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Greening of the tax system in Flanders

Issue 30-01-2017HIVA, the Research Institute for Work and Society, updated the indicators for the greening of the tax system in Flanders, as commissioned by the Flanders Environment Agency (Environmental Reporting Unit - MIRA). In the previous three editions (2004, 2011 and 2013), little change was reported, but the conclusion in the 2016 edition is different. Flanders can for the first time be said to have experienced a tax greening wave over the period 2015-2016.

The federal and (especially) Flemish governments have implemented a number of major tax reforms in recent years. One of them was the federal tax shift from tax on labour to other taxes including "green" taxes. At Flemish level, the most important greening operations were the increased Energy Fund contribution, the car registration tax (BIV) reforms, the annual circulation taxes and the new toll on lorries.

To measure the greening of the tax system, both revenue indicators and tax rate indicators are used, and it is important to consider these two types of indicators together. An increase in revenue from environmental taxes may be caused by more environmentally polluting activities or by a higher tax rate on these activities. An increase in the tax rate indicator (increase in tax or levy) indicates effective greening of the tax system and ideally leads to a reduction in environmentally polluting behaviour. A sharp reduction in environmentally polluting behaviour may lead to a decrease in revenue from environmental taxes.

A step in the right direction?

Some measures, such as the increased Energy Fund contribution (this levy is also known as the "Turteltaks") were decided on out of financial necessity, but in most cases they are deliberate greening operations. The Belgian and Flemish governments therefore seem to be responding to the call of international bodies to green the tax system.

Energy taxes remain predominant in stagnating revenue from environmental taxes

In Flanders, energy taxes remain the predominant taxes in government revenue from environmental taxes. In 2014, the last year for which figures are available, their predominance has even increased slightly, from 61.8 % in 2011 to 63.9 %. Transport taxes (including the circulation taxes and the car registration tax) represent 29.1 % of the revenue. In 2014, federal environmental taxes, which are comprised mainly of the packaging levy on disposable beverage packaging, accounted for 4.5 % of the total revenue from environmentally related taxes. Flemish environmental levies have a 2.5 % share and include the levies on landfill and incineration of waste, the groundwater levy and the waste water levy.

After a sharp increase in the 1990s, total revenue from environmental taxes has hardly changed in real terms (meaning that inflation was cancelled out). The upward bulge in 2004 was due to the sharp rise in excise duties on petrol and diesel, the introduction of the Elia levy, and the introduction and expansion of the federal contribution on electricity and gas. After 2005, revenue dropped again as a result of the decrease in excise duties on diesel and the abolition of the Elia levy. The downward bulge in 2009 was mainly due to the economic crisis. 

Especially the increased Energy Fund contribution and the toll on lorries will probably lead to an increase in total revenue from environmentally related taxes.

Figure 1: Total revenue from environmentally related taxes in Flanders (1981-2014)

Figure Total revenue from environmentally related taxes in Flanders (1981-2014)

Is Flanders keeping up with the European bunch?

Revenue from environmentally related taxes expressed as a percentage of the gross domestic product (GDP) or of the total tax revenue allows trends to be analysed and countries/regions to be compared with each other. In Flanders, both income indicators have been on a downward trend since 1996 as income from environment-related taxes has stagnated in recent years and both the GDP and the total tax income have increased. When plotting the income from environmental taxes for 2014 against the GDP, Belgium (2.05 %) and Flanders (1.87 %) score well below the average of the EU28 (2.5 %). The low percentage is explained by the revenue from energy taxes, which are low compared with the rest of Europe. The extent of the effect of the recent greening operations on Flanders' position compared with the European average, will become apparent in the next few years.

Households pay more than half of all environmental taxes

When determining who bears the environmental tax burden, we see that households pay 53 % of all environmentally related taxes in Belgium, and companies 45 %. Over the last four years, there has been a shift towards households, which accounted for 50 % in 2010. This shift is exclusively attributable to the energy taxes. In 2010, households paid 43.8 % of the energy taxes, a percentage that rose to 48.8 % in 2014. The shift could possibly become even more prominent after 2014, as the increased Energy Fund contribution (from 2016) will be paid primarily by households. Within the group of companies, the transport sector pays a little over one fourth of all environmental taxes.

Sharp rise in energy tax rates

The sharp increase in the tax rate indicator for energy is partly due to the increased Energy Fund contribution on electricity. The tax rates for low-voltage electricity, as used by households and most companies, rose from almost 30 euros to almost 40 euros per MWh. The tax rate indicators only indicate an evolution over time; they do not reflect the fact that taxes on electricity were very low (compared with transport fuel taxes). The tax rate indicator for transport showed a slight increase in 2016 due to the introduction of the toll on lorries. In 2015, the Flemish tax rate indicator rose mainly as a result of a sharp increase in the waste levy, which was partly reduced in 2016. The federal tax rate indicator covers only the environmental tax (from 2015 only the packaging levy). The rates are not indexed here, which explains why the federal tax rate indicator has a declining curve.

Figure 2: Evolution of overall tax rate indicators (1991-2016)

Figure Evolution of overall tax rate indicators (1991-2016)

Expressing the environmentally related taxes as a percentage of the final price allows different products to be compared with each other. The tax on transport fuels (around 50 % of the final price) is much higher than that on fuels for heating and other applications (not higher than 9 % in 2013). This changed in 2016 with the sharp increase in taxes on electricity use for households, due to the increased Energy Fund contribution. As a result, the percentage of taxes with regard to the final price of electricity for households rose from 3.5 % to 16.3 %. This is still much lower than the transport fuel faxes, but it does mark a break in the long-term trend. For the first time, a (great) difference can be observed between an average household and an average small company with an electricity consumption of 45 MWh per year. This difference is due to the increased Energy Fund contribution, and in particular to the highly degressive rate as compared to consumption.

Read the English summary of the Dutch report 'Greening of the tax system in Flanders'

Study commissioned by MIRA, the Environment Reporting Unit
Research report MIRA/2016/03

researchers: Kris Bachus, KU Leuven, HIVA

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