How Should We Tax Electric Vehicles?


by James A. Bacon

Electric vehicles (EVs) are commonly touted as a necessary part of America’s green energy future: Shifting from cars powered by gasoline-combustion to cars powered by 100% clean electricity will cut CO2 emissions (and other pollutants) implicated in global warming. Virginia ranks among the states with the lowest EV market share. But on the assumption that EVs eventually will become part of Virginia’s energy future, there’s no time like the present to start thinking about what EV taxation should look like.

Perhaps the most pressing issue is whether to tax EVs the same as conventional cars for the purpose of raising money to pay for the construction and maintenance of roads, highways and bridges. EVs contribute to traffic congestion and cause traffic accidents like any other kind of car. Should their owners not share in the cost of building, maintaining and operating roads?

The rise of EVs, hybrids and high miles-per-gallons vehicles was part of the justification when Virginia overhauled its transportation tax structure during the McDonnell administration. Revenues from the gasoline tax were stagnating, and legislators saw a need to diversify the source of transportation revenues. Once the tax increases were enacted, however, cogitation about the tax structure largely ceased.

Virginia cannot ignore the problem forever. One good place to start thinking about the issue of EVs and road maintenance is a new paper by two University of California professors, Lucas W. Davis and James M. Sallee, “Should Electric Vehicle Drivers Pay a Mileage Tax?” The paper explores the many trade-offs involved.

The issues are not straightforward because automobiles of all kinds have what economists call externalities, that is, they have social costs that are not reflected in the price charged for fueling and operating them. Vehicles of all kinds need roads and bridges to drive on. They also need police and rescue units to enforce traffic laws and clear accidents. They also generate pollution.

Analysis is made more complicated by the fact that the social cost of congestion varies by location and time. Driving a car northbound at 7:30 a.m. on Interstate 95 in Prince William County will create a higher social cost than, say, driving a car at 10:30 a.m. on Route 460 outside of Farmville.

Another complication is that while conventional cars emit CO2 at the tailpipe, EVs effectively emit CO2 at the electric plant, and some power companies are more carbon intensive than others. Thus, driving a car in a territory served by a coal-intensive generation fleet could generate more CO2 than in a territory with lots of nuclear, solar and wind power — and conceivably more than a car with a highly efficient internal combustion engine.

Then there’s the reality that EV subsidies are a form of reverse income redistribution. EVs qualify for federal tax credits valued at $2,500 to $7,500 per car. Who captures these subsidies? Wealthy people. As Davis and Sallee write, “Electric vehicles as a percentage of all vehicles increases from close to 0% for annual incomes below $25,000, to 1% for annual incomes $75,000-$125,000, to 4% for annual incomes above $200,000. Likewise, the structure of local taxation — taxing gasoline sales rather than charging on a mileage-driven basis — equates to a benefit of about $300 per year, the authors calculate. 

Bacon’s bottom line. What would be a rational state/local tax structure for EVs in Virginia? Here are some principles to guide the formulation of tax policy.

  • User pays + externalities. To the greatest extent possible, transportation should be a user-pays system — but a system in which the user pays not only for visible costs but externalities.
  • Construction, O&M, congestion. A rational funding system would distinguish between three sets of road and highway costs: the cost of building new capacity, the cost of maintaining and operating the roads, and the cost of driving during periods of peak congestion.
  • EVs should pay, too. EV drivers should pay their fair share of building new roads, maintaining and operating those roads, and the cost (externality) they impose on other motorists for contributing to congested driving conditions.
  • Pollution externalities. Cars of all kinds should pay some kind of tax/user fee that reflects the social cost of the pollution they generate, primarily Nitrogen Oxide, a contributor to low-level ozone, and CO2, a contributor to global warming. Ideally, they should pay in direct proportion to the amount of pollution they cause.

Conceptually, I think that’s pretty clean. The really big sticking point I foresee is calculating the social cost of CO2 emissions. No one, not even the International Panel on Climate Change (IPCC), knows the social cost of CO2. No one knows for sure how fast global temperatures are increasing, no one knows for sure what negative costs will come from higher temperatures, and no one knows for sure what offsetting beneficial impacts will come from a warmer climate. Inevitably, any calculation of the social cost will be driven by untestable and unproven assumptions, and by what factors are included and excluded from the calculation.

That messy question aside, an ideal scheme would adjust for both direct CO2 emissions from gasoline combustion and indirect emissions via the electric grid. Any such calculations would have to be revisited periodically to reflect the steady greening of the grid over the next few decades.

It’s fun to think about the ideal system of taxation. But is an ideal system economically feasible? That depends largely on the cost of administering the system. And is it politically feasible? There are so many winners and losers that fundamental change will be difficult. But we won’t know until we start the conversation.

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17 responses to “How Should We Tax Electric Vehicles?

