Photo courtesy of Nissan Motor Company

Taxing the Green Driver
| published June 28, 2014 |

By R. Alan Clanton
Thursday Review editor

The good news is that electric cars are not only saving American drivers money, and reducing the human carbon footprint by reducing auto emissions—but those newest electric cars are also reducing demand at gas pumps in some cities, counties and states. Especially along the U.S. West Coast, where all-electric models have become more popular and where electric fuel-charging stations are more frequent, demand at the traditional gas pump has dropped.

So, this is one of those win-win-win scenarios right?

Well, almost. There is a hitch: cities, counties and states where electric cars have become more commonplace have seen a sharp decrease in revenue. Why? Because those high gasoline taxes and fees—meant to discourage people from driving their internal-combustion-powered cars—are not flowing as projected. Fewer gas-powered vehicles mean less revenue, and that spells political troubles in those jurisdictions where a few extra cents of tax per gallon is critical.

This has forced some states and counties to find creative ways to fund road improvements, bridge repairs, and traffic projects already planned and scheduled. With the U.S. infrastructure suffering mightily from extreme old age—not to mention the horrendous effects of a particularly harsh winter (estimates show that potholes and surface damage accelerated by between 700 and 1000 percent in a hundred major cities during the winter months)—the pressure to make repairs and launch overdue improvements is nearly universal in the United States.

Because drivers of all-electric cars never stop at the local gas station, they also pay nothing into the typical revenue stream of states and counties. And in many areas, drivers of electric vehicles receive a variety of tax breaks from their state and county. And it’s not just all-electric cars. To cash-strapped states, counties and cities, hybrid vehicles also present a similar problem, but merely on a smaller scale. Even fuel-efficiency on traditional cars plays a role, as manufacturers like GM, Ford and Toyota learn how to squeeze greater mileage out of standard gas-powered cars and trucks.

And in an ironic twist, recent gas price increases—the result of market fears over violence in Iraq and the Ukraine—have triggered, at the very time when U.S. gasoline prices typically drop, a spring driving recession, leading many families to cancel vacations and forcing some drivers into fewer weekend trips. In most states, the effect of this drop in demand can be felt almost immediately by local and state agencies charged with getting those road repairs and bridge maintenance projects completed.

So what are states and counties to do?

Raising rates on other forms of taxes in order to make up the shortfall carries serious political risk for the vast majority of elected officials. Neither Democrats nor Republicans (nor Independents) like to discuss tax increases, especially when it requires taxes in one arena to be raised to make up a shortfall somewhere else. But states, counties and cities know all-too-well the problems associated with a dramatic drop-off in revenue: the housing and mortgage crisis of 2008, which triggered the start of the Great Recession, sent government revenue into the tank. States were strained. Dozens of counties and cities teetered at the edge of bankruptcy, and many other cities saw their credit ratings collapse. Most major cities were forced into years of anguished, contentious employee layoffs, depletion of retirement funds, and the cancellation of projects small and large. Governors, commissioners and mayors were forced into politically awkward positions.

So if all-electric vehicles become even more popular, as Elon Musk’s Tesla and other alternative-fuel car-makers would like, what will states and counties do to find that cash for road improvements?

One particularly controversial solution is to start taxing drivers of electric cars at a rate commensurate with drivers of gas-powered vehicles within the same size or weight range. State and county road department officials say that electric vehicles put the same wear and tear on roads and bridges as gas-powered cars, and they ask the simple question: why should drivers of electric vehicles not pay their fair share?

“Those of us who drive gas-powered vehicles,” says New Jersey Senator Jim Whelan (D) of Atlantic City, “which is 98% of the people in our state, are contributing to the transportation trust fund. But the 2% who are driving electric cars or compressed natural-gas cars drive the same roads and bridges that we do—they currently contribute zero. They literally get a free ride.”

Political pressure on legislators is extreme, so to say the least. Even in progressive Washington State—as green-friendly a place as one could envision—state officials began passing along a $100 per year fee to drivers of all-electric cars and a $50 fee to drivers of hybrids. Virginia followed suit shortly thereafter and began assessing green drivers $64 per year. At least five other states are in the process of establishing similar annual taxes, including Arizona, which has a bill pending before its legislature.

Environmentalists and green advocates rightly complain that increasing taxes and fees on electric vehicles merely punishes the very people who are trying to do something constructive to save the planet. Why punish EV drivers for doing something they have been encouraged to do—especially when part of that incentive for good behavior included tax breaks and the promise of savings in their commuting budget?

