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Should Electric Vehicle Drivers Pay a Mileage Tax?

EV drivers don’t pay the gasoline tax so pay less for roads.

(Today’s post is co-authored by James Sallee)

Every time we buy a gallon of gasoline, we help pay for roads. 18 cents goes to the U.S. Highway Trust Fund. Here in California, 30 cents goes to the state’s Road Maintenance and Rehabilitation Program.

EV drivers don’t pay the gasoline tax, so they pay less for roads. Several states are considering imposing a mileage tax on electric vehicle drivers to make up for the lost revenue.

How much lost revenue are we talking about? And does this policy response make sense? In a new Energy Institute working paper, we ask, “Should Electric Vehicle Drivers Pay a Mileage Tax?

Growing Hole in Road Budgets

According to our calculations, EVs have reduced U.S. gasoline tax revenues by $250 million annually. Of this, 30% ($75 million) is foregone federal tax, while the other 70% ($175 million) is foregone state and local tax.

For this we assumed that EV drivers would have otherwise been driving 15,000 miles per year in a 28.9 mpg gasoline-powered vehicle. These assumptions follow recent economic research (here and here), though we also report calculations based on, for example, fewer miles driven.

We also take into account the highly uneven pattern of EVs across states. As these maps illustrate, there tend to be more EVs in states with higher-than-average gasoline taxes (correlation 0.46). This correlation increases the gasoline tax revenue impacts by about 20%.

Maps
Source: Davis and Sallee, “Should Electric Vehicle Drivers Pay a Mileage Tax?”.  Gasoline taxes include all federal and state taxes including components not explicitly targeted at roads.

This $250 million annually in missing revenue represents less than 1% of total gasoline tax revenue. After all, EVs are less than 1% of the U.S. vehicle stock, so it makes sense the aggregate impact is so far pretty modest. Still, the impact per EV is substantial — $318 annually according to our estimates.

In addition, the missing revenue is highly concentrated in a handful of states. We calculate that for California alone the missing revenue is $90 million annually. California aims to have 1.5 million EVs on the road by 2025, and 5 million EVs on the roads by 2030, 10 times the number today. So, this trickle could soon turn into a flood.

The missing revenue is also highly regressive. We find that two-thirds of the missing revenue comes from households with $100,000+ in annual income. This reflects, as you might have guessed, that EV drivers continue to be disproportionately very high income.

But Wait a Minute

Right about now all the EV drivers are breathing heavily. “Yeah sure, we use the roads, but we create environmental benefits too!”

Yes, according to the latest analysis from Holland, Mansur, Muller, and Yates, EVs do tend to be less damaging than gasoline vehicles. It depends on where you drive, but the U.S. electric sector continues to get cleaner, which reduces the environmental damages from plugging in an EV.

That said, the environmental damages from EVs are not zero. Also, don’t forget, EVs cause traffic congestion and accidents, just like any vehicle. Ian Parry and other economists have argued that these “mileage externalities” are actually larger than the environmental externalities from driving.

charging
Note: EVs are not zero externality. https://www.shutterstock.com/download/confirm/1070497337?size=huge_jpg

Growing Interest in Mileage Taxes

With this as a backdrop, several states are now considering implementing a mileage tax. California, Washington, and Illinois have all conducted mileage tax pilots, and Oregon passed legislation allowing 5,000 voluntary motorists to pay a mileage tax of 1.7 cents per mile, in lieu of gasoline taxes.

A mileage tax would likely be more efficient than a gasoline tax for targeting traffic congestion and other mileage externalities. After all, vehicles create traffic congestion regardless of whether they get 10mpg, 50mpg, or 100mpg. Moreover, a mileage tax would help plug the hole in road budgets.

Mileage taxes are not a panacea, however. For example, traffic congestion depends on where and when you drive. Some people drive on crowded freeways at rush hour, while others drive on uncongested roads at 2am. As Severin points out, what you would really like to do is tax all externalities using time-varying, location-varying dynamic prices.

