Fuel Taxes in the COVID-19 Era and Beyond: Part 1

Municipal and state governments in the US are already feeling the harsh economic effects from COVID-19 and are likely to continue feeling the shocks for a while. Social distancing and stay-at-home orders have decreased the economic revenue that municipal and state government operations depend on—including sales and income taxes. As unemployment approaches 15%, revenue from both of these taxes continues to decline. 

In addition to decreased economic activity and higher unemployment rates, the pandemic has led to fewer people driving and purchasing fuel for their vehicles. Although this has resulted in better air quality in many parts of the world, it could be detrimental for government entities, particularly municipal governments, that depend on motor fuel excise taxes, colloquially known as gas taxes. 

Effects of Lower Gas Tax Revenue

Gas taxes are used to fund both new transportation infrastructure projects and infrastructure maintenance. Gas taxes are collected on a state level and are allocated to municipalities on a monthly basis depending on the amount of fuel purchased in the region. Municipal governments distribute these funds to local street and transportation projects, such as fixing potholes or building new bridges. State governments use a portion of the revenue for larger projects, such as highway expansions.

While oil prices are declining as a result of the pandemic, this does not have a substantial effect on most municipal and state governments in terms of gas tax revenue. Gas taxes are typically calculated based on gallons of fuel sold rather than a percentage of fuel sales, taxes collected are on a cents per gallon basis and not typically affected by fluctuations in oil prices. However, the decreased vehicle miles traveled is having a substantial effect on the revenue collected that help maintain transportation infrastructure. The American Association of State Highway and Transportation Officials has estimated that the pandemic may cause a 30% drop in gas tax revenue based on data from the 2008-2009 recession.

Preparing for the New Resilient Normal

The way society operates post-pandemic will likely be different in terms of previous consumer habits and tendencies, particularly in the transportation sector. There could be a continued decline in vehicle miles traveled due to more offices switching to work from home policies. Conversely, once offices open up, commuting via personal vehicles could increase as people grow skeptical of the cleanliness of public transit options like buses and commuter trains. While these trends are uncertain, the opportunity to shift to a more resilient society is still an option.

As automakers announce more EV models and governments around the world implement more stringent fuel efficiency policies, EV sales are expected to rise following the end of the coronavirus outbreak. With more vehicles being powered by electricity, local and state governments are expecting to receive a decreasing amount of revenue from gas taxes—similar to what is being felt right now with fewer vehicles on the road. Is the pandemic giving state and local governments a taste of what revenue from gas taxes could look like in a future with heightened transportation electrification?

Part 2 of this blog series will provide additional detail about the path forward for local governments in a world with more EVs.