By Hamilton Steimer
The transportation sector contributes towards 30% of the nation’s greenhouse gas emissions, more than any other single sector. If we are to successfully combat climate change, the transportation sector, primarily road transportation, needs to be dramatically transformed away from its dependence on fossil fuels. While there are different alternative fuel types, including biofuels and hydrogen, electric vehicles (EVs) seem like the likely future for the transportation sector, but the current adoption rate of EVs is too low for us to achieve our climate goals.
The $3.5 trillion reconciliation bill contains the country’s most significant investments to date in clean energy, emissions reduction, and clean transportation. The Democrats and Biden administration have recognized that the EV sector must grow rapidly to defeat climate change, so they have included tens of billions of dollars within the reconciliation bill to support the expansion of the EV sector. Unfortunately, the final contents of the bill and the resulting investments in EVs are uncertain as Democrats attempt to reduce the package’s price tag from $3.5 trillion to $1.5 trillion as demanded by Sen. Joe Manchin (D-WV).
Whether or not the reconciliation bill passes in its original form, one thing is for certain: EVs are the way of the future. Unfortunately, as this transition has inched along, we have not prepared ourselves for an EV-dominated transportation sector. One of the main impacts of EVs that is not as publicized is EVs’ impact on collected revenues. We need to find a way to pay for the repair and maintenance of our roads, bridges, and other transportation infrastructure, which are partially dependent on gas tax revenues, once the EV market fully takes off. Thankfully, there are several solutions available that are worth considering.
Maintaining the Status Quo
Currently, most spending on roads and other infrastructure is through state and local government funding, with federal funding accounting for only 25% of all spending on roads and highways. The revenues for road investments come from different sources, mainly from state and local motor fuel taxes, toll facilities, the federal Highway Trust Fund, and state, local, and federal general funds.
Based on the users-pay/users-benefit principle, gas taxes reflect the idea that those who receive government benefits should help pay for it. Although most road expenditures are from the state and local governments, federal gas taxes remain an important revenue stream for building and maintaining our national highway and road system. Unfortunately, the gap between raised revenues and repair costs has grown over the years because unlike many states which adjust their gas taxes, the federal government has not adjusted the federal gas tax since 1993. With the gas tax currently frozen at 18.4 cents per gallon of gasoline and 24.4 cents per gallon of diesel, the raised revenues equate to 1/7 the real revenue generated in 1950. Consequently, since 2008, Congress has sustained highway spending by transferring billions of dollars of general revenues to the fund but this gap will likely increase to over $189 billion by 2030.
Maintaining the status quo and doing nothing is not an option because when EV adoption rates increase dramatically, the revenues from gas taxes will plummet. New EV purchases, which the White House wants to be 40% of new car sales by 2030, further fuel efficiency improvements, and changing driving habits will all contribute to the growing revenues deficit. Something has got to change.
Raise the Gas Tax
One solution could be to simply raise the gas tax and index it to inflation and total fuel consumption. If adjusted for inflation, the gasoline tax should be 33 cents per gallon and the diesel tax should be 44 cents per gallon. To put into perspective the revenue impact of this increase, a one-cent increase would raise an additional $1.5-1.7 billion in gas tax collected revenues. This solution not only generates billions more in revenue, but it also is highly efficient from an administrative point of view, costs little to nothing to collect, and is difficult to evade.
The gas tax is an inadequate revenue tool for several reasons. First, while efficient as this solution may be, it ignores the fact that as EV adoption rates continue to increase, the gas tax will generate less revenue. Additionally, high gas taxes could actually exacerbate the funding gap problem and produce other negative side effects. For example, higher fuel costs could result in lower federal tax revenues by contributing to lower company profits. Also, higher fuel costs have been linked to the increased adoption of EVs and higher fuel efficiency vehicles, which would only compound the funding gap problem. Last, the gas tax is an imperfect user fee because it does not differentiate between vehicles that cause greater or lesser road wear.
Create a Federal EV Registration Fee
Another potential solution could be to enact a federal EV registration fee to generate additional revenues that could bridge the road repair funding gap. Already, many states charge EVs a special registration fee, on average $50 to $200, to generate revenues for road repairs because they do not pay gas taxes. However, without EVs paying the federal gas tax, EV owners typically pay less in fees than what gas vehicle owners pay in gas taxes.
