The Future Of Fuel: Tax Alternatives For Governments

As the world moves towards electric vehicles, governments are faced with the challenge of replacing the revenue generated from fuel taxes. In Canada, the federal government collects approximately $6 billion annually in gas and diesel excise taxes, while the total fuel tax revenue for all levels of government is estimated at nearly $18 billion. This money is used to maintain roads and transportation infrastructure. With the shift to electric vehicles, governments will need to find alternative sources of revenue to make up for the loss in fuel tax revenue.

One option is to impose additional taxes on electric vehicle owners, such as annual registration fees or road usage charges. Some jurisdictions in the United States have already implemented such fees, with Oregon charging electric vehicle owners an extra US$184 in annual registration fees. Another approach is to implement road user fees, such as highway tolls and congestion charges, as suggested by David Duff, Professor of Law at UBC.

The transition to electric vehicles will require governments to adapt their revenue streams to maintain the upkeep of roads and transportation infrastructure. The specific approaches they will take remain to be seen, but the need to replace fuel tax revenue is becoming increasingly urgent as the number of electric vehicles on the road continues to grow.

New taxes at charging stations

As governments transition to net-zero emissions by 2050 and encourage citizens to adopt electric vehicles, they face a challenge: how to recoup the potential loss of billions in gas tax revenue. In Canada, the federal government collects approximately $6 billion annually in gas and diesel excise taxes, and this money is used for local infrastructure and general revenue.

One solution proposed by Sherena Hussain, an instructor at York University's Schulich School of Business, is to introduce new taxes at charging stations. This approach has already been implemented in the US states of Oregon and Utah, where EV owners are charged an extra annual registration fee to compensate for the gas tax they don't pay. However, this flat fee means that people who drive shorter distances subsidise those who drive more.

To address this issue, Oregon introduced OReGO, a voluntary road-usage charge system where drivers pay per mile travelled. Participants are exempt from gas taxes and private firms handle data and payments to alleviate privacy concerns. Utah has followed a similar path, introducing a voluntary mileage-based fee program with plans to shift to a permanent, mandatory road-usage charge system by 2031.

In Canada, Saskatchewan became the first province to implement an annual EV fee of $150, although this modest step faced pushback from EV owners. As the gas tax becomes less relevant, governments will need to find alternative sources of revenue, and a system where drivers pay in proportion to their distance travelled seems the most likely substitute. This can be achieved through low-tech odometer readings or high-tech GPS monitoring, with the latter promising to provide a wealth of data that can be used to implement variable congestion fees and road tolls.

Annual fees for electric vehicles

Electric vehicles (EVs) are becoming increasingly popular, and governments are having to consider how they will replace the revenue generated by fuel taxes. One option that is gaining traction is to implement annual fees for EVs.

In the United States, more than 30 states have adopted EV fees to replace lost gas taxes. These fees vary from state to state, ranging from $50 in Hawaii and South Dakota to $200 in Texas and $235 in Michigan for electric vehicles over 8,000 pounds. Louisiana has also introduced a road-use fee of $110 a year for electric vehicles and $60 a year for hybrid vehicles, with hybrid or all-electric school buses being exempt.

The fees are typically charged as part of the annual vehicle registration process and are used to fund road and bridge repair projects, as well as local government transportation budgets. This is because, while EVs do not contribute to fuel taxes, they still cause wear and tear on roads and therefore contribute to maintenance costs.

Some states, like Oregon, have taken a different approach by creating a voluntary road-usage charge system. Participants in this program are exempted from gas taxes and EV fees and pay a fee for every mile they travel. This system aims to charge drivers based on their actual usage of the roads rather than a flat fee.

In Canada, the federal government collects approximately $6 billion annually in gas and diesel excise taxes, and the transition to EVs could result in a significant loss of revenue. To address this, Saskatchewan has become the first province to charge an annual EV fee of $150. However, this has faced some pushback from EV owners who argue that they should not have to pay to use roads since they are contributing to a greener future.

As the popularity of EVs continues to grow, it is likely that more governments will consider implementing annual fees or other alternative funding models to replace lost fuel tax revenue.

