Electric cars: Good for environment, bad for taxpayers?

May 9, 2022

You can save a lot of money by switching to a battery electric vehicle (BEV): up to $14,500 over 15 years in lower fuel costs, according to the Department of Energy. As a bonus, you can feel better about your carbon footprint. No wonder more than 300,000 Americans purchased BEVs or plug-in hybrids (PHEVs) in 2020. We predict that, at the current rate, more than 500,000 will have bought them by the end of 2021.

There’s just one problem: Gas taxes fund road construction and maintenance. As BEVs replace petrol-powered cars — and state transportation budgets literally run out of gas — who’ll pay for the pavement?

Congress has reallocated $150 billion since 2008 to cover the Highway Trust Fund’s shortfalls. At the state level, America is also facing enormous transportation revenue deficits. They could have big implications for what you’ll soon pay whenever you go to the pump (or to the charging station).

We crunched 20 years of data on state-by-state BEV, PHEV, and classic hybrid electric vehicle (HEV) adoption, along with state gas tax increases, number of drivers (and average miles driven) per state, and even fuel-efficiency forecasts.

Here’s what our projections found.

Key Findings

Unless states make changes to their current EV fees, they’ll cumulatively lose $6 billion in gas tax revenue by 2025. If the trends continue, they’ll lose $25 billion by 2030.
States are charging consumers more gas tax than ever in an attempt to make up these deficits. In the last 10 years alone, average state gas tax rates have skyrocketed by 26.1 percent, with Pennsylvania levying the most at 59 cents per gallon.
Even with these high gas tax rates, four states (Connecticut, New Jersey, New Mexico, and Rhode Island) generate less in gas tax revenues now than they did 20 years ago. New Jersey raised its gas tax by 6.3 percent over the past three years, but saw a 3.5 percent revenue decline nevertheless.
States are implementing extra annual BEV, PHEV, and hybrid registration fees between $20 and $225 to recover their funds, but experts believe a vehicle miles traveled (VMT) tax needs to replace the gas tax. If this tax happens, BEV and PHEV owners can expect to pay around $100 or more extra per year.

Check out InMyArea.com’s other research on local taxes and cost of living:

States Stalling Out With Gas Taxes

In 2020, state and local gas taxes raised $51 billion. However, only four states (California, Indiana, Montana and Tennessee) can fund their transportation costs through gas taxes alone now.

That’s because infrastructure has become remarkably expensive. “Spending on highways buys less now than at any time since the early 1990s,” reports the Congressional Budget Office. Plus, many states never tied their gas taxes to inflation.

It’s why so many states have desperately raised gas taxes in recent years. You can see this increase in the following map.

But higher gas taxes are insufficient in the long run, because BEVs are replacing traditional vehicles at increasing rates — and even traditional vehicles are getting more fuel-efficient each year. According to trends from the Bureau of Transportation Statistics, forecast miles per gallon for all fleet vehicles on the road will rise from 24.4 mpg to 25.7 mpg over the next decade.

Between rising EV sales, the EV fee gap, and improving fuel efficiency, a perfect storm is forming. When we put all of our data together, here is the picture that emerged.

Here are the 15 states that stand to lose the most revenue by 2025 and 2030, according to our calculations:

More than half of states have already seen their gas tax revenues decline over the past few years. Between 2018 and 2020, Michigan’s fell by 18.56 percent, Utah’s by 13.45 percent, Rhode Island’s by 10.57 percent, and Washington’s by 8.68 percent. The situation is dire everywhere.

The Rise of Hybrid and Electric Vehicles

Only 17 Americans bought hybrid cars in 1999, but it was the dawn of a revolution. When the Toyota Prius entered the U.S. market in 2000, no other street-legal vehicle got close to 50 mpg. Still, sales weren’t phenomenal: Americans purchased fewer than 10,000 hybrids that year.

This trend changed quickly. Although the Prius was infamous for slow acceleration on the road, it had massive acceleration off dealers’ lots.

In 2001, Americans purchased over 20,000 hybrids, double the first year’s sales. By 2006, Americans were buying a quarter-million hybrids per year, and in 2013, hybrid sales leveled off at nearly half a million.
Similar growth soon occurred for BEVs (from 10,000 sold in 2011 to 240,000 in 2020) and PHEVs (from 300 sold in 2010 to 66,000 in 2020).
We estimate that between 2020 and 2025, Americans will buy 7.8 million BEVs and PHEVs. Between 2020 and 2030, Americans will buy 26.1 million electric vehicles.

