A few weeks ago, we looked at the problems public treasuries will face as diesel and gasoline excise duties fall with the growth of net zero fuels and electric vehicles – plus, the likelihood of governments introducing widespread road user charging to compensate.
The US Congress Budget Office (CBO) predicts that 2021 federal excise tax on gasoline, diesel and kerosine will raise $33.5 billion: that’s more than air passenger, alcohol and tobacco duties combined. These revenues are mainly credited to the Highway Trust Fund to pay for highway construction and maintenance as well as investment in mass transit. States take even more: based on July 2020 data they collected a whopping $62 billion through sales and other related taxes. At some 6% of their total income, this is a very significant contribution indeed. And it’s also under very significant threat.
However, it’s becoming clearer and clearer that both federal and state governments face a very serious revenue crunch. States are already struggling to balance their budgets after COVID19 and are going to face some major infrastructure and operating budget pressures. Even now, federal revenue falls some way short of fully funding the government's spending on highways and transit - which has exceeded fuel tax revenues in every year since 2000. General revenue transfers have been consistently required from the Treasury to the Highway Trust Fund to meet minimum commitments. Further pressure from falling fuels taxes hardly comes at an opportune moment.
A tipping point is not far away…
In the above context, It may come as somewhat of a surprise to note that the CBO predicts year on year revenue increases right up to 2031, when it hits $34.4 billion. However, that number faces a pretty substantial challenge. Currently fossil fuel vehicles are cheaper to buy than electric vehicles, are quicker to fuel at the pump than to recharge, and the country has 115,000 gas stations, while charging station infrastructure is still limited at only 25,000 points and requires significant investment.
But be in absolutely no doubt that electric batteries will get cheaper, charging quicker, and chargers more widely available. It is predicted that by 2025 electric vehicles total cost of ownership will compare favorably with internal combustion vehicles. At that point sales could jump significantly, electric vehicles would outsell conventional ones by 2030 and by 2045 the last gasoline or diesel vehicle would be off the road. Together with ever increasing gasoline and diesel efficiency there is the potential by 2031 to reduce overall receipts by up to 20%, an eye watering $19 billion lost at federal and state levels.
Dilemma, debate and experiment…
One solution may be to raise tax rates on motor fuels - but that could well be counter-productive, speeding up the tipping point at which EV’s become more attractive and deepening the tax revenue black hole. Additionally, such taxes impose a proportionally larger burden, as a share of income, on lower income households and especially so in rural locations. Would that be socially wise or acceptable policy? These social groups tend to rely on less old and efficient vehicles, which would further impact affordability. The political dimension creates real difficulties: raising fuel taxes would be highly visible and especially unpopular in the COVID19 paradigm, with millions struggling with immediate and biting hardships.
There are already experimental systems here in the United States. Oregon has been piloting a road user charging scheme for years, while Washington’s Senate Transport Committee has very recently announced plans to look at new road user charging policies. The WA proposals, put together by Senator Rebecca Saldaña (D-Seattle) and supported by Transport Committee Chair Senator Steve Hobbs (D-Lake Stevens), would see electric and hybrid vehicle drivers (currently shelling out an additional $225 per year in road tax) paying a 2 cent per mile charge for highway use.
The debate in Washington, which revolves around how mileage data would be submitted and confirmed; whether a per-mile charge is fairer or more socially acceptable than an annual lump sum fee and whether the growing chasm in state finances can be filled this way – is one which is going to be echoed across America state by state. And it’s not going to be settled easily, quickly or comfortably.
The time for planning is right now
In summary, income is going to be lost – that much is certain. Replacing it is going to take time - time to discuss the dilemma, agree the options, choose viable policies, then plan and implement their introduction. The time for thinking through practical and affordable measures is now: 2025, and even 2031 are not far away.
Jonathan Elton is Senior Partner – Strategy and Restructuring (Americas) at PHC.
Pannell Hayes Consulting has extensive experience and knowledge in taxation, road pricing and tolls and is leading the thinking about how governments can replace falling fuel tax revenues.