Road-usage charges

As the uptake of electric vehicles increases, governments will need to find alternative sources of revenue to replace the billions of dollars generated by fuel taxes. One option is to implement road-usage charges, also known as mileage-based user fees.

Advantages of Road-Usage Charges

There are several advantages to this system:

• Fairness: Those who drive more, pay more.
• Choice and flexibility: Users have more control over what, when, and how often they pay.
• Better incentives: Both drivers and transport departments are incentivized to consider the efficiency, quality, and costs of transportation.
• Constraint: These charges can help prevent overconsumption and negative externalities like congestion and air pollution.
• Adaptability: As the connection between road use and fuel use breaks down due to improvements in fuel economy and the rise of electric vehicles, road-usage charges offer a more sustainable funding model for road maintenance.

Concerns and Challenges

Some motorists are concerned that road-usage charges will be an additional cost on top of existing taxes. However, pilot programs in several US states are testing these charges as a replacement for fuel taxes, not as a supplementary fee.

Another key concern is privacy. This can be addressed by giving users the option to pay a calculated fee without sharing their road-use data or allowing them to own their data and choose what information to share.

The cost of collecting mileage-based fees is also higher than for fuel taxes, although this cost appears to decrease as the system is implemented on a larger scale.

Examples

Oregon was the first US state to implement a road-usage charge system called OReGO, which is entirely voluntary. Participants pay 1.8 cents per mile and are exempt from gas taxes and special EV fees. Utah has also introduced a similar voluntary program, with plans to shift to a permanent, mandatory system by 2031.

Hawaii has signed into law the first mandatory road-usage charge in the US, which will replace fuel taxes for electric vehicles from 2025, with all vehicles enrolled by 2033.

On a national level, Congress has passed a $1.2 trillion Bipartisan Infrastructure Bill, which includes a five-year pilot for road user fees that may replace gas taxes in a decade.

California, a leader in the adoption of fuel-efficient and zero-emission vehicles, is also studying road-usage charges as an alternative funding mechanism to maintain its roads and highways.

Congestion charges

Congestion pricing strategies can be categorised into two groups: those involving tolls and those that do not. Within these categories, there are eight types of strategies, including HOT lanes, express toll lanes, pricing on entire roadway facilities, and zone-based pricing. The latter includes cordon and area pricing, which is relevant to the context of replacing fuel tax.

Zone-based pricing, such as the congestion charge in London, involves a daily fee for driving within a designated congestion charge zone during specified hours. This strategy effectively manages demand during peak times, reducing the number of vehicles on the road and improving traffic flow.

In Auckland, the government replaced the regional fuel tax with time-of-use congestion charges to fund new highways. This approach will help manage demand during peak hours and generate revenue for road infrastructure projects.

Road tolls

As governments transition to net-zero emissions and commit to banning the sale of light-duty gasoline-powered cars and trucks, they will need to find alternative sources of revenue to replace the billions in lost gas tax revenue. One option is to implement road tolls, which can be structured in various ways.

One approach is to charge a flat fee for all EV owners, similar to the annual registration fees for EV owners in Oregon and other states in the US. However, this approach can lead to inequities, as those who drive less end up subsidizing those who drive more.

A more usage-based approach is to implement a road-usage charge system, where drivers pay a certain amount per mile or kilometer traveled. This is similar to the OReGO program in Oregon, where drivers pay 1.8 US cents per mile traveled. Such a system can be voluntary, with participants exempted from gas taxes and special EV fees, and private firms handling data and payments to address privacy concerns.

Another option is to use GPS-based telematics to track and charge for road use. This technology is already used in 'black box' insurance policies and could be wired into cars to calculate tax owed based on when and where the car is driven. However, this approach raises privacy and security concerns, as well as the potential for mission creep with higher charges for driving in urban areas or during peak times.

A less technologically advanced but comparable solution is odometer-based taxation, where drivers are charged based on periodic readings of their vehicles' odometers. This system is already in place in New Zealand for diesel vehicles, where drivers pay a road user charge (RUC) based on the number of kilometers driven.

While the specific details and implementation of road tolls vary, they offer a potential solution to replace fuel tax revenue as the world transitions to electric vehicles.

Frequently asked questions