Key Tradeoff

So suppose we transition to a mileage tax. Let’s assume, moreover, that at least for the moment, the “tax all externalities” dynamically is off the table. In the paper we develop a model of driving under these circumstances and ask what level of mileage tax makes sense for EVs. This exercise highlights a key tradeoff.

On the one hand, driving an EV does generate externalities, which leads you to want to impose a mileage tax on EVs. On the other hand, gasoline-powered vehicles generate externalities too, and there has been a tendency to underprice these externalities. For example, many economists believe that gasoline in the United States is significantly underpriced.

If the externalities from gasoline-powered vehicles are sufficiently underpriced, then you don’t want to impose a mileage tax on EVs. To the contrary, you may actually want to subsidize drivers to use EVs, just so they won’t drive in gasoline-powered vehicles. One possibility would be to subsidize EV purchases, as is currently done, for example, with state and federal EV credits, while simultaneously imposing a mileage tax on EVs.

But again none of this is as good as the “tax all externalities” approach. Perhaps the biggest benefit of moving to a mileage tax would be that, in the longer-run, it becomes easier to implement more dynamic pricing. With the gasoline tax this is impossible, but it would be relatively easy, for example, to move from a simple mileage tax to one that varies by location and hour-of-day.

tesla
https://www.shutterstock.com/download/confirm/736453174?size=huge_jpg

 

For more details see Energy Institute Working Paper “Should Electric Vehicle Drivers Pay a Mileage Tax?”, by Lucas Davis and James Sallee.

Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas.

Lucas Davis View All

Lucas Davis is the Jeffrey A. Jacobs Distinguished Professor in Business and Technology at the Haas School of Business at the University of California, Berkeley. He is Faculty Director of the Energy Institute at Haas, a coeditor at the American Economic Journal: Economic Policy, and a Faculty Research Fellow at the National Bureau of Economic Research. He received a BA from Amherst College and a PhD in Economics from the University of Wisconsin. Prior to joining Haas in 2009, he was an assistant professor of Economics at the University of Michigan. His research focuses on energy and environmental markets, and in particular, on electricity and natural gas regulation, pricing in competitive and non-competitive markets, and the economic and business impacts of environmental policy.

12 thoughts on “Should Electric Vehicle Drivers Pay a Mileage Tax? Leave a comment

  1. This article is not true. You are completely missing that the registration fees for EVs went up as part of the gas tax law to already compensate for EV owners use of the road.
    The only unfair bit about the gas tax is that owners of plugin hybrids have to pay extra for registration and pay extra for gas.

  2. One externality which the gas tax does price reasonably well is GHG emissions: the amount of carbon coming out of the tailpipe should be pretty well correlated with the amount that goes into the gas tank. in the same way, a mileage tax is not as good a way to price the externalities of electricity generation and distribution as is a charging tax (unless it’s already priced into electric rates, which I doubt).

    • The externality of electricity priced into electricity, in California. Electricity providers are covered under the cap-and-trade system and have to buy permits to cover their CO2 emissions. There is also a strong policy in California to rapidly transition away from fossil fuel electricity towards renewable or non-emitting sources, which has resulted in rapid progress towards decarbonizing the California grid.

  3. All important points. Which leaves the biggest question: How would you go about implementing – in a practical sense – an externality and/or mileage tax? As other commentators have pointed out, to impose a fair tax, it would be necessary to calculate the actual mileage and externality costs of each and every vehicle on the road. As cars and truck become more and more high tech, this could be done, if consumers and the car companies and government regulators work closely together – and that consumer privacy be redefined in fundamental ways And that systems be set up to collect information collected by millions of cars and transmit it to taxing authorities. It’s doable – and arguably should be done. But, will be very difficult and costly to achieve!

  4. I think we need more systematic ways of talking about the differences between steady-state solutions and market transitions, and how to know when and how to switch between the two.

    Clearly in a future all- or majority-EV fleet, we’ll still need roads, and so a tax that impacts EV drivers is necessary.

    Today, we want to encourage the transition to EVs, so that sort of tax may be counterproductive in the short run.

    This is not unlike residential PV where in the long run NEM is not economically feasible, but in the short run, it has been very successful in creating an interesting industry, even if it has resulted in some less than ideal cross-subsidies.

