Fueling the Revolution: Sustainable Solutions for EV Funding Challenges

For over a decade now, electric vehicles (EVs) have been transforming the automotive industry, providing significant environmental benefits by reducing emissions. However, they also pose a challenge to traditional transportation funding models that rely heavily on gasoline taxes. As EV adoption grows, states are exploring various methods to compensate for the revenue shortfall resulting from declining gas tax collections.

Gas taxes have traditionally funded road construction and maintenance projects. However, with the rise of more fuel-efficient and electric vehicles, gas tax revenues have been dwindling quickly. The federal gasoline tax of 18.4 cents per gallon has not been increased since 1993, leading to a potential insolvency of the Highway Trust Fund by 2027. In 2023, federal fuel tax revenues were approximately $32 billion, and state fuel tax revenues were about $51 billion. These amounts still fall short of what is needed to maintain and construct roads due to inflation and improved vehicle mileage efficiency.

To address this issue, many states impose additional registration fees on EVs, which most view as a penalty. At least 38 states have now implemented such fees in hopes of recouping some of their lost revenue, leaving many eco-friendly drivers feeling burned by a system that marketed the cost savings benefit of moving to an EV.

EV purchasing incentives and penalties vary by state, with the political landscape setting the tone for each. Environmentalists and consumer advocates argue that while EV owners should contribute to road maintenance, the fees should be fair rather than punitive. Chris Harto from Consumer Reports emphasized that some states implement fees significantly higher than what gasoline vehicle owners would pay annually. This can disproportionately affect low-income drivers and deter EV adoption.  For example, in Georgia, EV drivers are hit with an additional $200 annual license fee for noncommercial alternative fuel vehicles. And Michigan fines EV drivers an additional $135 for non-hybrid EVs under 8,000 pounds and $235 for those over 8,000 pounds, indexed to the state gas tax.

While fee structures vary widely, greener states like California and much of New England use tax incentives to encourage EV adoption. Some of these states offset the tax revenue loss by instituting a gas guzzler tax for low-mileage vehicles, while others, like Vermont, Colorado, Alabama, Oklahoma, and Washington, allocate EV fee revenues toward infrastructure projects like charging stations. Utah initiated a voluntary program for electric and hybrid vehicle owners to pay a flat 1.06 cents per mile driven, with a cap on those yearly fees depending on the vehicle type.

The ire of EV consumers is slowly being recognized. In an attempt to reduce the sticker price backlash associated with overall EV ownership, some lawmakers have turned their sights on charging stations instead, with new plans to collect road taxes “at the pump,” so to speak. For instance, Iowa, Kentucky, and Montana each began imposing a 2.5-3.0 cents tax per kilowatt hour on all public charging stations. These charging station taxes can help reduce the yearly tax burden on EV owners. Montana, the state that began piloting this approach, said the money collected through its charging station taxes will allow the state to reduce electric vehicle registration fees by 30% starting in 2028.

Addressing Funding Gaps and Policy Recommendations

As the transition to electric vehicles accelerates, it is crucial for states to develop fair and sustainable funding mechanisms for transportation infrastructure. By adopting innovative solutions and customizing fees to align with policy goals, states can ensure that all drivers contribute equitably to road maintenance and improvement projects while promoting the adoption of cleaner, more efficient vehicles. Plug In America, a nonprofit organization with a mission to accelerate the transition to affordable and accessible plug-in vehicles, suggests a three-step process for states to develop a fair and balanced approach to implementing EV road user fees:

STEP 1: Identify Revenue Replacement Baseline

 Calculate fees to replace gas tax revenue based on average vehicle mileage and fuel efficiency. For instance, an average car with a fuel efficiency of 30 mpg and an SUV or pickup truck with 20 mpg can be used as baselines.

STEP 2: Adjust Gas Taxes

Index gas taxes to inflation to ensure long-term sustainability. Had the federal gasoline tax been indexed to inflation, it would have been 35 cents per gallon in 2021, generating an additional $21 billion in revenue for road maintenance and other DOT infrastructure projects.

STEP 3: Customize Road User Charges

Tailor fees to state policy goals, such as incentivizing annual miles traveled or supporting low-income drivers by waiving or reducing fees.