Electric Vehicles Will Need New Taxation Or Governments Will Lose Billions

Governments all over the world rely on the income from vehicle tax and a percentage from the fuel vehicles use. But with EVs, that fuel revenue is gone. This is causing great concern everywhere that EVs are showing dramatic sales growth, which is most of the developed world now. But perhaps, rather than being a threat, this could be an opportunity to make car tax more equitable, so drivers pay more directly according to use.

In the UK, a Transport Select Committee from the British Parliament raised concerns about the loss in revenue looming from EVs. Currently, the combination of vehicle excise duty (VED) and tax on fuel make up £35 billion ($48 billion) a year in government income. Considering that the overall UK government tax revenue from all sources is around £800 billion ($1.1 trillion), losing over 4% of that is quite significant.

In the US, fuel taxation is a bit more complicated, because it is split between state and federal levies. The federal tax is uniform (18.4 cents per gallon for gasoline and 24.4 cents per gallon for 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, the total tax revenue from fuel in the USA was $52 billion in 2019. Considering the US population is nearly five times that of the UK, and drivers travel further on average too, this shows you how much the UK taxes transportation fuel – and how much more the UK government is set to lose as EVs become the dominant vehicle type over the next couple of years. But at least fuel tax is equitable in the sense that the more miles you drive, the more fuel you use, and the more tax you pay.

Despite Internet rumors to the contrary, it will be very hard to tax EVs charging at home for their energy in a similar way. While it might be possible to differentiate dedicated domestic charger electricity from other usage, it will be nearly impossible to do so for “granny” chargers plugged into a regular mains plug. Only public chargers could be reliably targeted, and if this was too onerous people would simply avoid public charging as much as possible (which EV drivers who can, do already). In other words, it’s not going to work.

There are other taxes EVs don’t pay too. Like most countries, the UK has provided incentives for EV adoption, and one of these is zero-rated VED. So, for the time being, an EV pays no vehicle tax, and plug-in hybrids didn’t until early 2017 too. That’s a loss of revenue compared to ICE, as well, although this could be reintroduced (as it was for PHEVs) once the need for an incentive is deemed to have lapsed. The UK government has already reduced its plug-in car grant twice in the last year, claiming that it is not needed on premium vehicles anymore.

This kind of vehicle tax is another levy that varies greatly around the world, although most countries have it in some form. In the US, it even varies from state to state, not just in quantity but in how it is calculated. California uses current vehicle value, whereas New York State uses vehicle weight, and in some states individual counties also apply their own tax.

The question is, what should replace these taxes in the era of electrification? To work this out, it’s worth thinking about what this form of taxation should be for. In the UK, lots of people still call VED “road tax”, even though the revenue hasn’t gone directly into roads for decades. However, it should, because that is the public utility road vehicles both use and use up as they travel, necessitating costly repairs. This is clearly the thinking behind New York’s weight-based calculations.

But charging a flat per-vehicle rate is incredibly iniquitous when some people do tens of thousands of miles a year and others barely do thousands. Charging more for heavier vehicles makes sense, because they can cause more road wear and potentially more pollution (depending on vehicle type, as I recently argued). But there’s a ripe opportunity to charge per mile, so that those who use the roads more would pay more. There could be other discounts applied as incentives – for example, for commuting keyworkers. But in general, the more you use the roads, the more you should pay to maintain and develop them.

Modern cars should make it a lot easier to apply this kind of tax, because an increasing number provide online data connections and apps that can present the current mileage. This could then be used to calculate a tax level, either via dynamic monthly payments or annually. Some income tax systems let you pay estimated instalments and then declare the true figure at the end of a period before making a balancing payment or receiving a rebate. Perhaps vehicle tax could work in the same way. Vehicles without connected capabilities could have their mileage recorded and declared for taxation alongside an annual check, such as the UK’s MOT system.

Of course, there are opportunities for fraud here. Dodgy garages could under-report mileage. Old odometers could be “wound back” to reduce the values shown. If any self-declaration was involved, lying would be possible. But as more cars become Internet connected – EVs or ICE – true mileage will be much more easily accessible. It wouldn’t be fair to tax cars that already pay heavy duties on their fuel as much as EVs that aren’t. But a mileage-based system is the only fair way to replace the current fuel tax revenue as it disappears along with the cars that pay it. Let’s hope governments see sense and realize that while EVs will collapse fuel revenue tax, their connected capabilities could enable an alternative that might even work better – and be fairer too.