Fuel Taxes in the COVID-19 Era and Beyond: Part 2

Part 1 of this blog series discussed how decreasing motor fuel excise taxes (gas taxes) is affecting local and state governments in the US. Given the stay at home and social distance policies instituted due to the coronavirus outbreak, fewer people are driving, which has led to a decline in revenue that these government entities received from gas taxes. This decrease could lead to less investment in transportation infrastructure—both new projects and maintenance. But what can local and state governments learn from this decline and how can they prepare for a future with electrified transportation and significantly less gas tax revenue?

Paying for Road Usage

Gas taxes in the US are often equated to a user fee, meaning that someone that uses the roads more should be liable to pay for the benefit (i.e., the more someone drives the more they are taxed). The gas tax is also seen as an offset for negative externalities caused on infrastructure from increased driving. This Pigovian-style gas tax is generally considered to be well-designed. However, with a shift away from vehicles powered by gasoline and diesel, there must be new policy measures put in place to maintain transportation infrastructure. 

EV drivers do not pay the gas tax since they receive vehicle fuel via electricity, but they use the same roads and infrastructure that internal combustion engine vehicle owners use. While this could be seen as a benefit of driving a clean vehicle that contributes less to pollution, once the majority of vehicles on the road are EVs, it poses a much larger problem—significantly less tax revenue to maintain infrastructure.

Policy Changes to Mitigate a Loss of Gas Tax Revenue

Some states have already begun to mitigate the loss of gas tax revenue from EVs via operating fees that are collected when an EV is registered. These fees range from an additional $50-$200 (depending on the state) on first registering an EV and type of electric powertrain, and vary on an annual basis after initial registration. The operating fees are meant to replace traditional gas tax revenue but, depending on how often the vehicle is driven, may not adequately represent the revenue lost. 

Vehicle miles traveled taxes, which would tax consumers on a per mile traveled basis, could be a suitable solution to the downside of charging a lump sum fee for EVs in lieu of gas taxes. Despite the potential administrative and logistical issues with a mileage-based tax, states like California, Washington, and Oregon are already considering the tax change. While EVs pose an issue, fuel efficient vehicles are also an issue, which require less refueling for the same amount of travel. Oregon previously ran a pilot program that required participants to pay $0.017 per mile in lieu of paying a gas tax and concluded that it was possible to administer such a tax and recover gas tax revenue losses.

Building a Resilient Future

While the coronavirus outbreak has been catastrophic for a number of reasons, it is important to use the lessons learned from such stark changes in consumer habits to build a more resilient future. Loss of gas tax revenue as a result of the pandemic will affect state and local government transportation projects for years to come. However, implementing new tax and policy structures that account for alternatively fueled vehicles enables a smoother transition for these entities as electrified transportation gains more market share.