Is the Fuel Tax Destined to be Replaced? What It Could Mean for Fleet Electrification

By Mark Boada, Executive Editor

There’s more talk across America these days that the federal and state fuel taxes that are used to keep our highways and bridges in shape be replaced by another, more reliable source of funding: a Vehicle Miles Traveled (VMT) tax, also referred to as a mileage-based user fee.

The subject came up at the last meeting of NAFA’s government affairs committee, of which I’m a member, the agenda question being whether the organization should take a position on it. (We haven’t, at least not yet.) It was also the subject of an article in the September issue of NAFA’s Fleet Solutions magazine.

For the record, fuel taxes are rolled into the price of gasoline and diesel at the pump. The federal tax is 18.4 cents for each gallon of gasoline and 24.4 percent for diesel. On top of that, every state and the District of Columbia lay on their own taxes and fees. The states’ levy averages around 50 cents a gallon, ranging between 33.13 cents in Alaska to 77.10 cents in Pennsylvania, the highest in the country.

As of this writing, the average motorist pays a hair more than $2.76 a gallon for gasoline, 68 cents of that, or nearly 25 percent of the price, cover taxes, the revenue from which is supposed to be spent on keeping our roadways safe to drive. But, as almost any driver knows, our roads and bridges are crumbling, and, without any other source of funding, the Congressional Budget Office says the federal Highway Trust Fund will face a $75 billion shortfall by 2026.

So, what’s the problem? As I wrote recently, there are two. First, federal fuel taxes aren’t indexed to inflation and haven’t changed in 25 years, even though the cost of highway and bridge construction, along with nearly everything else, is more expensive. And secondly, cars and trucks have become a lot more fuel-efficient. So, even though there are more vehicles on the road than ever before, and we’re driving many more miles, the revenue for our highways hasn’t been able to keep up with the need.

Now, enter electric vehicles. While internal combustion engines have achieved fuel economies of more than 30 miles per gallon, today’s hybrids have levels of combined fuel economy of 40 to more than 50 miles a gallon. Compare those numbers to the U.S. average for cars and trucks in 1993: it was 16.7 in that year.

And look ahead: by 2035, the European Commission wants all new cars sold to be fully electric. That may not happen, but if does there and over here too, a few years afterward, there will be no gasoline or diesel sales to be taxed.

So, it makes sense to a lot of people that instead of taxing the fuel autos use, we tax the miles they drive. From where I sit, it seems a good and likely solution.

In fact, it’s already been piloted with 5,000 drivers on a voluntary basis in Oregon, where officials have deemed it a success, and a number of other states, including California, Connecticut, Delaware, New Hampshire, Pennsylvania and Washington, are looking into it.

And the benefits seem to be there, at least according to a recent joint study by professors at Arizona State University and the University of Houston. They found that implementing a VMT tax at a level that would raise $55 billion a year for highway spending would produce $10.5 billon in benefits, including reduced traffic congestion, fewer and accidents and cleaner air.

That is undeniable a pretty picture, but leave it to me to see a downside, and a pretty clear one. A VMT tax applied evenly over every kind of vehicle would cut away at of the fuel cost advantage for electric vehicles over those powered by fossil fuels. That, in turn, would raise the total cost of ownership of electrified vehicles, which is based both on the low price of electricity (about 11 cents a kilowatt hour) and the fact that there’s no fuel tax for them.

Case in point: a 2018 Toyota Camry Hybrid LE carries an MSRP of $3,800 more than a 4-cylinder Camry LE that runs only on gasoline. Not considering subsidies or lower maintenance costs, it would take more than seven years in fuel savings to recover the higher expense of buying the hybrid. That exceeds the average fleet holding period of three to four years, and for a fully-electric vehicle, the break-even period would be even longer.

I, for one, like the idea of replacing the current federal and state fuel tax scheme with a mileage-based user fee, and believe it’s inevitable. But while it could solve one big program, it would it would also play havoc with fleets’ plans to transition to an electric fleet. Without a steep reduction in the cost of batteries, a steep rise in the price of gasoline, or a government mandate regardless of cost, a VMT could well slow down that transition.

The post Is the Fuel Tax Destined to be Replaced? What It Could Mean for Fleet Electrification appeared first on Fleet Management Weekly.

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