Electrifying the highway use tax

There are good reasons for states to encourage the sale and use of electric and hybrid vehicles. There may even be good reason for states to ban sales of new gas-powered vehicles — as a growing number of states are doing. That said, states should also consider one of the downstream effects of electric and hybrid vehicle mandates: a corresponding drop in fuel tax revenue.

“Electric vehicles and other highly fuel-efficient vehicles are powerful tools to help states meet clean energy goals and reduce air pollution,” notes the National Conference of State Legislatures (NCSL). “But they can cause headaches for transportation agencies trying to maintain roadways. The reason: The vehicles use little or no gas, and the motor fuel tax makes up the largest share of state transportation revenue — 38.4% in 2022, down from 41.1% in 2018.”

States stand to lose even more gas tax revenue moving forward thanks to greater fuel efficiency in vehicles. According to forecasts, state gas tax revenue could be down $87 billion by 2050.

Since chucking electric vehicle (EV) mandates and incentives could exacerbate air and climate issues and thwart clean energy goals, states are seeking creative ways to replenish dwindling gas tax funds. 

They could raise gas taxes, and some have: North Carolina raised its motor fuels tax rate from 38.5 cents to 40.5 cents per gallon on January 1, 2023. Pennsylvania also increased motor fuel tax rates effective January 1, 2023. And gas tax rates in many states are tied to inflation or the consumer price index. 

Yet increasing gas taxes won’t solve the issue if it results in a drop in consumption, and it typically does to a greater or lesser degree. Indeed, it’s estimated that increasing the federal gas tax by 25 cents would decrease consumption by 30-35 million barrels. It could also pique consumer interest in EVs. 

Another option is for states to set a registration fee for electric vehicles, or a tax on the electricity that runs them. More than 30 states have adopted EV fees to replace lost gas taxes already. 

Other EV-related taxes and fees already in effect or under consideration include:

• Electric vehicle highway use equalization tax
  
• Fees on public EV charging stations
  
• Fees on miles traveled (road usage fees)
  

North Carolina lawmakers are considering an electric vehicle highway use equalization tax. If adopted, for the period of January 1, 2024, through December 31, 2024, any electric vehicle registered in the state would be subject to a flat 1.2 cent tax per mile traveled by the electric vehicle during the previous calendar year. 

For calendar years beginning on or after January 1, 2025, the North Carolina electric vehicle highway use equalization tax would be the amount for the preceding calendar year, multiplied by the percentage set for 2025.

Electric vehicle owners that file North Carolina income tax would report and remit the tax with their individual income tax returns. The tax on EVs owned by a corporation would be paid on the corporation’s income tax return. There will also be an electric vehicle highway use equalization tax return for EV owners not required to file income tax in North Carolina.

It seems a bit complicated, but the North Carolina House passed it on its first reading. If North Carolina ends up adopting the tax and it proves successful, other states could mimic it.

Iowa, Kentucky, Oklahoma, and Pennsylvania are among the states that have per-kilowatt-hour fees on EV charging stations, or soon will.

Iowa implemented an electric vehicle registration fee on January 1, 2020, along with a hydrogen fuel excise tax. Starting July 1, 2023, the Hawkeye State will impose a per-kilowatt-hour excise tax for public charging stations and a new excise tax on sales of “electric fuel” — aka electricity dispensed into an EV for the purposes of propelling the EV. Owners of EV charging stations will be responsible for reporting and paying the tax.

Kentucky will levy a per-kilowatt-hour excise fee on charging stations starting January 1, 2024, the same day a registration fee takes effect for EV and hybrid vehicles.

A per-kilowatt-hour fee will also come into effect at Oklahoma public charging stations on January 1, 2024. 

Pennsylvania’s alternative fuels tax applies to electricity and other forms of alternative fuels. 

The following states are considering a similar fee during the 2023 legislative session:

Kansas. A proposed EV energy equity road repair tax would apply to electricity distributed from a public EV charging station.

Montana. A proposed tax on electric vehicle charging stations would reduce the additional EV registration fees for Montana residents. Alternatively, Montana could impose an additional electric vehicle registration fee.

Nebraska. A proposed excise tax on electric energy used at commercial electric vehicle stations would take effect January 1, 2024, along with a new registration fee for plug-in hybrid vehicles and a sales tax exemption for certain electric energy stored, used, or consumed by a motor vehicle. 

Drivers of eligible fuel-efficient, hybrid, and/or electric vehicles can opt to participate in road usage charge programs in Oregon, Utah, and Virginia. Oregon is now looking to levy a tax on use by EVs of highways in Oregon, as measured by miles traveled between registration dates, at a rate equivalent to the gasoline tax owed by a motor vehicle that gets 30 miles per gallon. 

It often takes years for such pilot programs to transition to full-fledged road usage fees. In 2017, California completed a four-year road charge pilot program created to test, study, and evaluate all aspects of a road charge system. The Road Charge Technical Advisory Committee (TAC) will make recommendations to the California State Transportation Agency by July 1, 2023, on the design of a pilot to test revenue collection.  

Hawaii may institute a mileage-based road usage charge for electric vehicles starting July 1, 2025, and a capped mileage-based road user fee starting January 1, 2025. It would also eliminate the $50 registration surcharge for electric vehicles for owners who choose to pay the road usage charge instead; taxpayers would have such a choice until 2033.

Although Wyoming lawmakers have rejected highway maintenance equity-electric vehicle metering, there are a few different proposals still alive in several other states.

• Idaho may amend and expand provisions regarding electric fuel tax for commercial electric vehicles.
  
• Montana is considering a gross vehicle weight (GVW) fee for electric vehicles and permanently registering hybrids.
  
• Oregon may impose a tax on electricity used to charge electric vehicle batteries. The rate would be equivalent to the rate of license tax imposed on first sale, use, or distribution of motor vehicle fuel. 
  

States will watch to see which of the proposals outlined above are successful. If a plan works, it will likely be emulated.

Gas-powered vehicle bans are coming, at least in some states.

In August 2022, the California Air Resources Board approved a plan to phase out sales of new gasoline-powered cars in the state by 2035. Within a matter of months, Massachusetts, New York, Oregon, and Washington said they’d do the same. 

On March 13, 2023, Governor Wes Moore announced Maryland’s adoption of the multistate Advanced Clean Cars II rule, “which requires manufacturers to continuously increase the share of electric vehicles they sell, reaching 100% of passenger car and light truck sales by model year 2035.” 

Vermont is moving in this direction as well, as are a growing number of other states and the federal government itself. President Biden wants half of all new passenger cars and light trucks sold in the country in 2030 to be zero-emission vehicles.

Gas-powered vehicles will still be on the roads, of course. Even the states that will ban sales of new gas guzzlers will allow used gas cars to be bought and sold. But the direction of travel is clear: States need to get creative to fill gas-tax revenue gaps.

For more fuel and excise tax trends, read the 2023 Avalara Tax Changes report.