To fully understand these numbers, we need to talk about California.

In 2007, Californians purchased more than a quarter of hybrids in the U.S. By 2013, the Prius was California’s most popular car line. This trend is partly attributable to the Golden State’s environmental politics and to its significant gas tax, the highest in the country at 53 cents per gallon.

When BEVs hit the scene in the 2010s, California drove the market again:

California registered 425,300 EVs in 2021, accounting for 42 percent of the domestic market share.
While you might think California would lose gas tax revenue and the ability to pay for its roads, our historical tax research shows that it nearly tripled its gas tax between 2000 and 2021. This shift raised annual revenues by 178 percent, making up for any shortfalls that hybrids and BEVs would have caused.
In 2020, California (No. 1 in our revenue loss rankings) mandated that all new vehicles sold in the state must be BEVs by 2035, which will make the state’s gas tax more or less obsolete. Since the auto market often follows California’s lead, this change will have national ramifications — potentially tanking every other state’s gas tax numbers by sheer force of its market influence.
State Solutions to the Gas Tax Gap

Currently, EVs only cost about $175 million in lost federal gas tax revenues per year, but that number could explode to $4.5 billion in a single decade. That’s not even including the cumulative $25 billion in losses we’ve projected at the state level. Here are lawmakers’ three most commonly proposed solutions:

Electric Vehicle Fees

More than half of states (including many of those losing the most gas tax revenue) now add special fees to register a BEV, a PHEV, or even an HEV. We’ve ranked them from highest to lowest.

We discovered that you’ll currently pay less for BEV fees than for gas taxes in many states (with the exception of Alabama). If these states don’t raise their fees or adopt a new tax system, deficits will grow with each BEV sold.

Outside of California, we found there already seems to be an inverse relationship between BEV adoption and state gasoline expenditures. North Dakota and Wyoming have the fewest and second-fewest BEVs in America respectively, while they spend the most and second most on gasoline per capita. Meanwhile, some of the states with the most BEVs (New York, Illinois, Florida, Georgia) spend the least on gasoline per capita.

Are higher registration fees for alternative fuel vehicles the best way to address budget shortfalls? Are they fair? Let’s explore the pros and cons.

Pros:

BEV, PHEV, and HEV drivers now pay less for roads through gas taxes, but they use roads at the same rate as other drivers.
Unlike other solutions, such as a VMT, special registration fees don’t require implementing a complex new system, as drivers already pay a standard fee.

Cons:

The federal government provides a tax incentive for buying BEVs, so charging extra at the state level could be interpreted as sending mixed signals.
A high flat fee “can be harder for households to cover than fuel taxes or other revenue options that are spread over time,” according to the North Carolina Department of Transportation.
These fees could dissuade consumers from making the environmentally friendly choice. “It’s punishing people and families who are seeking to reduce their carbon footprint,” objects the Sierra Club.

Alternative Fuel Taxes

From 2018 to 2020, the number of charging stations across the U.S. grew from approximately 70,000 to 100,000. Because of this growth in public charging stations, many states are attempting to levy a point-of-sale excise tax like gas stations.

Pennsylvania already taxes BEV fuel on a gallon-equivalent basis, and Iowa will implement a per-kWh excise tax in 2023 along with a hydrogen fuel tax. Minnesota has explored the idea as well. Here are some pros and cons of the alternate fuel tax.

Pros:

A tax based on kilowatt-hours (kWh) instead of gallons would be a familiar and politically uncontroversial concept.

Cons:

Many BEV owners usually charge their vehicles at home, not at stations, and they currently receive a tax credit for doing so. A new tax would again send mixed signals.

Vehicle Miles Traveled Tax

Gas taxes are based on how much fuel you burn. The VMT would tax you based on how far you go. It’s a huge change from the current system, but lawmakers from both parties — at the federal and state levels — believe it’s the best and fairest way to future-proof transportation budgets.

