In the U.S., EV drivers don’t pay tax when they buy gasoline. That means EVs have reduced U.S. gasoline tax revenues by $250m annually. It’s only 1% of the total, but that’s because EVs are less than 1% of the vehicle stock. Clearly, as EV numbers increase, so will that lost revenue. As a result, several states are considering imposing a mileage tax on electric vehicle drivers to make up for it. And why not?! EVs are not carbon-zero (most electricity still comes from fossil fuels) and cause wear and tear. Lucas Davis and James Sallee at the Haas School of Business, University of California, Berkeley, summarise their recent paper that looks at ways to pay for externalities – both environmental and material – without losing the incentives needed to keep EV sales rising.
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%.
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.
EVs are not carbon-zero, and cause wear and tear
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.
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.
Externalilties taxes have always been too low
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.
Subsidise EV purchases, not road taxes
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 subsidise drivers to use EVs, just so they won’t drive in gasoline-powered vehicles. One possibility would be to subsidise 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.
For more details see Energy Institute Working Paper “Should Electric Vehicle Drivers Pay a Mileage Tax?”, by Lucas Davis and James Sallee.
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
James Sallee is Assistant Professor, Department Of Agricultural And Resource Economics, University Of California, Berkeley
This article is published with permission.