  1. Good post, Jim. I am not optimistic that our policymakers will start thinking that far ahead.

    It seems that taxation on vehicles of any kind should be limited to construction, O&M, and maintenance. For the EVs to contribute their fair share, the state will need to shift to a mileage tax for all vehicles. One knotty problem with this approach will be how to capture revenue from drivers passing through the state, including trucks.

    To deal with the external problems created by CO2 emitted by internal combustion vehicles and at electric plants for EVs, we could institute a carbon tax. As you point out, there is no reliable way of gauging the external cost, so any tax rate would be pretty arbitrary. How the revenues from such a tax should be used is a topic for another day.

    As EVs get more common, charging stations should be springing up to meet the demand. I assume that EV drivers would pay for the electricity for charging their vehicles similar to how they pay for gas.

    By the way, in additional to the various subsidies for EVs, Virginia has one more: the I-64 west-bound New Kent rest area has charging stations for EVs at no cost to the driver. (https://www.virginiadot.org/travel/safety_rest_area_faqs.asp)

  2. There is actually a simple approach, recommended by Toyota and other auto makers. However, conflicts have developed.

    Simple answer (Toyota etc):
    (1) Assume we continue per gallon gasoline taxes as per today
    (2) Cars which use 100% gasoline (no plug-in for electricity) continue in this manner. This includes “gasoline hybrids” like Prius.
    (3) Cars which use electricity pay a fee typically $100-$200 to cover state taxes avoided by the alternate fuel

    This is what Virginia, and some other states, do already.

    Conflicts:
    (a) Many EV advocates feel that electric vehicle owners should be excused from paying the fuel taxes on gasoline, for a variety of reasons, but to encourage adoption of EV’s

    (b) Many (mostly red) states are now moving in with taxes on “gasoline hybrids”, which is considered unfair since many hybrids get lower MPG.

    (c) Many (mostly red/rural) states object to per gallon gasoline taxes since they feel that unfairly allows higher effiiciency cars to pay less tax. Rural drivers who need pick-ups and drive lots of miles are therefore over charged for taxes.

    So that’s where we are…divided as usual

    One compromnise would be to accept the Repub proposal to change from per gallon tax and start using tax per mile drivien. Which is awkward but the only way to get Repubs on board.

  3. I don’t think $200 comes close to what most folks pay right now.

    take someone who drives 20,000 miles a year and gets 20mpg – they use 1000 gallons of fuel – at about 35 cents a gallon in Federal and State tax and remember that’s only about 1/3 of the total revenues collected for transportation which when you allocate out for the number of cars/drivers in the state – works out to more than $500 per capita per year. In other words – a quick and dirty calculation would be VDOT’s annual budget about 3.3 billion divided by the population of the state 8.5 million = $388 per capita which includes people under 18.

    What we really need is an “elegant” solution as “use” tax no matter what flavor of vehicle you drive – your “share” of the road costs as opposed to even more convoluted schemes.

    I’m a little amazed that Climate skeptic bacon is advocating some kind of tax for CO2 but I’m thinking instead of a road tax that the extra tax should be on the sticker of the new car much like the gas guzzler tax.

    But once you got the car – in terms of road use -there is not difference.

    In places where there is peak-hour congestion – they should still charge a premium for solo driving and incentivize multi-passenger vehicles – i.e. dynamic tolls.

    I think the temptation to roll these disparate goals into one tax is a recipe for regulatory disaster….

    Should keep road use taxes separate from pollution taxes.

    • The $100-200 fee is for replacement of state fuel taxes, and is about right, any quite a few states do this already.

      So far nobody has talked much about asking EV/hybrid drivers to pony up for Federal fuel taxes avoided.

      You probably should use 25 MPG and 15000 miles or less as average numbers for this purpose.

      • re: ” So far nobody has talked much about asking EV/hybrid drivers to pony up for Federal fuel taxes avoided.”

        Virginia gets it’s share of Fed Gasoline tax revenues that everyone who drives – should pay. no?

        • Larry- I am not sure how the Feds decide to distribture the trust funds. I do think the Feds should develop some policies, like when and if it is acceptable to tax hybrids/EVs. If the state violates the rule (by over-charging), then hold back some Federal trust funds.

          • @Tbill – they distribute them roughly according to each states contribution of the gas tax. It has nothing to do with EVs or hybrids – it comes back primarily as new construction funding.

            but the point here is that Virginias do pay that tax and it’s pretty close to what they pay for state taxes so just figure about 35 cents a gallon for taxes – for road use.

  4. Unless and until state and local government prohibits all new development and redevelopment in areas subject to flooding and imposes extra taxes to help fund flood control measures in those areas, why should anyone pay a carbon tax? Even if rising seas are largely caused by natural forces, there is no reason to keep building or allow rebuilding in areas subject to the rising seas. And if we were to build big sea walls or put these buildings on stilts, shouldn’t the owners bear most of the costs?

