepared to take the opposite decision increase taxation and reduce revenue without any fear even though this strategy has proven over and over again to be riskier than the reduced taxation option. The Department of Finance’s mantra appears to be to increase taxes for the sake of increasing rates of tax without any sophisticated and comprehensive analysis of the effects of increasing these rates of tax. We have already seen this government increase Vat and VRT without increasing overall tax revenues from these sources of taxation. The Department Of Finance does not appear to have analysed what effect reducing taxation rates would have on the overall income generated from these sources of taxation. We hear minister after minister talking about stimulating demand in the local economy while at the same time increasing the very taxes that inevitably depress demand. It’s really depressing to hear these ministers talk one way and act in the exact opposite way. It’s as if words are everything and actions mean nothing except that in the world that we inhabit, actions mean more than words. It appears that this practice of saying one thing and do the exact opposite is endemic within politics and the administration of our state, most of the institutions of state are not fit for purpose especially the Department Of Finance. The decades of weak and directionless leadership, inability to make a decision, procrastination, protecting the status quo, protecting elites within the public and private sector, protecting banks at the expense of every other section of society, afraid of new ideas and more afraid of putting new ideas into practice has lead the country to where it is today. Unfortunately the current government has done everything within its power to maintain the status quo and keep repeating the tried and failed policies of the part decades. We believe that the operation of VRT and the system that supports it demonstrates in one small way the ineffective management of our economy. Unfortunately for us all, this mismanagement is common in every single sector of our economy and society in general and it’s time to change and maybe reform of VRT and annual road tax represents a low risk opportunity to begin this change.

You have very recent direct examples of how tax reductions work to generate demand, the car scrappage scheme in 2010 and 2011 and the reduction in the rate of Vat in the tourism and hospitality sectors. These very recent examples prove the point that you can reduce taxation while generating more taxation income while employing more people. It could be that the governments fear is misplaced,you should consider reversing this high taxation policy which depresses demand, VRT reform offers a means to achieve this.

We commissioned (as part of a previous submission) three Economists from University College Cork, Mr. Robert Butler MEconSc, Mr. Seamus Coffey MEconSc and Dr. Edward Shinnick to calculate the effects on the demand for new cars that the reform of VRT will have on the market and the consequent effect on exchequer revenues. They concluded that every 1% reduction in taxation will increase sales by 1.6% which is more than enough to give us the flexibility to reform VRT and annual road tax.

Previous Submissions on VRT and Annual Road Tax Reform

This is the fourth submission we have made on reform of VRT, the first in 2009 to the commission for taxation which agreed with our submission at that time that VRT should be abolished, the second to the Department of Finance in 2009 following the collapse in the new car market in that year and the third in 2012 prior to the increase in VRT in the 2013 budget. We warned in our 2012 submission that any increase in VRT in the 2013 budget would decrease sales of new and used cars and would result in a loss to the exchequer rather than the €50m, they hoped to raise from the increase. We also warned that the increase would cost jobs and unfortunately both predictions came through with a reduction in the new car market in 2013 and more of our staff lost their jobs. (We lost €105m instead of raising an additional €50m, a variation of €155m on what the Department of Finance predicted,(usual accuracy from the Department Of Finance). The government pressed ahead with its goal of increasing taxes irrespective of the consequences. We have had six years of tax increases and cuts with no appreciable benefit to the domestic economy in which 100% of our revenue is earned. We believe that the time has come to take a new approach to the needs of the country to increase total income rather than increasing rates of taxation. VRT reform represents an opportunity to change the tried and failed methods of raising income through increased taxation.

Since the latest increase in VAT and VRT in 2012 and 2013, new car registrations have fallen by a combined 17% a loss of 15,000 units which in turn translates into a loss of €105m in total tax revenue over what the exchequer got from VAT and VRT in 2011. We wouldn’t have to have “medical car probity” or citizens with disabled children being forced onto the streets if this government didn’t increase VAT and VRT in 2012. If it had made the €1,250 VRT reduction which existed during the scrappage scheme permanent, it would have generated an additional €105m. We as a nation could have done a lot with €105m especially in these troubled times. Instead, they reverted to type mainly spurred on by the Department of Finance and increased taxes for the sake of increasing taxes. We spent much time and expense in making our third submission and we requested an opportunity to make our point direct to the Department Of Finance, we never even got the courtesy of even a reply to our submission. When what we predicted would happen actually happened, we get silence from the minister and the department, no accountability for a bad decision.

We did make representations to all Cork politicians in the Dail and true to form, it was the opposition deputies who replied while the government politicians made the weak and impotent argument that the cabinet makes the decision and that they cannot exert any influence on these decisions. The last time I looked we lived in a democracy and the cabinet was responsible to the Dail. The whip system prevents cabinet accountability and if the cabinet was held responsible in the Dail, maybe we would not be where we are today, we will never know. It’s not as if we have the most brilliant and articulate beings within our cabinet that their decisions are infallible and must be obeyed. What is wrong with a representative of any political party disagreeing with the executive and arguing this difference in the Dail and try to get the executive to change or amend its decision. Isn’t this what you were elected to do. VRT reform could begin a general process of badly needed reform of the administration of our state including the Dail.

