Increased Fuel Economy Could Change How Gas is Taxed

how is gas taxed

In the U.S, governments both federally and regionally are feeling the effects of declining gas tax revenues. On average 48.8 cents of every gallon purchased is gas tax with 18.4 cents going to the federal government (you can find your state’s tax here ). The taxation of our fuel has been a steady source of revenue for decades but that is changing as we move towards stricter fuel economy standards and adoption of electric and hybrid vehicles. This is putting fiscal pressure on governments and they are actively searching for a solution to this problem.

Drivers of conventional vehicles are paying less in gas tax dollars, hybrid owners are paying less still, and all-electric vehicle owners are paying no gas tax at all. This poses a revenue and equity problem to governments at all levels. There have been several solutions proposed to generate tax dollars and level the taxation paying field. The most popular are charging an annual fixed amount, charging a tax on a per mile basis, and to leave the system as is.

Fixed Annual Energy Tax

This solution has been proposed by many politicians mainly because it is simple to implement. The idea is to tax a set amount per vehicle once a year, regardless of vehicle type, when the vehicle’s license needs to be renewed. While this may solve equity amongst vehicle types it certainly does not solve it all together. The challenge becomes determining an appropriate annual rate. In the state of Washington, a bill was passed to charge electric vehicle owners a $100 annual fee( At 49 cents a gallon in tax that means an electric vehicle owner is paying tax on 204 gallons a year or about 17 gallons a month. Depending on your driving

patterns and whether you drive a combustion vehicle or an electric will influence whether you think that is fair. From the governments stand point this option is attractive because it is easy and preserves government revenues to maintain transportation infrastructure while vehicle’s become more efficient.

Taxed per Mile

Another option is to administer the tax based on how far a vehicle travels. Vehicles that use the roadways more often pay more in tax dollars to maintain them; a similar concept to taxing per gallon of gasoline consumed. Arizona state rep. Steve Farley proposed a fee of $0.0143 per mile. While this approach might be more equitable, it could pose some implementation challenges. In Oregon. the department of transportation is experimenting with cell phone applications to monitor mileage while other approaches might include odometer readings similar to the approach for energy in buildings.

Leave the Gas Tax as is

Some politicians believe that we should leave this issue alone, at least for now. Many government bodies are lobbying for the adoption of electric vehicles and increasing corporate average fuel economy (CAFE ) standards. Finding ways to tax this progress would clearly be counter intuitive, especially when the federal government is offering incentives towards the purchase of electric vehicles. With very lofty goals for electric and hybrid vehicle adoption, it may be best to leave the gas tax structure as is. The added tax benefits that accompany high efficiency vehicles can propel us to a healthier environment and a decreased dependence on foreign oil.

Regardless of the remedy, the way vehicles are taxed will likely change and should be monitored closely by fleet managers and vehicle buyers. The future of vehicle taxation could make or break the business case for high-efficiency vehicles.


Category: Taxes

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