While taxation of vehicles also covers registration fees, VAT, excise duties on motor fuel, road usage fees etc., car taxes usually stand for whether buyers are charged a one-time acquisition fee upon buying the vehicle and whether there is an annual levy for owning a car. Countries differ by only collecting one of those taxes or both. While Estonia has neither at present, the new coalition has vowed to change that.

"Taxes related to the purchase, ownership and usage of vehicles were introduced in most OECD countries in the first half of the 20th century and have become an important source of tax revenue for many governments. All member countries rely on a wide range of tax instruments to raise revenue from both private and commercial vehicle owners and road users," an OECD consumption taxes overview from 2022 reads. It adds that vehicle and vehicle usage taxation in its widest definition "represents a prime example of the use of the whole spectrum of consumption taxes" to which governments have over time integrated environmental and climate goals.

The OECD report emphasizes that differentiating taxes on the purchase or registration of vehicles to account for their polluting emissions can give buyers an immediate incentive to buy a vehicle that pollutes less. "This is now done in 35 out of 38 OECD countries," the report points out, adding that in 2022 all OECD member countries except Colombia, Costa Rica and Estonia took environmental or fuel efficiency criteria into account when determining the level of taxation and/or providing bonuses for the purchase of vehicles at the national level.

The fact that Estonia lacks a vehicle tax is also mentioned by international consultants PwC and the European Automobile Manufacturers' Association (ACEA).

The European Federation for Transport and Environment's "The Good Tax Guide" from last October that looks at car taxes in 31 countries found that nine have no acquisition fee, while four lack an annual car tax. Ten countries that haven't changed regulations recently do not consider CO2 emissions when determining tax sums.

According to the guide, 20 countries consider CO2 emissions when determining the tax a person must pay when buying a vehicle, ten consider the price of the vehicle, six also look at type of fuel and five at engine power. Three countries consider engine capacity and the age of the vehicle, with some states also looking at other emissions indicators, weight or length of the vehicle. None of these aspects enter into consideration in Estonia, Czechia, Germany, Latvia, Romania, Luxembourg and Sweden.

When calculating annual car taxes, 23 countries consider CO2 emissions, nine type of fuel, seven engine power, five engine capacity and vehicle age, three vehicle weight. None of these aspects were considered in Estonia, Czechia, Lithuania and Poland when the tax guide was put together.

Magnus Piirits, former Riigikogu Foresight Center analyst, economic expert for the Ministry of Social Affairs, said that a car tax was being discussed in Lithuania when the guide was being put together and that the Czech Republic also has a tax for commercial vehicles now. "They also have a small additional charge when buying an older vehicle, while this does not apply to vehicles that correspond to the Euro 3 or higher emissions standard. Therefore, they do not have a universal and specific car tax as such," he said.

Taxation in Estonia can learn from the mistakes of others

The European Federation for Transport and Environment's car tax guide also lists good and bad car tax practices, with Estonia mentioned in passing in the latter category.

"Compared to good policy practice, the identified cases of bad policy practice constitutes a longer list of noteworthy examples that range from the complete lack of taxation in Czechia and Estonia to attempts at taxation that border on the absurd, such as the subsidy pots for zero-emission cars being exhausted in eight days in the Netherlands and two minutes in Estonia and Croatia."

The report lists 12 bad taxation practices none of which were found in Finland, Iceland and Sweden, while Croatia stood out in terms of the most poor practices employed. Because Estonia has no car tax, it did not figure in this category.

But the report also concludes that Estonia's status affords it the opportunity to learn from the mistakes of others.

"Car taxation in Estonia thus remains a 'blank canvas' and there is an opportunity to apply some of the best policies from other European countries. Such a tax reform would also present an opportunity to renew the Estonian car fleet.
With an average age of nearly 17 years, the Estonian car fleet is the third oldest in Europe."

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