Lets ignore the conjectures and hyperbole about how we are raising funds to “electrify the railway”. If government is going to spend a certain amount of money (which it is whether it is a regional body or a national body paying for the electrification) we should be interested in raising funds for this spending in the most efficient way possible. Furthermore, we would prefer to tax in such a way that we actually get people who benefit from the spending to pay for it.
There are two ways that I see the fuel tax as more efficient than what the government is suggesting – which is effectively higher income taxes in the future. Firstly, the fuel tax was an externality tax. Because the social cost of fuel consumption is greater than the private cost the government can place a tax and (potentially) improve outcomes! Even once this justification is used up, we have another one – Ramsey Pricing. Demand for petrol is inelastic, so we can raise a set amount of revenue with a lower “dead-weight loss” (loss of happiness from the tax) than if we taxed goods with more elastic demand.
Secondly the fuel tax was at least partially targeted – as it raised the revenue for the public good work from the region where the work was going to happen.
Dumping the this tax implies that national income taxes will have to be higher than they would have otherwise been. This implies that we are using a less efficient, and less targeted, means of taxation to achieve a level of government spending in Auckland and Wellington (which in this case just happens to be on a railway – something that needs to have its merits debated separately). Bad policy.