Fuel Efficient and Hybrid Cars Reduce State Gas Revenues; States Look for Alternative Funding Sources

State gas taxes that fund everything from new roads, bridges and paving to bike paths, mass transportation and light rail declined from $40.7 billion in 2004 to $37.9 billion in 2010, according to inflation-adjusted data from the Institute on Taxation and Economic Policy, a research group in Washington. The decline will continue and the slope downward is expected to get steeper as consumers increasingly drive fuel efficient, hybrid and alternative fuel vehicles.

The Obama administration has mandated higher fuel efficiency standards; cars must average 54.5 mpg by 2025.  Meanwhile, consumers have howled about the price of gas which now averages about $3.58 per gallon but at times has been higher than $4 per gallon. The lower price, while better for consumers, is bad for the states because it means less tax revenue. In California, the gas tax has climbed from 36 cents per gallon to 39.5 cents per gallon recently and state officials said explicitly that the state’s environmental policies, which mandate greater fuel efficiency, have reduced revenues.

States have to find alternative ways to fund transportation projects and legislators are looking at new, unconventional approaches including:

  • Electric charging station fees.
  • Vehicle Miles Travelled (VMT) taxes.
  • Hybrid and electric vehicle-specific registration fees.
  • Higher fuel taxes.

The VMT is the first choice in some states. During the 2013 legislative session lawmakers in 18 states have considered 33 bills dealing with VMT taxes and other alternative funding mechanisms. Some 53 bills were considered in 24 states proposing more traditional gasoline tax increases.

Some bill examples include:

NJ SB 2531 – would impose a VMT tax in the state.

CA SB 454 – would allow certain fees to be imposed on electric vehicle charging stations.

MA SB 1381 – would exempt electric vehicles from the sales tax provided that the owner agrees to pay a VMT tax.

MI HB 4632 – Creates a vehicle registration tax for hybrid and alternative fuel vehicles.

NH HB 617 – would have increased the state’s gas tax by $0.12 cents per gallon.

Each state is wrestling with a slightly different problem dependent in part on their transportation spending challenges and the status of their existing gas tax. The current federal gasoline tax is 18.4 cents per gallon. Across the states, Alaska currently has the lowest state excise tax on gasoline at 26.4 cents per gallon, while New York has the highest at 69.6 cents per gallon. The national average, including the federal tax, is 48.8 cents per gallon.

Oregon and Virginia have dealt in part with the problem by creating a special registration fee for electric and hybrid vehicles. North Carolina is also currently considering such a fee and Virginia hiked its motor vehicle sales tax overall from three percent to four percent.

The Indiana and Vermont legislatures have also commissioned interim studies to explore additional taxes and fees on electric and hybrid vehicles. Indiana has also extended its fuels tax to several potential alternative fuels such as natural gas and propane.