We believe that the case for reform is sound and will benefit the industry, the consumer, employment numbers and exchequer revenues. The European Commission, The Commission for Taxation, Consumer Groups and the Industry has called for the abolition of VRT. The timing for abolition could not be better as the financial consequences from the abolition of VRT can be controlled without the catastrophic consequences suffered by the industry from the previous reform of VRT in July 2008. The time has come and it’s now time for the Dail, through your committee to act decisively and reform VRT.

We are not members of the SIMI so this submission is a direct submission on the specific effects of VRT in the car retail sector and not a combined industry submission.

Common MythsAbout The Motor Business Which Must Be Dispelled Before Any Reasoned Decision Can Be made on VRT Reform.

Further reform of VRT cannot be considered without first evaluating the results of the previous reform of VRT rates and bands implemented on 1st July 2008. This reform destroyed a once profitable industry overnight and contributed to an unprecedented collapse in the new car market in 2009 which has continued ever since. It made the coming recession significantly worse for car dealers, many of whom unfortunately didn’t survive.

There has been many misleading commentary on the causes of this collapse but the only authoritative analysis is the independent report prepared by the eminentPeter Bacon on the causes of the collapse. This report is the definitive analysis of what happened post July 2008. We can forward a copy of this report if you have an interest in reading it. The need for VRT reform which is needed now is as a direct result of bad decision making, really bad or no research and bad timing in 2008. We have to learn from the mistakes made in 2008, we cannot repeat the mistakes made in 2008, if we do then the consequences for car retailers will be catastrophic.

Unfortunately and sadly, there was much spin and misinformation about the collapse in the new car market in 2009 and the direct effect that the badly researched and mistimed VRT reform had on the industry and the market. In keeping with the culture within the Department Of Finance, the decision was defended even though the resulting collapse was there to see physically in car dealerships and in the registration statistics.We are compelled here to directly address and dispel the critical myths surrounding the VRT reform in July 2008. We cannot move forward unless we dispel these myths as we cannot trust the Department of Finance to use these myths again to defend the indefensible.

1. The VRT and Motor Tax changes implemented in July 2008 changed consumer behavior and resulted in a switch to more fuel efficient vehicles.

This statement is not true even though consumers have in fact switched to more fuel efficient vehicles.However, this change would have happened irrespective of VRT reform in 2008.

At the time these changes were announced in the Spring of 2008, it was evident to everyone except the government at the time that these changes would lead to significant reductions in the prices of new diesel cars and consequently significant reductions in the tax take from the sale of new cars.In 2008 manufacturers were already in the process of reducing significantly the CO2 emissions from their cars. The European Commission introduced the Clean Air For Europe Regulations (“CAFÉ Regulations”) requiring manufacturers to reduce their average CO2 emissions to 120gm by 2012 and to 95gm by 2020. There were concerns about peak oil and the ever increasing price of fuel which combined with global warming concerns shifted consumer demands to more fuel efficient less CO2 producing vehicles. Consumer sentiment had shifted towards low emission, more fuel efficient vehicles and manufacturers reacted accordingly.

Our own manufacturers Volkswagen and Audi introduced blue motion technologies, diesel particle filters, start stop technologies, enhanced engine management systems and new emission control and management systems all of which resulted in significantly reduced CO2 emissions on our vehicles. These cars were launched in 2008 and we had cars about to be launched with even more improvements in CO2 emissions. The government in 2008 made the decisions oblivious to changing technologies which were coming in 2008 and future years. When the changes were announced and we looked at the emissions on the new technology cars which were already available for sale and which were coming soon, it became very clear that the government had made a major miscalculation and most cars would move to category A and B emission categories. These changes in reality started the demise of VRT revenues to the level which now exists where over 90% of the cars sold are category A and B cars. In reality the changes resulted in diesel cars reducing to the same price as the equivalent petrol car and the prices of premium branded vehicles reduced in price significantly more that the volume branded vehicles. Consumers switched the equivalent diesel models and more premium branded cars were sold

Consumers would have changed their behavior anyway due to the response of manufacturers to the CAFÉ regulations and consumer demand. The VRT changes in 2008 accelerated these changes but in the process destroyed forever VRT revenues and fatally damaged a viable industry.

1. Cars are the major cause of CO2 emissions in Ireland

This is another myth. The environmental protection agency calculates the amount of CO2 emissions from various sections of the economy. However, they do not publish the emissions from cars separately, they are included in the transport sector. In 2007 immediately prior to the introduction of the VRT changes, cars accounted for approximately 10% of the CO2 emissions in Ireland. Cars still accounted for approximately 10% of CO2 emissions in Ireland in every year from 2008 to 2010. CO2 emissions from cars reduced by 14% from 2009 to 2011 but this is mainly due to reduced driving caused by the recession and the rise in petrol and diesel prices since 2008. There hasn’t been enough CO2 friendly vehicles sold since 2008 to have a significant CO2 impact. The vast majority of Ireland’s car fleet is made up of pre CO2 friendly vehicles. (The CO2 figures obtained directly from the EPA).

The VRT changes were announced as a means to reduce CO2 emissions in the country as a whole and given the general commentary at the time, we would have been forgiven if we thought that cars are the major contributor of CO2 emissions in Ireland. This myth is so prevalent that every time global warming is shown on the news, we always get an image of a car exhaust. It would be more representative to show a cow grazing in a field. The reality is a long way from the perception.