    But in both cases, I feel as if our discourse lacks the tools to identify when a program has “succeeded” and it is time to begin phasing out one regime and replacing it with another. Obviously, politics has a lot to say about this, as the winners and losers from the existing and proposed regimes will battle it out. However, I’m not aware of a literature (that could be on me, of course!) that provides an economic framework for thinking about how and when to remove one subsidy and replace it with another as the market transitions. Perhaps someone here could point out some appropriate papers?

  5. Two quick thoughts (without having read the underlying paper…). One of the issues with a “tax all the externalities” approach is a) correctly identifying ALL of the externalities and b) correctly pricing them. Some of those externalities are location and time dependent – e.g., air pollution effects are going to be more pronounced in an urban air basin at rush hour than driving at 2 am on US 50 east of Reno. And then there is the issue of the subsidies that the oil and gas industry get – electric power industry also.

    One potentially useful way to think about offsetting a mileage tax (which seems like a reasonable way to help pay for infrastructure) would be a “carbon tax credit” for EVs or presumably even hybrids if one can figure out how to allocate the credit – all this assuming that a larger scale carbon tax isn’t implemented (or isn’t correctly priced).

    • The notion of funding highway infrastructure almost entirely with fuel tax revenue is increasingly antiquated. Regardless of what energy on-highway vehicles use, they are becoming more efficient on average, thus decreasing their fair payment for miles driven over time. Fuel taxes should be abolished and replaced by VMT fees, applied to all vehicles, with fee rates set based on vehicle weight, and adjusted annually according to the consumer price index. This would be a more representative and sustainable revenue source for road infrastructure. It’s highly inappropriate to single out EVs as the only vehicle type in need of VMT fees. Particularly true given: 1) small EV market share; 2) reduced societal and environmental impacts of EVs compared to ICEVs; 3) EV-specific fees’ negative impact on the efficacy of public purchase subsidies; and 4) urgent need to accelerate consumer adoption of ZEV technologies in all technically feasible application as a means for improving local air quality and mitigating global climate change.

  6. Excellent article. For those who are interested, I would highly recommend this report, done by an ITS-Davis colleague, Alan Jenn, by the request of the Legislature in the gas tax bill. It evaluated the effect of ZEV registration fees, which are the current default most jurisdictions are looking at for assessing ZEVs for their impact on roads.

    https://escholarship.org/uc/item/62f72449

    The result: Yes, EV registration fees do seem to reduce EV purchase rates, by a little bit and only transiently (probably related to media coverage). A better option would be to use on-board telematics in ZEVs to assess per-mile fee obligations without having to transmit a lot of personal travel data to the state. Gasoline/diesel vehicles should just stick with gas/diesel taxes as long as those fuels are still used.

  7. Azmat:
    This is actually called a weight-mile tax and is the basis of taxation for heavy trucks in some jurisdictions.
    Implementation of such a tax — for all vehicles — is a bit challenging, but cars of more recent vintages report their location in real time — thus making the mileage part fairly straightforward (GM’s OnStar, for example.)
    Most road wear comes from heavy trucks who generally are subsidized by other road users. A major component turns out to be the road surface — light duty roads are expensive to maintain when used for heavy trucks. If implemented across all road users, we could use the location data to create an incentive for heavy vehicles to prefer appropriate routes.
    However, as the authors have noted, EVs are a minor part of the overall issue and will likely continue to be for the immediate future. So, we have the ability to implement a good solution without waiting for EVs to catch up.
    Robert

  8. Seems ridiculous to focus on a vehicle’s fuel type when it would be more accurate to focus on vehicle efficiency to determine who is or should be paying more or less. A hybrid vehicle averaging 50 mpg underpaid road taxes too and hybrids are ubiquitous in some states, like California. A high MPG gas car underpays too. EVs usually pay local taxes assessed on electric bills. And California recently enacted an annual fee for EVs to support road maintenance.

  9. Yes they should pay a mileage charge. A combined charge weighted by miles driven and weight of vehicle. The electronics on the vehicle should transmit the odometer reading to DMV 2months prior to reg renewal.

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