The Tax Implications of Gas Vehicle Bans – CPApracticeAdvisor.com | CarTailz

Will the power grids be able to keep up with the increased demand?

Usually. Probably.

Even as electric vehicle initiatives spread, some states are struggling to meet existing electricity needs.

California was “on the brink of rolling blackouts” during a September 2022 heatwave. State officials say drought, extreme heat and wildfires will “threaten the reliability of California’s power grid” over the next five summers. And California isn’t the only state facing this predicament. In February 2021, around 4 million Texans lost power when a winter storm “broke the grid.”

Producing enough electricity is not really the problem. The problem is storing the electricity generated and getting it to where it is needed. Unlike fossil fuels, electricity cannot be poured into a barrel and transported to where it is needed. As the US Energy Information Administration explains, electricity is generated in power plants and then travels through a network of substations, transformers and power lines to get to consumers. If states increase electricity consumption by introducing electric vehicle regulations, can they ensure that electricity is where it is needed to power those vehicles?

And, as anyone who has ever attempted to drive an EV beyond its range knows, another major obstacle to widespread EV adoption is the lack of a nationwide charging system that allows EV drivers to get from point A to point B, no matter how far that distance is.

How will the ban on the sale of gas-powered vehicles affect fuel tax revenues?

It will probably go under.

Gas tax revenues are already falling in some states. Connecticut’s fuel tax revenue fell 4.2% between fiscal years 2012 and 2021. Some of that decline was due to the pandemic, but the Connecticut Office of Policy and Management says, “There has always been an assumption that increases in motor fuel consumption will naturally become negative as consumer behavior changes, either due to price increases or through the increased use of alternative fuel vehicles.”

The West Virginia Department of Transportation projects that gas tax revenues will fall between 11% and 20% by 2030 and between 31% and 52% between 2030 and 2050. In a 2021 report on Future Funding and Funding, it wrote: “Fuel consumption taxation is increasing in the In relation to the total travel activity further decreases.”

According to The Pew Charitable Trusts, fuel taxes account for nearly 40% of government transportation, and “much of that could disappear in the coming decades.” Federal fuel taxes will also suffer. The Congressional Budget Office projects the Federal Highway Trust Fund will be short of about $140 billion by 2031.

An increase in gas tax rates could slow losses

One way to offset falling fuel tax revenues would be to increase federal gas tax rates, which have not changed since October 1, 2023. At 18.4 cents per gallon for gasoline and 24.40 cents per gallon for diesel, federal fuel taxes in the United States are among the lowest of any member country of the Organization for Economic Co-operation and Development (OECD).

States could also increase their taxes on fuel. However, raising fuel tax rates will not generate the necessary revenue if consumption of petrol and diesel falls drastically, as some states at least are aiming for. Additionally, according to a 2004 study by the National Bureau of Economic Research on the impact of gasoline taxes on labor costs, a 10% increase in gasoline prices could reduce gas use by 4.3% (about 37 gallons per household per year at the time). This could offset at least some of the potential gains, as “taxes on gasoline are forcing drivers to consider these costs when making driving decisions.”

Special license fees and road tolls could fill the revenue gap

According to the National Conference of State Legislatures (NCSL), 31 states have a special registration fee for plug-in electric vehicles and 18 have a fee for plug-in hybrid vehicles. Most collections go to state transportation funds, but some help build or support electric vehicle infrastructure — additional costs states need to consider.

Another option is a road user charge (RUC), also known as a vehicle mileage charge (VMT) or kilometer-based user charge (MBUF). These apply to all drivers, regardless of the performance of their vehicle. According to the NCSL, at least 19 states were considered RUCs in 2019 and 2020, and New Laws were enacted by Maine, Nevada, New Mexico, Oregon, Utah, Virginia and Washington.

California and Oregon have been conducting pilot programs for years to study how VMTs can be implemented. They have received federal grants along with Delaware, Hawaii, Kansas, Minnesota, Missouri, New Hampshire, Ohio, Texas, Utah, Washington and Wyoming to explore alternative forms of funding such as RUCs. The NCSL tracks the state’s RUC activity.

Many economists advocate a VMT tax, but as the Tax Foundation notes, “developing a fair and effective VMT tax will not be an easy task.” There are privacy concerns; States need to figure out how best to track mileage. So it will take some time for VMT taxes to get going.