    I think pushing everyone to a miles driven tax is not politically feasible today. But electric vehicles might be a place to start. There should be mileage bands for taxation similar to what auto insurance does. Some gas-tax equivalent formula should be imposed.

  5. TMT – you’ll be glad to know that the biggest beneficiaries of the flood insurance problem are – TA DA – the wealthy…..

    Wealthy Counties Benefit Most From FEMA Home Buyout Program, Study Finds

    https://efficientgov.com/blog/2019/10/14/wealthy-counties-benefit-most-from-fema-home-buyout-program/

    and surprise, SURPRISE – it’s the wealthy than benefit from the tax breaks for electric cars!

    We have folks down Fredericksburg way – and the ONLY reason they got a hybrid was so they could ride solo in the HOV lanes.. had NOTHING TO DO with being “green” !!!!

    that’s why I think road use should be separated from pollution because most folks end up not really understanding it and the opportunistic will, as usual, find out how to scam it.

  6. re: ” I think pushing everyone to a miles driven tax is not politically feasible today. But electric vehicles might be a place to start. There should be mileage bands for taxation similar to what auto insurance does. Some gas-tax equivalent formula should be imposed.”

    I’m pretty much with Jim that there ought to be a “use” tax – and that the tax levied should be commensurate with “use”. If you use more – you pay more. I’m not in favor of special discounts for lower polluting vehicles because no matter how much pollution – your car is “using” up road money… maintenance and operations as well as new roads and improvements – no matter how “green” your car is or not.

    I’m in favor of an up-front tax on the sticker of new cars for it’s pollution. That allows folks who want to reduce their pollution to make that choice and for folks who are not as concerned about to pay the tax – like they have been for “gas guzzlers”.

    We’re confusing road use with other issues.. For all of those that “use” the roads – they need to pay their fair share.

    • One key finding, I would point out that incentives (free HOV, rebate$$, tax credits) are extremely important to spur sales of green cars.

      For example, in the early 2000’s, Virginia was the very first state to give free HOV to hybrids. Hybrids then sold like I-95 hot cakes. Virginia was for a few years close to No. 1 on hybrid sales (not sure if we ever bested the Ca, but maybe per capita, we did briefly).

      Most > 50% plug-ins are sold in CA and free HOV and large federal+state tax credits is the basic reason. No free HOV= no plug-in market in the USA. Many people feel we need to stop using gasoline, with urgency, and therefore large incentives for EV’s is the only way to do this. Not saying I agree with popular opinion, just saying what the actual situation is, where the rubber meets the road.

  7. Just a couple of tidbits of information.

    All trucks used for interstate transport and regulated by the USDOT must make payments to each state based on the miles traveled in that state to pay for road maintenance. These are tracked, reported and paid by the companies that own the vehicles (similar to the driver logs that track the hours driven by their drivers). This is in addition to whatever amounts are paid with fuel taxes. As trucking fleets move to EVs this will continue to cover the use on a per mile/per state basis.

    The amount of CO2 released per mile by EVs is considerably less than the typical amount of CO2 released per mile from the average internal combustion engine (ICE) vehicle because the bulk generation of electricity (even including transmission losses) plus the very high efficiency of electric vehicles releases less CO2 per mile than very low efficiency ICE vehicles.

  8. If EVs are charged from SOLAR – when available – the reduction in CO2 is significant. This illustrates that solar has a potentially valuable impact on transportation in that even though it’s not always available and when available not at 100% – whatever IS available and used – reduces the emissions – from tailpipe OR grid.

    We keep thinking in binary terms about renewables as if they are “available” or not – and because they’re not available 24/7 they are somehow not as “good” as fossil fuel generation of electricity.

    The goal is to REDUCE the burning of fossil fuels WHEN WE CAN – before we ever get to the point of Draconian measures. If we build enough solar to charge vehicles at workplaces during the day – we will cut GHG substantially without any other measures taken. When we combine widespread solar with energy conservation – we may well be able to cut electricity use by a huge amount – just keep in mind that utilities like Dominion see this as a direct threat to their business model and will not be interested in building that much solar unless they can make a profit on it comparable to what they make generating electricity from fossil fuels.

  9. I am inspired by Larry’s response to indulge in a little bit of wishful thinking. Leaping forward, an ideal situation would be EVs outfitted with solar panels. The cars could generate and store their own energy. On cloudy days like today, one could plug the car into the grid.

    • The current Toyota Prius Prime plug-in is designed for on-roof solar option, that is not available in the USA due to our strict roof roll-over strength requirements. It can get up to 10% of its miles by self-solar recharging which is quite remarkable accomplishment. If solar is not available it gets about 60 MPG on gasoline, but also you can plug-in. Not too shabby.

      At today’s lower cost of energy in the USA, the cost of solar option at several thousand $ will not be made up from savings on fill-up with gaso or electrons.

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