A dozen states are now studying the VMT. Oregon’s pilot program, called OReGO, is the furthest along, with thousands of drivers currently participating. Oregon charges drivers in the program $0.018 per mile. The average Oregon driver travels 8,900 miles per year, which adds up to $160 annually in VMT taxes. When we factor in Oregon’s $110 BEV fee, the total ($270) is equivalent to the amount Oregonians pay per capita in gas tax. The math checks out perfectly.

VMT may seem like a good middle ground between registration fees, alternate fuel taxes, and gas taxes, but it’s not without its drawbacks. We put together the following pros and cons of a state VMT so you can see the whole picture.

Pros:

The Congressional Budget Office has proposed that GPS technology might be used for automatic congestion pricing, which they estimate could lower highway funding needs by about 30 percent.
BEVs, PHEVs, HEVs, and traditional vehicles would be charged on the same system. Nobody would have to pay extra.
Mileage is a better indicator than gallons (or kWh) of how much stress each individual driver is putting on the public roads. Vehicle weight could be factored in too.

Cons:

Privacy groups worry about how GPS data will be stored, deleted, and even sold.
Like higher registration fees, the VMT would force greener drivers to pay more than they do now by an estimated $100. Gas guzzlers might even pay less than they do now.
States will need to coordinate (or use a national system) for tracking and taxing cross-country travel.

Conclusion

For many years, gas taxes allowed state governments to pay for most or all transportation needs. However, this condition is no longer true, as gas tax is failing to cover infrastructure costs in 46 states. With BEVs skyrocketing in popularity, this situation will grow far more dire, costing states up to $25 billion by the end of the decade, according to our extensive research and forward projections.

A new funding mechanism has become necessary. The proposed mileage tax is the most likely long-term solution, but it will make alternative fuel vehicles more expensive to drive at a moment of environmental crisis.

Ultimately, each state will need to decide for itself how to balance its transportation budget in the years ahead, but the price of doing nothing would be the highest of all.

Methodology and Data

In order to generate our state gas tax revenue loss projections, we made the following calculations using these authoritative sources of data:

We collected the current and historical BEV, PHEV, and HEV sales per state from the Alliance for Automotive Innovation (Auto Innovators). We then utilized EV sales forecasts from EVAdoption to project the number of registered EVs in each category per state through 2030. We combined these figures with EV fee listings from the National Conference of State Legislatures to determine the revenue generated from potential EVs in each state through 2030.
We projected the number of drivers, miles driven, and average miles per gallon for light-duty vehicles in each state through 2030 by applying triple exponential smoothing (TES) to historical figures derived from the U.S. Department of Transportation’s Federal Highway Administration (FHWA) and the Bureau of Transportation Statistics (BTS). Using these numbers, we calculated the gallons used per capita in each state by dividing the vehicle miles traveled per capita by the average miles per gallon per forecast year. We multiplied these figures by current state gas tax rates, obtained from InMyArea.com original research for our National State Tax Map, to determine the gas tax paid per capita by drivers in each state.
We finally established the revenue loss per state due to EVs through 2030 by finding the difference between gas tax revenue per capita and EV fee revenue per capita and multiplying that result by the number of sales for BEVs, PHEVs, and HEVs. We totaled these figures across categories for 2021 to 2025 and 2021 to 2030 to arrive at the revenue loss projections up to 2025 and 2030. We chose to limit the effects of hybrid fees by only considering 50 percent of the potential loss from that category, as HEVs still partially contribute to state gas taxes.
We also pulled information and insights from following reputable organizations not mentioned above: U.S. Department of Energy (DOE), U.S. Bureau of Labor Statistics (BLS), U.S. Census Bureau, Congressional Budget Office (CBO), U.S. Energy Information Administration (EIA), North Carolina Department of Transportation (NCDOT), NC Clean Energy Technology Center (NCCETC), National Resources Defense Council (NRDC), Sierra Club, Green Car Reports, Tax Foundation, and Guidehouse Insights.

Technology changes every day and with it, so does the mind of consumers.

InMyArea Research is composed of industry analysts and data scientists. We conduct studies on internet usage, TV and streaming services viewership and how consumers make decisions when it comes to their home services. We also study internet connectivity, the digital divide and how it impacts students, low-income consumers, rural consumers and veterans.

This article originally appeared on InMyArea.com and was syndicated by MediaFeed.org.