Electric vehicles will need new taxation or governments will lose billions

Governments around the world rely on vehicle tax revenue and a percentage of vehicle fuel usage. But with electric vehicles, that fuel revenue is gone. This is causing great concern wherever electric vehicles are showing dramatic sales growth, which now affects most of the developed world. But perhaps, rather than a threat, it could be an opportunity to make car tax fairer, so drivers pay more directly based on their usage.

In the UK, a transport select committee of the British Parliament has expressed concern about the impending loss of revenue from electric vehicles. Currently, the combination of vehicle excise duty (VED) and fuel tax accounts for £35 billion ($48 billion) a year in government revenue. Considering that the UK government’s overall tax revenue from all sources is around £800 billion ($1.1 trillion), losing more than 4% of that amount is quite significant.

In the United States, fuel taxation is a little more complicated, as it is split between state and federal levies. The federal tax is flat (18.4 cents per gallon of gasoline and 24.4 cents per gallon of diesel), but state rates vary from 8.95 cents per gallon of gasoline in Alaska to 74.1 cents per gallon of diesel in Pennsylvania. According to the Tax Policy Center, total tax revenue from fuel in the US was $52 billion in 2019. Considering that the US population is nearly five times that of the UK and drivers travel farther in On average, this shows you how much the UK taxes on transport fuel – and how much the UK government stands to lose as electric vehicles become the dominant vehicle type over the next couple of years. But at least the fuel tax is fair in the sense that the more miles you drive, the more fuel you use and the more taxes you pay.

Despite rumors to the contrary on the Internet, it will be very difficult to tax electric vehicles that charge their energy at home in the same way. While it is possible to differentiate electricity from a dedicated home charger from other use, it will be nearly impossible to do so for “grandmother” chargers plugged into a regular AC outlet. Only public chargers could be reliably targeted, and if it was too expensive, people would simply avoid charging the public as much as possible (which EV drivers who can already do). In other words, it won’t work.

There are other taxes that electric vehicles do not pay either. Like most countries, the UK has provided incentives for EV adoption, and one of these is the zero-rated VED. So, at the moment, an electric vehicle doesn’t pay vehicle tax, and plug-in hybrids didn’t until early 2017 as well. It is also a loss of revenue compared to ICE, although it can be reintroduced (as was the case with PHEVs) once the need for an incentive is deemed to have expired. The UK government has already cut its subsidy for plug-in cars twice in the last year, saying it is no longer needed on high-end vehicles.

This type of vehicle tax is another levy that varies widely around the world, although most countries have it in one form or another. In the United States, it even varies from state to state, not only in amount but also in how it is calculated. California uses current vehicle value, while New York State uses vehicle weight, and in some states individual counties also apply their own tax.

The question is what to replace these taxes with in the era of electrification? To solve this problem, it is worth thinking about what this form of taxation should be. In the UK, many people still call the VED ‘road tax’, even though the revenue hasn’t gone straight to the roads for decades. However, it should be, as it is the utility that road vehicles use and consume while traveling, requiring expensive repairs. This is clearly the thinking behind the calculations based on New York’s weight.

But charging a flat rate per vehicle is incredibly unfair when some people travel tens of thousands of miles a year and others barely travel thousands. Charging more for heavier vehicles makes sense, as they can cause more road wear and potentially more pollution (depending on the type of vehicle, as I recently argued). But there is a good opportunity to charge per kilometer, so that those who use the roads more pay more. There could be other discounts applied as incentives – for example, for key workers who travel. But in general, the more you use the roads, the more you have to pay to maintain and develop them.

Modern cars should make it easier to apply this type of tax, as more and more cars provide online data connections and apps that can show current mileage. This could then be used to calculate a level of tax, either through dynamic monthly payments or annually. Some income tax systems allow you to pay installments and then report the actual figure at the end of a period before making a balance payment or receiving a rebate. Perhaps the vehicle tax could work the same way. Vehicles without connected capabilities could have their mileage recorded and reported for taxation purposes alongside an annual check, like the UK’s MOT system.

Of course, there are opportunities for fraud here. Dodgy garages may under-report mileage. Older odometers could be “rewound” to reduce the displayed values. If it were a self-declaration, lying would be possible. But as more and more cars are connected to the internet – EV or ICE – true mileage will be much more readily available. It wouldn’t be fair to tax cars that already pay heavy fuel taxes as much as electric vehicles that don’t. But a mileage-based system is the only fair way to replace current fuel tax revenues because they disappear with the cars that pay them. Hopefully governments see the common sense and realize that while electric vehicles will crash the fuel revenue tax, their connected capabilities could enable an alternative that might even work better – and be fairer too.

About Robert Pierson

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