Electric Vehicles Are Paying Their Way

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Electric vehicles are a key technological innovation in the 21st Century and the state that pioneered the auto industry now stands at the forefront of its future. The success of this industry, however, depends largely on whether the market for electric vehicles strengthens. This will likely require continued government support while the technology matures and the sales price declines.

Yet, some policymakers are now arguing for additional taxes on electric vehicles because they presumably benefit from “free--‐use” of the roads, a result of their not contributing to gas taxes. The following analysis explores the facts about road funding in Michigan and presents the case that a tax on electric vehicles would do little more than potentially stifle an emerging market.

michigan-transportation-revenueA Primer on Roadway Funding in Michigan

Funding for Michigan's transportation system comes from a variety of state, local, and federal sources. Federal funding from the federal fuel tax (18 cents per gallon), is the single largest funding source. However, state--‐generated revenue supplies the majority of the income and is collected from three different sources: 1) motor--‐vehicle registration fees, 2) Michigan fuel taxes (19 cents per gallon on gasoline and 15 cents per gallon on diesel fuel), and 3) sales tax collected on vehicles.

Then and Now

The idea behind the gas tax is as follows: The more you drive, the more you pay. Likewise, bigger vehicles that do more damage to roads and burn more gas pay a larger amount. Similarly, this “use fee” was easy to collect. By taxing drivers at the pump, the gas tax effectively charged roadway users their fair share. Herein lies the problem: the gas tax only works if we’re continuing to burn fuel and driving a lot. As soon as people start driving less or driving more fuel--‐efficient vehicles, the gas tax revenue vanishes. Trends indicate an overall reduction in the demand for gasoline. First, as the baby boomers age, they are driving less. Similarly, over the past 25 years, there has been a significant decrease in the percentage of young people with a driver's license. According to the Federal Highway Administration, in 2008, 31% of 16--‐year--‐olds had a license, compared with 46% in 1983. Lastly, Congress enacted Corporate Average Fuel Economy (CAFE) standards, mandating auto manufacturers to improve the fuel--‐economy across their vehicle fleet. CAFE standards coupled with improving transit systems and behavioral changes has left a budgetary void for policymakers.

‘No Free Rides’ Argument

To fill the budgetary void created by falling gas tax revenue, policymakers in several states, including Michigan, have considered taxing electric vehicles as a solution. However, electric vehicles comprise a very small share of the vehicles on the road, and will not likely comprise a significant proportion of the vehicle pool for a decade or more. On the other side, supporters of electric vehicles and associated industries are concerned that an additional tax could harm this emerging market and dissuade potential consumers.

How Electric Vehicles Pay Their Way

While it is true that electric vehicles do not burn gasoline and therefore do not contribute to the gas tax, electric vehicles do “pay their fair share.” The Ecology Center has prepared the following table to illustrate the revenue derived from various vehicle models and fuel types.

table1

Values are based on driving 15,000 miles annually over 11 years (165,000 miles)
₁ Values derived from the MV--‐118 Michigan Vehicle Base Price Booklet
₂ Michigan has a 6% Sales Tax, a portion of which is allocated to transportation funding.
₄ Values taken from the Fuel Economy Guide --‐ Model Year 2012 published by the US Environmental Protection Agency
₅ Michigan Gas Tax is 19 cents per gallon, with two--‐thirds allocated to the transportation fund, and the remaining going to the school aid fund.
₆ The Chevy Volt combined fuel economy is estimated by USEPA at 60 mpge (mpg “equivalent”) in the 2011 Fuel Economy Guide, with 95 mpge in electric--‐only mode and 37 mpg when running primarily on gasoline. http://www.fueleconomy.gov/feg/pdfs/guides/FEG2011.pdf

Compared to their non--‐electric counterparts, electric vehicles, highlighted in green, contribute a higher gross revenue and revenue per mile driven. At this point in time, the argument that electric vehicles receive a “free ride” appears to be misplaced.

Forging Ahead

Rather than adding to their tax burden, Michigan should join other states that incentivize electric vehicles to help support this emerging industry. States such as Illinois, Washington, Pennsylvania and California have introduced additional tax credits, reductions in state sales taxes, and waived initial vehicle registration fees to boost electric vehicle sales. Many states have also introduced non--‐monetary incentives, such as access to HOV lane access or preferential parking for electric vehicles. Electric vehicles are a promising new and evolving advanced technology. Yet, the technology already faces barriers to adoption. Conversely, a fee that singles out electric vehicles will be an additional disincentive to the growth of the electric vehicle market. Lastly, as a practical matter, there are currently so few electric vehicles on the nation’s roads today that their impact in replacing fuel tax revenues will, for now, be negligible and therefore will not bridge the funding gap. Taxing electric vehicles or otherwise imposing a fee on an emerging market could have deleterious effects on the long--‐term prospects for this technology and Michigan’s future opportunities for bringing this technology to the masses.