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The Multibillion-Dollar Implications of EVs for State Budgets

It’s not just the decline in fuel tax revenues and its impact on highway construction and maintenance. Real estate will also be affected, and sales taxes are likely to take a hit. States need to begin developing strategies.

A gas pump showing the prices for different fuel types.
Something EV drivers never encounter: Federal and state taxes on fuel for internal-combustion-powered vehicles are the main source of funding for building and maintaining highway infrastructure. (Shutterstock)
America’s transition to electric vehicles promises clear benefits for the environment and human health. And with an aggressive ramp-up of EV car and truck manufacturing and its associated domestic supply chain, the nation has the opportunity to remain economically competitive with China and the European Union.

This is great news, of course, but states must quickly develop new transportation funding strategies to make up for declining fuel tax revenue or we will face a significant national challenge.

Federal and state fuel taxes are the main source of highway and road funding, and the Congressional Budget Office projects that balances in both the highway and transit accounts of the federal Highway Trust Fund will be exhausted by 2028. The decline of fuel-tax revenues resulting from EVs never needing to visit a gas pump will further diminish state and local governments’ ability to maintain our deteriorating network of roads, highways and bridges. At the same time, governments will be faced with increased expenditures due to aging road infrastructure that is threatened by extreme weather events.

State and local governments will also see expenditures rise as they begin transitioning their own fleets to electric and installing charging infrastructure for both public and private vehicles, as well as the longer-term costs of remediating abandoned underground fuel storage tanks as demand for gas stations erodes.

However, most states have not yet taken stock of these emerging trends. A new report from our Dynamic Sustainability Lab at Syracuse University, commissioned by the Pew Charitable Trusts, documents the direct and indirect funding at risk from the EV transition as well as the associated increases in public expenditures.

California, which has the nation’s highest market penetration rates of EVs, is projected to see a 64 percent decline in the state’s gasoline tax, equating to a revenue hit of more than $5 billion over the next 10 years. As a result, its local-government highway maintenance and rehabilitation programs are projected to face funding declines of $1.5 billion over the next decade, dropping from $5.7 billion to $4.2 billion.

Similarly, Michigan experienced an estimated $50 million revenue decline between 2019 and 2021, even with a mandatory EV registration fee. Cumulatively, by 2030 the road funding deficit in Michigan from EV usage would be $390 million to $470 million under current policies.

But it’s not just our infrastructure at risk. Fuel taxes also support public transit in some of our largest metropolitan areas. New York state, which is already facing a $1 billion shortfall in funding for the New York City region’s Metropolitan Transportation Authority, used 84 percent of fuel-tax revenues for mass transportation in the last few years. To try to shore up the deficit, it has instituted an increased payroll mobility tax of 60 cents per $100 of gross wages/salaries on employers in the city’s five boroughs and surrounding counties.

State and local governments are also likely to see dips in sales tax revenue from auto-parts sales and mechanics’ services because EVs require less maintenance than internal-combustion vehicles. And there will be transitions in real estate as legacy gas stations begin to close or repurpose, which will also have the potential for revenue declines in sales taxes on food and merchandise as well as lottery sales deriving from convenience stores.

There has been some movement at the state level to address these potential budget shocks. Many states have enacted widely ranging EV registration fees, and several have piloted programs charging motorists by miles driven rather than fuel usage. The federal government has also taken some steps: The Infrastructure Investment and Jobs Act provides $125 million to demonstrate the potential of a national per-mile user fee.

Although it is important to note that not every state will be affected equally, each of them will face some sort of budgetary impact as battery-powered EVs and hybrid vehicles expand in the marketplace over the long term. Now is the time for states to analyze the budget implications and develop strategies to address rapidly growing deficits and deteriorating roads.

Jay Golden directs the Dynamic Sustainability Lab and serves as the Pontarelli Professor of Environmental Sustainability and Finance in the Maxwell School at Syracuse University. He is the author of the recently released book Dynamic Sustainability: Implications for Policy, Markets and National Security.

Governing’s opinion columns reflect the views of their authors and not necessarily those of Governing’s editors or management.
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