Are electric vehicles draining the motor fuel tax system?

More and more electric vehicles (EVs) are cruising our highways — in the United States, EV registrations ramped up 41% in 2020. Though battery-operated cars still comprise less than 2.5% of autos running on the road in 2021, their numbers are revving up. This is great news for automakers that have turned toward producing electric models. But has the growing number of registered EVs put a dent in tax revenue collected on gasoline and diesel fuels at the state and federal levels?

The federal motor fuel excise tax is the primary source (84%) for the Federal Highway Trust Fund, which helps support federal transportation infrastructure expenditures. Federal grants to state and local municipalities for mass transit and highway programs account for most of the trust fund’s spending. A 2020 congressional report stated that federal spending for U.S. highways totaled $46 billion in 2019.

All 50 states also impose transportation-related excise taxes that help pay for their highways and roads.

Now with some 1.3 million EVs roaming U.S. roads at the close of 2020, fewer people are buying gas, and the motor fuel excise tax revenue has taken a hit. And with 25 new electric car models available in 2021, EV sales are likely to increase, and motor fuel tax revenue is likely to decline further.

Some states have increased their motor fuel tax rates over the years, and as is typical with individual state taxes, rates and regulations vary. The federal government, however, hasn’t raised its rate since 1993. Currently, the federal motor fuel excise tax rate for gasoline sits at 18.3 cents per gallon and diesel at 24.3 cents. An additional 0.1 cent per gallon is tacked on for the Leaking Underground Storage Tank (LUST) Trust Fund. 

Based on Congressional Budget Office estimations, if the trust fund’s taxes continued at their current rate and the “funding for highway and transit programs increased annually at the rate of inflation,” the federal trust could come up $189 billion short by 2030.

The dwindling motor fuel tax revenue has federal and state authorities concerned and looking for other avenues of funding. The obvious solution is to raise taxes on motor fuel. A 15-cent hike per gallon would be needed to align the rates with inflation and continue inflation increases in the future. The Joint Committee on Taxation estimated that could churn up $329 billion more for the Highway Trust Fund between 2021 and 2030. Raising the fuel tax rate, though, would diminish business incomes.

Another option for offsetting the tax revenue decline is to tax electric vehicle charging station purchases and usage — as of December 2020, 96,536 charging ports were powered up in 30,451 locations across the United States. Currently, drivers of traditional automobiles subsidize road maintenance and new construction through the taxes they pay on motor fuel. Many supporters of EV taxes feel that a tax on battery-operated car “fuel” — electricity sold at charging ports — is a natural parallel to pick up slack in the gasoline tax yield.

In fact, 43 states have already put vehicle charging station tax on the books. Of course, many of those states are doing it differently. Currently, three options exist for EV charging station tax:

1. Charging station purchase tax
2. Charging station usage flat fee tax
3. Charging station usage per kilowatt-hour tax (kWh)

As of September 2021, 35 states and the District of Columbia (D.C.) charge tax on all three accounts. Six states levy taxes on charging station purchases but not usage taxes as these states, in a broad sense, exempt sales of electricity delivered to customers: California, Idaho, Illinois, Nevada, Rhode Island, and Virginia.

One state, West Virginia, allows for a charging station buyer to claim a refund on the tax after purchase and doesn’t charge tax on the usage. Massachusetts is the only state that imposes the flat fee and kWh tax, but not the purchase tax — the state exempts machinery sales used to furnish electricity directly.

Only seven states remain free of charging station taxes for all three categories: Alaska, Delaware, Montana, New Hampshire, North Dakota, Ohio, and Washington. Will they follow the other 43 states?

Some industry insiders question whether EV charging station taxes are a viable solution for transportation infrastructure funding. Though EV sales continue to climb, long-term projections still see battery-operated cars as the minority on the highway. Charging station taxes probably wouldn’t give the trust fund the jump officials say it needs because fuel-efficient cars are also helping to create a shortfall. Gas-powered vehicles with high fuel efficiency obviously use less gas, and therefore their use contributes less to the highway fund.

Virginia is one a of a few states that have also begun levying highway use fees (HUFs) on fuel-efficient autos. And a few other states have begun charging flat fees on EV purchases and registrations to help invigorate the trust fund. As of November 2020, 28 states had mandated additional registration fees for electric vehicles. Colorado has the lowest stipend at $50, and Hawaii charges the highest at $225. Alabama, Arkansas, Ohio, and Wyoming bumped up their fees to $200 in 2019. And no less than five of the 28 states have married the fees to inflation changes or consumer price indexes, and thus, inevitable increases.

The path to sustaining the highway fund isn’t straight and clear. Every option harbors drawbacks and complications. But one certain point is that drivers of electric vehicles use the same roads as traditional auto drivers. It would only seem fair to expect EV drivers to contribute to the highway fund in some regard. However state and federal tax authorities manage this issue, the predicted fund deficit will most likely continue as an ever-evolving journey, with stops and starts, twists and turns.