Green advocates suggest that it is time for states and counties to become innovative and think outside of the confines of antiquated budgeting processes designed decades ago. And some EV advocates go further, suggesting that taxes and fees on electric vehicles is not only lazy, misdirected intervention by cash-strapped politicians, but worse—political manipulation by oil companies and the big three automakers. Why else would any serious legislator consider slapping a hefty fee on a driver of a green vehicle?

Economists and those who watch state and county revenue processes suggest that somewhere in the middle is a solution, and they remind us of the crux of the problem: revenues from gas taxes have actually been steadily declining for about ten years, well before electric, compressed-natural gas, and other alt-fuel cars were widespread. The recession fed the same cycle, as millions of families moved from the exurbs and suburbs back into urban areas, moving closer to jobs, schools and centralized shopping. Millions more moved into apartments close to work. The tight economy put the squeeze on home budgets. When U.S. drivers take fewer vacations or forego those extra trips to the store, they spend less on gas, and that means fewer dollars flowing back to the state capital for road projects. And even technology played a role: each year as vehicles become more fuel-efficient (even those still burning fossil fuels the traditional way), less revenue gets kicked back up the pipeline to Uncle Sam.

In the post-Recession economy, those revenue streams are critical. And legislators have to find a way to fund their projects and pay for public works. Tax revenue is king, and somebody has to pay.

Toyota has already made public its complaints about states and counties levying additional fees to drivers of hybrids. Toyota says that such taxes are inconsistent with government efforts to drive technology and reduce greenhouse gases. And environmental groups point out that taxing people for driving fuel-efficient cars is about as counter-productive as it gets.

“It’s like your county or state raising your home’s property tax just because you installed solar panels on the roof,” one green advocate in Orlando, Florida told Thursday Review, “and because now those same officials see that you’ll be paying less for your electric or gas bill each month. It’s inverted logic, and it’s anti-innovation to boot.”

Moderates on the issue suggest a compromise: tax drivers of vehicles at appropriately tired levels: fully gas-powered cars at 100% of current tax rates both at the pump, and at the time of vehicle registration or tag renewal; tax hybrids at 75%; compressed natural gas at 50%; all-electric at 25%; and so on. The arrangement can be tweaked and adjusted each year, and rearranged as newer technologies enter the markets, but a simple Federal standard could set the basic percentage range for states to adopt. Each state could still manage its own overall gas tax rates just as is the current practice (New York and California have the highest gasoline taxes; Wyoming and Alaska have the lowest).

This higher percentage rate for gas-powered cars would provide an incentive at one end of the spectrum, while the substantial tax break at the green end would reward drivers for lower emissions while not giving them a free pass on roads, highways and bridges.

In the meantime, add this to the contentious mix: in Washington State, the free electric recharge program has come to an end for drivers of vehicles which use eVgo electric stations or other charging stations. Those drivers, who own or lease a Nissan Leaf, a Mitsubishi i-MiEV, or a Tesla Model S with the appropriate adaptor, will now have to pay for recharges at the dozens of stations in the Pacific Northwest. All-electric drivers can pay-as-you-charge, usually $7 to $9 for the full recharge, or they can sign up for a flat monthly fee of $19 with unlimited charging.

Tesla, confident of its business model and its battery design, offers free unlimited charging at any Tesla station, but at the moment there are only about 100 Tesla stations nationwide. Tesla plans to open hundreds more stations in the U.S. and Canada over the next 18 months. (Tesla, hoping to jump-start its business model, recently opened up its patents to competitors).

But since Tesla’s cars—using only the CHAdeMO-to-Tesla adaptor—take a little longer to charge than the comparable Nissan or Mitsubishi, there are already concerns that the “unlimited” plan for recharging on Washington roads and highways would basically give the typical Tesla driver an advantage.

Some green moderates again say that this is where some form of Federal intervention might be useful, even if it was enough to set a few standards for consumption within easy-to-understand ranges. Tesla says it does not intend to establish a price for its recharging stations anytime soon, and makes no apology that it is using this incentive of free charging to encourage car-buyers to consider Tesla vehicles.

Tesla may also benefit greatly if the battles between other alt-fuel car makers continue, but Tesla owners may still be hit with the same annual fees for road and bridge repairs as everyone else if more states begin to adopt annual road-use fees.

The Kiplinger Newsletter and other news sources say that in some states, even EV programs like free parking and free downtown shuttle services may be cancelled by local governments—an indication that in the war between eco-friendly cars and government revenue, cash flow often wins the day.


Related Thursday Review articles:

Tesla's Open-Source Gamble; R. Alan Clanton; Thursday Review; June 15, 2014.

Hydrogen's Promise, Hydrogen's Hype; Earl Perkins; Thursday Review; December 30, 2013.