A road tax for America?

How to solve for EV sales triggering lower gas-tax revenues

The federal gasoline tax is part and parcel of Americans filling up their internal combustion engine cars at the pump. But what happens when the pump is spitting electrons?

Growing adoption rates for electric vehicles (EVs) means decreasing gas tax revenues. The US Highway Trust Fund has been underfunded for decades, and as trust fund revenues decline, the shoddy quality of American roads could worsen. Covering that shortfall was the topic of a CERAweek panel featuring several key policy advisers.

A new taxation system is needed to help fund existing and future roads and safeguard future government taxation revenue. As such, is road pricing inevitable? Several solutions are being analyzed and in pilot stages, but all seem to have blind spots for either consumers, legislators, or industry.

"We have a huge problem," said Barbara Rohde, executive director of the Mileage-Based User Fee Alliance (MBUFA), a non-profit based in Washington DC. "We've been taking money from the general fund since 2008 to pay for our highways. By 2033, we will have a deficit of USD250 billion because of the rate of growth of EVs and hybrids."

Although EV market share is still in the single digits in the US, it is likely to reach 40% by 2030, according to S&P Global Mobility forecasts. By that year, the total number of EVs in operation could reach 28.3 million units.

The tax rates on gasoline and diesel fuels have not changed since 1993 and thus have failed to keep pace with inflation, noted David Sandalow, inaugural fellow for the Center on Global Energy Policy at Columbia University. "Blaming the shortfall on EVs is to miss a major part of the story," Sandalow said.

Laying a new tax on EV buyers may in turn disincentivize the programs pushing people to join the electrification crusade, said Levi Tillemann, vice president of policy and international outreach for Ample Inc, which focuses on modular battery swapping.

Tillemann also is strongly against a proposed tax based on vehicle miles traveled: "When a dually pickup truck pays the same tax as a Prius, you are incentivizing fuel inefficiency. We need to target the issues that isolate pollution, we need to look at energy security, we need to look at gasoline consumption in the actual space.

"We're spending a lot of money to subsidize EVs, battery cell manufacturing, battery pack manufacturing, construction of the factories, the actual EVs consumers are buying, the recycling and refurbishing of batteries," Tillemann added. "We don't want to disincentivize the output of electric vehicle miles traveled. Every mile you transfer (from internal combustion) to EV is a win for climate. We should do everything we can to incentivize maximum utilization of EVs. I would subsidize every mile EVs drive for some time."

The MBUFA has started limited-scale pilot road use tax programs in 38 states, including Hawaii, Oregon, Utah, and Virginia, Rohde said. "We need to make people believe it's in their interest to sign up. Many states have high registration fees, so people turning to the user fee are feeling it's more fair."

Sandalow recommends a surcharge that combines vehicle miles traveled and vehicle weight, which he said would more fairly address road wear and tear. For EVs, there could be an electricity surcharge, but there are practicalities of metering electricity usage for those who charge at home, as well as privacy concerns.

If tax rates had been indexed for inflation since 1993, the current tax on gasoline would be about 33 cents per gallon, while diesel fuel would be taxed about 44 cents per gallon, according to the Tax Policy Center.

So why not simply account for inflation since 1993, and raise the gas tax to where it should be? Because the anti-tax sentiment among legislators in many states will perceive this as an added tax, even if it is merely correcting for poor fiscal accounting, Sandalow said.

But something needs to be done. On the global scale, American roads rank 17th, according to the World Economic Forum, trailing countries including Portugal, Spain, and Croatia.

Tom De Vleesschauwer, senior director of transport and mobility for S&P Global Mobility, noted that EV-crazed Norway is realizing that the lack of road taxes coming from a shrinking number of CO₂-spewing cars is becoming an issue.

Where do Norway's roads rank? A distant 49th place.

This article was published by S&P Global Mobility and not by S&P Global Ratings, which is a separately managed division of S&P Global.