A federal EV registration fee is also an imperfect solution that cannot fully resolve the revenue deficit. According to the CBO, if there was a $100 federal EV registration fee in 2019, it would have raised about $150 million, but this amount would be nowhere near enough to fill the Highway Trust Fund’s 2019 revenue shortage of $11.6 billion. This solution could be more viable if partnered with a raise in the gas tax, but it could also slow EV adoption as some drivers may instead purchase hybrid vehicles which do not pay this EV registration fee and would also pay less in gas taxes. In addition to raising sufficient funds, a flat EV registration fee is also less fair because it doesn’t consider vehicle miles traveled (VMT), so EV owners, who currently have a limited driving range, would pay disproportionately higher taxes compared to gas vehicles based on road usage.
Implement an Electricity Use Tax
A tax on electricity used for charging EVs is probably the most comparable solution to the gas tax. With charging being an indirect indicator of EV driving, this solution continues the users-pay/users-benefit principle behind the gas tax. Since 1997, Pennsylvania has imposed a per-kWh tax on EVs’ electricity consumption, which adjusts annually and was $.0172/kWh for 2020. EV owners are supposed to report and remit the taxes they owe at the end of the year to the government, but due to this complicated system, many EV drivers don’t remit what they owe. Iowa recently passed its own “electric fuel excise tax” of $.026/kWh, which EV drivers will pay during charging at nonresidential locations starting in 2023.
There are a few shortcomings with this solution, although it remains promising. The biggest complication is implementing this tax, as there must be a system in place capable of calculating the tax owed and ensuring that the government receives the owed funds. Without being too familiar with the economics of charging stations, I would assume a similar system could be created where charging station owners, like gas station owners, remit the tax collected based on the kWh of electricity used at their charging stations. Another problem with this solution is that it has a similar flaw to the gas tax, where it doesn’t charge differently between vehicles that cause greater wear on the roads. Additionally, EV drivers tend to drive not as far as ICE vehicle owners, so an electricity tax on charging would not generate the same amount of revenue as gas taxes. Lastly, there would have to be incentives to dissuade EV users from charging at certain times during the day when excess electricity use can add increased pressure to the grid and be costly. Establishing an electricity tax system for charging that could track kWh used, different vehicle types, and time-of-use would be very complex both for drivers and charging station owners.
Charge a Vehicle Miles Traveled Tax
In my opinion, a Vehicles Miles Traveled (VMT) tax or user charge is the best solution. This solution ensures that those using the roads the most pay more towards their upkeep. It is also a fairer system that could be adjusted for vehicle weight, time of day, and location. That way, heavier vehicles pay more due to their increased wear on the roads, drivers are encouraged to drive during certain hours, and vehicles in urban locations, where air and noise pollution is most damaging, pay more. This solution also ensures the same revenues are generated between ICE and electric vehicles, but it could also be indexed so ICE vehicles pay higher fees because of their environmental damages. The INVEST in America Act directs the USDOT to establish a national per-mile user fee pilot program, so hopefully, more information about this solution’s viability will come out in the near future.
Unfortunately, this solution is also not perfect. While a simple federal version could be create that applied a flat rate adjusted for vehicle weight, maybe paid at the pump, this solution is more complex and costly if implemented at a state level. You would have to know exactly where (and even when) people are driving to determine and allocate VMT revenues between states and localities, so you would need new toll roads, camera systems, installed GPS systems, or tracking apps to record and report VMT to state and local governments for taxes. These solutions obviously raise privacy concerns, so it will be interesting to see what the future federal pilot program looks like. Implementing this solution for the freight industry may be easier since freight companies already track their vehicles’ movements.
So which solution works best?
After reviewing these solutions and considering others, such as carbon taxes or a highway freight tax, I’m convinced there will not be a one-size-fits-all solution that has no drawbacks. However, it is clear to me, that relying on gas taxes is unsustainable as EVs become more dominant in the near future.
Although administratively complex and likely expensive, a tax on electricity use for charging and VMT tax seem the most sustainable options. These solutions are fair, reflect the growing importance of EVs, and can be adjusted for different vehicle types and different situations. If we can ensure people’s privacy and minimize implementation costs, a VMT tax seems very capable of producing needed revenues now and when EVs become a majority of the market. An electricity tax on charging seems very useful as well, but I wonder if that could be utilized to raise funds to further expand our charging infrastructure and pay for its upkeep and maintenance.
Passing the infrastructure and reconciliation bills will be crucial steps in transforming the transportation sector. We cannot maintain the status quo and must plan accordingly for how the transportation sector will evolve in the coming years. Federal and state pilot programs are beginning to look into some of these alternative solutions, and I look forward to reviewing their results.