The levy is part of the state government's plan to legalise ride-sharing services like Uber, while compensating existing taxi drivers and also funding a $378 million buy-back scheme.

The government will buy back a single taxi licence for $100,000 and pay $50,000 for the second licence of owners, with a so-called "fairness fund" providing $75 million of immediate hardship support.

Taxi fares will also be deregulated by 2018.

Who will be charged?

All commercial passengers vehicles will be charged the levy, which the Andrews government expects will raise $44 million a year, and is to run for at least eight years.

The new levy will be introduced from 2018, but individual operators will be able to choose how they pass the levy on to passengers.

"It may well be less than $2 for a short trip and perhaps more than $2 for a longer trip," Premier Daniel Andrews told reporters on Tuesday.

"It will be a matter for them [providers] and that will be another point of competitive difference."

Mr Andrews said the changes would create level playing field for the taxi industry.

"There will be more choice. There will be greater value," he said. "This is comprehensive reform, but it is grounded in fairness."

'Outrageous tax slug'

However, the Australian Taxpayers' Alliance has condemned the government for introducing what it described as "the world's largest tax on ride-sharing consumers".

"This is an outrageous and economically damaging tax slug by a government that is clearly more interested in bailing out mates than the taxpayers of Victoria," said Tim Andrews, executive director of the alliance.

"There is no economic justification to bailout a dying industry, because it has failed to keep up with technology.

"To use hundreds of millions of taxpayer dollars to pay off cabbies is simply morally repugnant. This craven cash grab means Victorian will be slugged with the world's highest tax on ride-sharing. In the United States, only one state (Massachusetts) has instituted such a tax - and it was five cents."

State opposition public transport spokesman David Hodgett said Mr Andrews had broken an election promise by announcing a "new tax".

"There is nothing fair about slugging consumers $2 every time they take a taxi or Uber," he said.

"This means Victorians will pay more for Uber than any other state."

Uber 'reasonably comfortable'

While he was "reasonably comfortable" with the proposed regulations, Uber Victoria general manager Matt Denman said the company wanted more detail on exactly what the $2 levy will be spent on.

As the company was still reviewing the new laws, Mr Denman would not say whether the fee would be passed directly on to customers who use the service.

He also declined to say if driver earnings would be protected.

"Uber's position is that anything that makes transport more expensive is a bad thing for consumers," he said.

"We would ask and urge the government ... to provide a full justification and economic modelling for any proposed levy."

Mr Denman also called on the state government to be transparent about who receives compensation from the taxi bailout war chest and why.

Victorian Taxi Association chief executive David Samuel said the taxi industry had to adjust to a changing market, but wanted fairness for people who had invested in it.

He said he hoped fares would be cheaper in the future.

"We can't say at this point by how much," he said.

With Uber paving the way for the legalisation of all ride-sharing, Mr Denman expected other competitors to begin popping up in Victoria.

"We're more than willing to see that competition; that can only be a good thing for consumers," he said.

London Rides director Elgan Potter said the latest announcement meant the company could bring a fleet of accessible cars to Victoria. London Rides cars are fitted with wheelchair access.

"We're aiming to lift the standards of taxi industry in Melbourne - we will deliver a superior service for the same price of a regular taxi," he said.

Public Transport Minister Jacinta Allan said the government wanted to make sure taxi drivers were treated with respect.

In the coming two years the current taxi licensing system will be replaced with a single registration regime for all commercial passenger vehicles, including taxis and ride-sharing services.

There will also be a $75 million "fairness fund" for people experiencing hardship as a result of the changes, including funding to maintain transport options for people with a disability.

The new rules

Two pieces of legislation will be introduced to allow the changes to proceed.

The massive shake-up will result in the removal of taxi licensing, which will be replaced with a registration process for all operators.

All drivers, including Uber drivers, will need to be accredited by the Taxi Services Commission. They will all have to pass police, medical and driving history tests.

The knowledge test that is currently part of the taxi driver registration process will also be scrapped. However, drivers of wheelchair accessible vehicles will have to complete an assessment.

The government will buy back a maximum of two taxi licences per licence holder. The government will pay $100,000 for the first taxi licence and $50,000 for the second per licence holder.

Sex Party MP Fiona Patten had introduced a private member's bill to legalise Uber before the government moved to make its own changes.

Ms Patten welcomed the latest announcement but said the $2 levy was too high. "I'd like to see the business plan and modelling for how they came to that figure," she said.

Taxi payments company Cabcharge chief executive Andrew Skelton said he hoped the reforms would create a fairer industry, but described the buyout package as "inadequate".

"While compensation for plate owners is imperative, it's fundamentally unfair that Victorian passengers will be made to subsidise what is essentially the government's decision and responsibility," he said.