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Are there signs of a greening tax system in Flanders?

Issue 25-10-2013The answer to this question is No. Since 1997, the tax system applicable in Flanders has not shown any further signs of greening. In fact, there seems to have been a slight move in the opposite direction. This is revealed by a new MIRA study report compiled by HIVA-KU Leuven. Based on the revenues, a third of the environmental taxes levied in Flanders comes under Flemish competence, meaning that Flanders has only a partial impact on the greening of its tax system.

Both Flemish and federal environmental taxes are levied in Flanders. Of the total revenues generated from environmental taxes, 34 % fall within the competence of Flanders. This percentage includes revenues from transport taxes and Flemish environmental taxes. Revenues from energy taxes and federal environmental taxes are a federal competence and account for 66 % of the revenues. In recent years environmental taxes in Flanders have not gained in importance in the spectrum of policy instruments. However, the European Commission and the OECD have already been calling on member states to green their tax systems since the early 1990s. Environmental taxes are considered an effective and efficient policy instrument to tackle environmental problems. This report does not comment on the effectiveness of the overall environmental policy in Flanders.

Analysis based on five complementary indicators

The European Commission and the OECD are advocating to achieve greening of the tax system by shifting taxation away from labour to taxes that are less detrimental to growth, such as environmental taxes. All indicators from the study indicate that the tax system applicable in Flanders has witnessed a period of significant greening between 1989 and 1997.  For the period of 1997 to today, however, no further greening is observed. In fact, there seems to have been a slight move in the opposite direction. The same applies for most of our neighbouring countries. Compared with other European countries, Flanders also levies high taxes on labour. In summary, up to now Flanders has not recorded any shift away from the tax burden on labour to environment (figure).

Figure: Evolution of revenues from labour taxes and environmentally related taxes, Flanders, selected European countries and the average value for the EU-27, 1995-2010
Figure Evolution of revenues from labour taxes and environmentally related taxes, Flanders, selected European countries and the average value for the EU-27, 1995-2010

Note: for each country/region there are four observations: for 1995, 2000, 2005 and 2010; the last value has an arrow to indicate the trend of the evolution. In order not to overload the figure, only the neighbouring countries and a few large European countries are shown. The horizontal and vertical dotted lines represent the average values for the EU-27 for 2010.

Further findings of the report:

  • revenues from environmental taxes applicable in Flanders are low with respect to total tax revenues and with respect to the gross domestic product;
  • the federal government levies low energy taxes as compared to other European countries, which mainly explains the low revenues from environmental taxes in Flanders;
  • tax rates on petrol and diesel, adjusted for inflation, have declined in the last two years;
  • transport taxes have been stable;
  • Flemish environmental taxes have increased slightly.

Potentially environmentally harmful subsidies?

The European Commission has called on member states to inventory potentially environmentally harmful subsidies and to phase them out by 2020. Against this backdrop, the study looks at tax cuts and exemptions on environmental taxes. Tax cuts and exemptions can in fact be considered as subsidies.

The report includes an experts' assessment of the economic, social and environmental impact of three tax cuts and exemptions on environmental taxes. The three cases were selected on the basis of the following criteria:

  • clear support measure;
  • significant tax cuts;
  • representative of the objectives of the majority of environmental taxes.

All three of the selected measures are a federal competence:

  • degressivity of the federal contribution on electricity;
  • reimbursement of professional diesel;
  • maximum prices for electricity and gas.

The experts' views, while not unanimous, provide an orientation for two cases that could support policy makers in reaching a final conclusion, taking into account the policy objectives.   However, the results of the three case studies cannot be applied to other tax cuts and exemptions.

Read the English summary of the Dutch report ‘Greening of the tax system in Flanders - actualisation and in-depth study’

Study commissioned by MIRA, the Environment Reporting Unit
Research report MIRA/2013/06

researchers: Kris Bachus, KU Leuven, HIVA

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