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Clock Ticking for States to Replace Dwindling Gas Taxes

They are a key source of funding for transportation infrastructure, but have been shrinking for years. Two new reports explore possible alternatives.

In Brief:
  • Gas taxes, a key source of funding for transportation infrastructure, will generate less revenue as more drivers switch to electric vehicles.

  • States have begun charging annual registration fees for EVs, and are exploring additional fees based on vehicle miles traveled.

  • A national pilot program to collect VMT fees in place of gas taxes is expected in the next few years.

  • This month, electric vehicle drivers in Texas will start paying an additional fee of $200 per year to register their cars.

    While that may sound like a vindictive measure from a conservative state aimed at extending the primacy of fossil fuels, it’s in fact an increasingly common tool used by states of every stripe, as they face down the question of how to replace dwindling revenue from gas taxes. More than half of U.S. states, including Michigan, Washington, Wyoming and California, have similar fees on the books, according to a recent report from the MIT Mobility Initiative. The fees range widely in scale, but most aren’t high enough to replace the revenue the average driver pays in state gas taxes each year, according to the report.

    As more drivers switch to electric vehicles, incentivized by provisions of the Inflation Reduction Act and other federal laws, states will see gas tax revenue continue to shrink. While many leaders have embraced the transition to electric vehicles, neither the states nor the federal government have yet figured out a perfect way to replace their gas taxes, which have traditionally been a critical source of funding for transportation infrastructure. The sooner alternatives are put in place, the better, says Jim Aloisi, a lecturer of transportation policy and planning at MIT and former secretary of transportation for Massachusetts.

    “The one thing you don’t want to do is spring this on people at the very end of the process,” Aloisi says. “People need to know that a consequence of this transition is that we need to find a replacement for the one revenue source we’ve relied on since the 20th century, and that’s the gas tax.”

    New Funding Model Needed

    As Aloisi and his co-authors wrote in their July report, Replacing the Gas Tax, gas taxes have been “the mainstay of transportation funding for most states since the early decades of the 20th century, and for the federal government since enactment of the Interstate Highway Act of 1956.” But they’ve been inadequate for years. The federal gas tax was last raised in 1993, and hasn’t kept pace with inflation. Fewer than half of states have tied their own gas taxes to inflation, according to the National Conference of State Legislatures. The federal Highway Trust Fund is currently solvent for the first time in over a decade because of funding from the Infrastructure Investment and Jobs Act, but won’t stay that way for long, the MIT report notes.

    The need to replace the gas tax is also a chance to build a “more rational transportation funding system,” the report says — one that accounts for all the ways that cars wear on infrastructure and the environment, whether they’re electric or gas-powered. The group lays out a framework to help policymakers design possible alternatives, including more sophisticated measures than registration fees.

    Some key considerations include making such programs easy to administer, tough for drivers to evade, stable and fair, the report says. They should also be able to address traffic congestion, road wear and tear, safety and emissions, it says. People are also more willing to accept taxes and fees that they don’t have to think about every day, Aloisi says, like the way cash tolls used to anger motorists.

    “It’s not too early to start thinking about this,” Aloisi says. “If a state wanted to take it slow and say, ‘We’re going to pilot something, try it out, have a dialog with the voters’ — whatever they want to do, that takes time.”

    States Test Fuel Tax Alternatives; National Pilot Expected

    Advocates and researchers have been talking for years about moving from a gas tax to a user charge based on vehicle miles traveled (VMT), and some states already have pilot VMT programs in place. Concerns about the gas tax long predate the rise of electric vehicles, says Garett Shrode, a policy analyst at the Eno Center for Transportation and lead author of a recent report on national alternatives to the gas tax.

    “If you look at the numbers over the last two decades, we’ve been losing revenue to fuel-efficiency gains in internal combustion engines,” Shrode says.

    The first state to pilot a VMT fee was Oregon in 2006; that program became permanent in 2015, and allows drivers to opt in and pay a 1.8-cents-per-mile fee and get a credit against gas taxes paid. Lawmakers have discussed making it mandatory in coming years. Other states with permanent, voluntary programs include Utah, Virginia and Hawaii, while many other states have pilot programs in place. There’s no consensus on the best way to monitor each driver’s vehicle miles traveled yet, but options include manual reporting of odometer readings, onboard devices and mobile phone apps.

    “The pilots have been pretty good at answering some questions we needed answered” about administration and logistics, Shrode says.

    States have introduced pilot programs in a revenue-neutral way, to test out methods for measuring and collecting fees, but haven’t begun leaning on them to generate funds on the scale of the gas tax. At the national level, the IIJA requires the Department of Transportation to run a pilot of its own to “test the design, acceptance, implementation and financial sustainability” of VMT fees, according to the Eno Center report.

    Shrode says the department has been “dragging its feet” on that pilot. Given the experimentation that’s already being done at the state levels, he says, the national pilot should focus on simplicity, and on finding ways for federal and state VMT programs to overlap.

    It’s likely that states will end up with a range of approaches to collecting VMT fees, Shrode says. But as the U.S. edges closer to mass adoption of EVs, the urgency of finding an alternative to gas taxes will only grow.

    “It really looks like a patchwork of revenue mechanisms are going to be needed and there’s not going to be one clear solution,” Shrode says. “So states, in order to set themselves up for success now, should really be exploring multiple potential avenues.”
    Jared Brey is a senior staff writer for Governing. He can be found on Twitter at @jaredbrey.
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