States and municipalities rely on the federal gas tax (set at 18.4 cents per gallon) and state and local gas taxes (averaging 31.04 cents per gallon, but vary widely) to fund 43% of total spending on state and local roads.
Supporters of these taxes argue that using revenue generated from gasoline taxes to at least partially fund roadway construction and repair properly aligns taxation to consumption. And many politicians have supported recent increases to these taxes – 25 states across the political spectrum have increased their gasoline taxes since 2015.
In addition to funding road repairs, fuel taxes have an environmental benefit by nudging consumers to more fuel-efficient vehicles. Gasoline taxes increase the operating costs proportional to vehicle efficiency, encouraging drivers to purchase more fuel-efficient vehicles. (This also highlights the regressive nature of a gasoline tax as lower income individuals tend to drive older, less efficient vehicles.)
Electric vehicles present a problem for this system of taxed consumption. EVs do not consume gasoline, and therefore electric vehicles drivers do not pay their “fair share” of the road maintenance costs through gasoline taxes.
Today, electric vehicles represent a negligible percentage of total vehicles on the road and lost tax revenue hasn’t put a dent in government coffers yet. However, policy makers need to start thinking about solutions now to prepare for an increasingly electrified world.
One option is to continue taxing consumption. This can be done by either collecting an annual EV registration fee, as the state of California has already begun doing. This could also be done by taxing EV drivers on a per mile basis, although this raises significant privacy concerns as this would require tracking driving behavior.
Alternatively, policy makers could rethink what it is that really should be taxed. Taxing the consumption of miles puts a drag on the numerous economic and social benefits of vehicular travel. Instead, policy makers could choose to tax environmental and other negative externalities related to the transportation industry. Options include:
Increase taxes on internal combustion engine vehicles based on their fuel efficiency
Tax the electricity used to fuel electric vehicles based on its source (e.g. tax “dirty” production)
Tax non-carpool drivers
The revenue generating potential and consequences of these suggestions would require significant study. And many of them would only be short term fixes, as they would incentive their own decline. For example, taxing carbon generating electricity will quicken the transition to renewable energy. However, these options represent the opportunity policy makers have to revamp infrastructure funding and fight externalities by properly compensating for the loss of gas tax revenue through EV adoption.