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States See Transportation Funding Threats from EVs and Hybrids

New federal regulations would force a shift to fuel-efficient hybrids and electric vehicles in the coming years. States such as New Jersey are already raising gas taxes and adopting EV fees.

Electric vehicles recharging along the New Jersey Turnpike. The state wants to raise both gas taxes and EV fees to address declining revenues.
Larry Higgs/TNS
In Brief:
  • States are looking for ways to collect transportation funding as revenue from gas taxes shrinks.

  • The New Jersey Legislature agreed to raise the gas tax and fees on electric vehicles in the short term.

  • Some states are experimenting with vehicle-miles-traveled fees and other road-user charges.

  • States may eventually be forced to overhaul the way they pay for road construction and maintenance. But when and how they can do that remain open questions.

    Gas tax revenues have been the bedrock of transportation funding in most states for decades. As cars have become more fuel efficient, and electric vehicles have entered the market, many states are facing a future with lower revenues. None of the options for replacing it are an easy political lift, but states have begun gradually adopting new policies and experimenting with new revenue sources as they seek to negotiate this problem.

    This year, for example, the New Jersey Legislature passed a bill to authorize the state's transportation trust fund for the next five years. The bill, which sponsors expect Democratic Gov. Phil Murphy to sign, would incrementally raise both gas taxes and fees on electric vehicles. It’s a policy that will make it possible to invest in transportation infrastructure for the next half-decade. But supporters of the approach expect the next reauthorization might look a lot different.

    “Given our state’s environmental policies in the future, where we really are trying to be an all-electric state, we have to start thinking about how we’re going to pay for the roads,” says state Rep. Clinton Calabrese. “We have to prepare for the future.”

    Fluctuating EV Demand

    With gas taxes doing most of the heavy lifting for transportation funding, a critical question for states is if or when electric vehicle adoption will start leaving unsustainable holes in their transportation budgets.

    Federal policies and government purchases under the Biden administration led to an uptick in EV sales over the last few years. Demand for EVs has fallen off in recent months, but demand for more fuel-efficient hybrids has spiked. Manufacturers are still pushing ahead with production of electric vehicles, as they expect the industry will continue to grow worldwide. New federal regulations that Biden announced last week would gradually tighten the rules around tailpipe emissions, forcing automakers to produce more EVs and hybrids over the next decade in order to comply.

    States, especially those with ambitious climate goals of their own, are anticipating big declines in gas tax revenues. California is expecting a $6 billion reduction over the next decade, partly as a result of its own policies to push more electric vehicles. Maryland is making painful cuts to transportation and transit budgets as it foresees lower gas tax revenues. Massachusetts Democratic Gov. Maura Healey appointed a task force to study new transportation funding sources as the state tries to meet a goal of selling only electric vehicles by 2035.

    Tough Choices

    Most of the options for shoring up revenue have political downsides. Raising the gas tax itself is always an unpopular idea. The federal gas tax hasn’t been increased for more than 30 years. Nevertheless, 33 states have passed gas tax increases in the last decade, according to the National Conference of State Legislatures (NCSL). The bill in New Jersey, which is controlled by Democrats, would raise gas taxes by 2 cents per year over five years, which drew opposition from Republicans.

    Lawmakers also face pressure to incentivize adoption of electric vehicles and hybrids, even as they are helping to alter the transportation funding calculus. States with big climate goals don’t want to disincentivize EV adoption with fees that are too high. At least 32 states currently charge a registration fee for electric vehicles and 19 have fees on plug-in hybrids, according to NCSL.

    Those types of fees don’t capture how much drivers actually use the roadways — something that the gas tax at least approximates. Many states and the federal government are experimenting with vehicle miles traveled (VMT) fees, which charge drivers based on how much they actually use the road. Oregon and Utah were the first states to create such programs, which are currently voluntary.

    Following a pilot, a state-appointed task force in Oklahoma recently recommended creating a permanent VMT fee program that could eventually replace its gas tax. The Kansas Department of Transportation launched a study for a similar program this month.

    Many experts believe those fees will eventually be needed to replace the gas tax, but there are challenges to implementation, including decisions about how to track VMT for individual drivers, when to collect the fee, and how to coordinate policies across state lines.

    The politics of collecting revenue from drivers may also shift. Drivers don’t like paying gas taxes, but they accept it as something they have to do to fuel up their cars. The dynamic may look much different when road-user charges are imposed in different ways or at intervals, such as an annual tax based on vehicle miles traveled. Some states are also considering fees or taxes on EV charging, which would mimic the gas tax model.

    “The bottom line is … EVs have to participate somehow,” says Greg Lalevee, a union leader in New Jersey and vice chair of the state’s Transportation Trust Fund Authority. “They are heavier vehicles. They do beat up the roads more because of it.”

    If Gov. Murphy signs the transportation bill in New Jersey, the gas tax and the fee on electric-vehicle registration will increase each year for the next half-decade. It’s a necessity to keep funding infrastructure work, which is important to the state economy, Calabrese says. But it’s also a bit of a placeholder.

    New Jersey currently collects gas taxes from drivers who use its roads just when they’re passing through the state, which is part of one of the largest population centers in the world. A registration fee on electric vehicle owners in the state doesn’t work the same way.

    Calabrese predicts the next time the state has to reauthorize the fund, New Jersey and other states will be thinking about how to collect transportation funding from drivers in a “dramatically” different way. “There’s going to need to be a way to capture the [road] use,” he says.
    Jared Brey is a senior staff writer for Governing. He can be found on Twitter at @jaredbrey.
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