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As Electric Vehicles Take Off, States Test Taxing Options

Congress continues to debate how to replace revenue from the long-term decline in the gas tax. Meanwhile, some states have upped the registration fees for EVs and a few experiment with a vehicle-miles-traveled tax.

(TNS) — As debate continues on Capitol Hill over the shape of a multibillion-dollar infrastructure package, exactly how to pay for those investments remains vague. But one thing appears to be off the table for now: Asking America's drivers to help foot the bill.

Policymakers are running up against the reality that the main source of highway funding — fuel taxes — has long failed to generate enough revenue for needed infrastructure improvements, and that will only get worse as electric vehicles become a greater share of cars on the road.

The funding debate has put the problem in stark relief: electric vehicles are expected to take off and gas-powered cars will only get more efficient.

"Electric vehicles are what's going to kind of doom the gas tax in the long term, and of course, electric vehicles are chipping away at the system now," said Douglas Shinkle, transportation program director at the National Conference of State Legislatures. "In the short term, there's a lot of vehicles that get a lot better gas mileage than the vehicles that were on the roadways five or 10 years ago."

Some Republicans in Congress have suggested putting new federal taxes on electric vehicle drivers as a way to help make up the difference, including "user fees" such as a vehicle-miles traveled system in which motorists pay for how far they drive.

President Joe Biden and many congressional Democrats have resisted the call to increase user fees, arguing they would disproportionately affect low-income people and violate a campaign promise not to raise taxes on people who make less than $400,000. Instead, they've argued for raising the corporate income tax rate from 21% to 28% and other taxes on the ultra-wealthy, which Republicans oppose.

Biden and a bipartisan group of senators struck a deal late last month that avoids both of those potential funding options. Instead, they opted for a patchwork of solutions, including reductions in unemployment spending, public-private partnerships, extra COVID-relief money and more, which some experts have described as "pixie dust" and "wishful and fanciful."

Pressed for Cash

While the funding issue is exacerbated by the advent of EVs, it's far from new.

Federal highway funding goes to construction and upkeep projects on the country's more than 1 million-mile highway system, which includes around 25% of all public roads in the U.S.

Around 90% of that money comes from taxes on fuel, a fixed fee of 18.3 cents per gallon for gasoline and 24.3 cents per gallon for diesel that hasn't been raised since 1993. That means the amount hasn't changed to keep pace with inflation — if it had, those taxes would be around 34 cents per gallon for gasoline and 45 cents per gallon for diesel today.

The fuel tax "doesn't come close to paying for all of the federal transportation spending," said Robert Puentes, president of the Eno Center for Transportation. "There's a concern that the transportation trust fund is unsustainable in the long term because of the shift away from internal combustion fuel vehicles."

Since 2007, when demand for fuel leveled off, cars have become more fuel-efficient and Americans have maintained more consistent total miles driven than in the past, according to the Department of Energy.

Those fuel taxes were no longer enough to fund the billions needed every year to maintain the nation's highway system. The next year, Congress began taking money from the general fund and back-filling the highway fund, totaling $150 billion to date.

There have been multiple attempts to raise the federal gas tax in the decades since, but none has been successful. In 2018, the U.S. Chamber of Commerce proposed a 25-cent-per-gallon increase and former President Donald Trump said he would be open to it, but it never gained momentum in Congress.

The fund is expected to run out in 2022, according to the Congressional Budget Office. If existing funding structures remain, the fund would have a shortfall of around $195 billion accumulated by 2031.

"The tenor of the discussion has shifted recently," said Joseph Kane, a fellow at the Brookings Institution specializing in infrastructure policy. "The needs have gotten so enormous because we've been kicking the can for so long, now the bill is due. We're kind of taking a toothpick to a glacier."

Local Experiments

As discussions about long-term funding for highways sputter in Washington, states are actively experimenting with ways to move forward.

"States are generally the laboratories of democracy. They have more ability to be nimble and experiment with programs and try different things," Shinkle said. "They are also closer to the people, so I would argue it's a better place to start in terms of building understanding and support for a replacement to the gas tax."

Twenty-eight states have laws requiring an extra registration fee for electric vehicles, including Michigan. The fees range from around $50 annually in Colorado and Hawaii to $225 in Washington state, according to the state legislatures group. Most traditional battery-powered electric vehicles in Michigan pay $135 every year. It's indexed to the gas tax, meaning if the gas tax goes up, so does the EV tax.

At least 10 states have launched studies to explore the possibility of a vehicle-miles-traveled tax, also known as "road user charges." Under such a system, motorists pay for the miles they drive rather than one bulk fee.

A 2019 report from Congressional Budget Office estimated a national VMT tax of 5 cents per mile for trucks alone would have raised $12.8 billion in two years, while an annual EV fee of $100 would have raised around $150 million over the same time frame.

Two states, Oregon and Utah, have opened their pilot programs to volunteer drivers, and a third, Virginia, approved a similar program last year that will go into effect in 2023. Drivers who join the program are exempted from other fees as an incentive to participate.

Miles-traveled taxes can be considered a more accurate user fee because they're based on actual road use rather than a one-time charge, Shinkle said, but they can raise privacy concerns. States are navigating that by offering non-tracking options like an annual odometer reading.

The Oregon program has been open to the public since 2015 and includes more than 750 vehicles, said Michelle Godfrey, spokeswoman for the Oregon Department of Transportation. Program participants can choose between GPS tracking — data that's aggregated and anonymized, Godfrey said — and other reporting options.

A bill being considered in the state Legislature would make the program permanent for new models beginning in 2026.

"The discussion is just getting bigger and bigger because more and more states are coming to the realization that funding is going to be compromised pretty dramatically as electric vehicles and hybrids become widely adopted," she said.

"How do you maintain roads when nobody's contributing to them? You're going to end up with a bunch of shiny new electric vehicles on the road and nowhere to drive them."

Standstill in Washington

Despite the funding shortfall, experts say not to expect a federal electric vehicle user fee or vehicle-miles-traveled tax any time soon.

Implementing and collecting taxes on road usage nationwide would come at a significant cost, and environmental groups remain concerned that moving away from a gasoline tax would discourage the adoption of EVs, which emit fewer carbon dioxide emissions over the course of their lifetimes.

The U.S. House passed a bill last year that would have created a test program for a VMT tax, but it wasn't approved by the Senate.

There's been vocal support for a federal program from Republicans, such as Missouri Rep. Sam Graves and Maine Sen. Susan Collins. And earlier this year, Transportation Secretary Pete Buttigieg said a VMT tax is an option for long-term funding, though the administration made clear it's off the table in the short term due to equity concerns.

Infrastructure costs also don't have to be borne directly by the users. General fund money — raised by other fees such as sales taxes or income taxes — can be a source of funding.

There's some conversation among policy experts about moving to permanently paying for transportation through the general fund, said Puentes of the Eno Center. Several other countries pay for road upkeep this way, including Australia, England, Germany, Italy and Mexico.

Kane agreed that's a possible solution, though it's more likely that a multi-pronged solution will be needed soon to ensure roads and bridges stay safe for travel.

"Federal leaders are basically raiding the sofa cushions trying to find loose pennies where they can. But they need to come up with literally billions, if not tens of billions," he said.

"I commend them for laying out all the tools on the table, cracking open the piggy bank and trying to count all the coins. But that's probably not going to be sufficient when, structurally speaking, the roof is caving in."

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