Electric Car Growth Sparking $300 Billion Budget Loss for States

States are being forced to adapt to dwindling tax revenues from sales of gasoline and automobiles that will trigger large shortfalls in their budgets over the next two decades.

One economic model suggests the states could lose more than $300 billion annually by 2040 if they fail to modify their tax codes to adjust to electric and self-driving vehicles. New transportation business models such as shared vehicle ownership and network-owned vehicle organizations will also impact state revenue.

“Already revenues are way down because of improved fuel economy, and electric cars and hybrids will further impact gasoline sales,” said Richard Pomp, a professor of tax policy at the University of Connecticut School of Law.

Recent actions by states or companies to promote eco-friendly vehicles raise significant questions about the long-term viability of state road funds and the federal Highway Trust Fund. Some lawmakers in Oregon and elsewhere are already pivoting toward a tax system based on mobility, or road usage, rather than fuel, vehicles, and drivers.

That transportation future is already unfolding. California’s governor last month issued an executive order requiring sales of all new passenger vehicles to be zero-emission by 2035. Ride-hailing giant Uber announced 100% of its rides would take place in electric vehicles by 2030. And Michigan’s governor announced a first-in-the-nation initiative for a dedicated autonomous vehicle corridor linking Detroit and Ann Arbor.

Road Fund Losses

Kil Huh, vice president for government performance at the Pew Charitable Trusts, said his organization has harbored concerns about declining road funds for years and commissioned a study by University of Tennessee economist William Fox examining the impact transportation technologies and consumer choice would have on state finances.

“We currently tax only inputs. We tax gasoline, licenses, registrations, license plates. And we tax sales of vehicles,” Fox said in an interview with Bloomberg Tax. “Those tax revenues will decline significantly because we will need fewer vehicles. Nearly all will be electric. Many of them will be autonomous and many will be owned and operated through networks or pools.”

Fox developed revenue models for six states that assume: electric vehicles will eventually replace gas-powered vehicles; most vehicles will operate autonomously; and, many consumers will forgo direct vehicle ownership. He then looked specifically at the revenue losses from fuel taxes, sales taxes on vehicle purchases, registration fees and licenses, and tolls.

The losses, after a phase-in period between 2025 and 2040, are striking. California stands to lose $23.5 billion annually by 2040. The projected loss is: $245 million for New Hampshire; $4.5 billion for New York; $3.7 billion for Ohio; $2.6 billion for Tennessee; and $12.5 billion for Texas.

Extrapolating those losses nationally, the states stand to lose more than $300 billion per year, or between 6% and 7% of total revenues. Portrayed differently, Fox said the losses will be more than 60% of the total revenue collected from state transportation-related taxes and fees.

The Tax Foundation analyzed state road fund tax losses in a report issued in August and also examined losses on the federal Highway Trust Fund, sustained by an 18.4 cents per gallon tax on gasoline that hasn’t changed since 1993.

The foundation concluded improved fuel economy, growing sales of electric vehicles, and inflation are having a dangerous impact on state and federal road funding.

On Oct. 1 President Donald Trump signed a one-year extension of the Fixing America’s Surface Transportation Act, which moves gas tax revenue into the trust fund. The measure did nothing to address long-term highway funding challenges. The cumulative shortfall in the program is expected to reach $189 billion by 2030 under the current revenue formula, the Congressional Budget Office concluded in May.

Vehicle Miles Traveled

Fox and the Tax Foundation pointed to the same policy solution to improve the health of state and the federal road funds: tax systems tied to vehicle miles traveled (or VMT). Any system creating charges for miles traveled would treat modes of transportation and business models equally, and create more sustainable streams of revenue.

“If we can’t use gas purchases as a proxy for how someone drives, it would be more efficient to just measure how many miles you drive and apply a tax,” said Ulrik Boesen, author of the Tax Foundation’s report.

Focusing on vehicle miles traveled could address other transportation problems, Boesen added. For instance, VMT systems aided by global positioning technology could help cities address congestion in business districts by imposing premiums on travel based on location or specified hours. Policymakers could also adjust rates on vehicles that do the greatest damage to roadways.

The National Conference of State Legislatures reports several states have debated legislation aimed at VMT systems. In 2019 and 2020 Maine, Nevada, New Mexico, Oregon, Utah, Virginia, and Washington enacted laws piloting or formalizing road usage charges in their transportation codes. Bills were considered in another dozen states.

Oregon Trail Blazers

Oregon has made the greatest headway with VMT tax systems under its OReGO program, which lets participants pay 1.8 cents per mile driven rather than the state’s 36 cents per gallon gasoline tax. OReGO began as a voluntary program in 2015, but expanded to all motorists in 2019. Mileage is generally reported by an in-car device and charged directly to the driver. Participants are credited for gas taxes paid at the pump.

Participation in OReGO has been tepid. In total, 1908 vehicles have been enrolled during the five years of the program and 700 vehicles are active, said OReGO spokesperson Michelle Godfrey.

Still, OReGO represents Oregon’s best option for solving persistent road-funding challenges, she said.

Utah’s voluntary Road Usage Charge program went live Jan. 1. The program is targeted to drivers of electric and hybrid vehicles, who pay the state 1.5 cents per mile tax up to an annual cap.

Fox suggested that the states adapt their tax systems to VMT models soon and create the best strategies for sustainable road funds.

“If we want the best form of mobility to play out, we need to get the tax system established at the beginning so it’s taxed neutrally,” he said.