Are there hidden environmental costs in increasing EV production?

Inevitably.

Some experts fear that regulations for electric cars could actually increase CO2 emissions. For example, Indonesia, the world’s largest nickel miner, aims to produce more Class 1 nickel needed for electric vehicle batteries (it currently produces mostly Class 2 nickel). But as the Brookings Institute explains, “Indonesia’s nickel sector is particularly carbon-intensive and polluting.”

There are other environmental and even geopolitical concerns. Electric cars require more copper than gas-powered cars, and copper mines are often powered by coal-fired power plants. Cobalt mines sometimes use child labor. And what do we do with all the batteries when they run out? These are big problems.

Nevertheless, the mandates for electric vehicles are increasing.

President Biden wants 50% of new vehicles sold in 2030 to be zero emissions

President Biden calls for half of all new cars and light trucks sold in 2030 to be zero-emission vehicles (such as battery electric vehicles, plug-in hybrid electric vehicles, or fuel cell vehicles). An ambitious goal, given that only about 6% of new car sales in Q3 2022 were all-electric.

There are no penalties for not meeting this non-binding target. Instead, the Biden administration is hoping that new tax incentives created by the Inflation Mitigation Act will encourage electric vehicle (EV) sales. And it could work: A recent NEF study by Bloomberg predicts that by 2030, about 52% of passenger vehicles sold in the U.S. will be electric.

EV mandates in California and other states will certainly help boost EV sales.

California will ban new gas vehicle sales by 2035

On August 25, 2022, the California Air Resources Board (CARB) approved a plan to phase out sales of new gasoline-powered automobiles in the state by 2035. By then, the state must meet the following benchmarks for Zero Emission Vehicle (ZEV) sales:

  • 35% ZEV sales by 2026
  • 68% ZEV sales by 2030
  • 100% ZEV sale by 2035

You don’t have to have an electric car in California by 2026, 2030, or even 2035. And you can still drive gas cars in California after 2035, when the total ban goes into effect. However, if all goes according to plan, by 2035 you won’t be able to buy a new gasoline car in California.

California also aims to ban the sale of new, fossil-fuelled, medium- and heavy-duty trucks by 2040 and have 100% ZEV trucks and buses (where possible) by 2045.

Other states will follow California’s lead

At least five other states want to emulate California’s plan and ban the sale of gas-powered vehicles by 2035. “California had to have primacy under federal law,” Larry Chretien of the Green Energy Consumers Alliance told NBC Boston, “and now states can piggyback on the California rule.”

As of May 2022, the following states had adopted California zero emission vehicle standards under Section 177 of the Federal Clean Air Act:

  • Colorado
  • Connecticut
  • Maryland
  • Massachusetts
  • Minnesota
  • Nevada
  • New Jersey
  • new York
  • Oregon
  • Pennsylvania
  • Rhode Island
  • Vermont
  • Virginia
  • Washington

Delaware and Maine have adopted some California standards but not their ZEV program.

After California acts, Massachusetts, New York, Oregon, Vermont and Washington are likely to develop similar ZEV plans of their own. However, not all federal states will follow suit.

Colorado and Pennsylvania are unlikely to automatically adopt California standards. Minnesota announced a new comprehensive climate plan in September 2022 that includes the development of more robust electric vehicle charging infrastructure but does not ban the sale of gas-powered vehicles until 2035. Republican lawmakers in Virginia want to decouple Virginia from the California requirement.

It will be interesting to see how other states react when California meets its first benchmark in 2026.

Local governments are paving their own way towards electric vehicle adoption

Cities and counties in the US (and around the world) are promoting EV adoption in a variety of ways.

According to the International Council on Clean Transportation, about 25 cities worldwide are signaling “there will be no room for vehicle emissions on their roads for years to come.” These include London, Los Angeles, New York, Oslo, Paris, Shanghai, Stockholm and Tokyo. Exactly what that means for the future remains to be seen.

Denver, Colorado has a plan to electrify 100% of the city’s light commercial vehicles and 100% of the city’s taxis and transportation network by 2050. King County, Washington, (home to Seattle) is working to achieve a 100% zero emissions public transit fleet. In Hoboken, New Jersey, where driveways and garages are scarce, the city wants to build electric vehicle charging stations within a five-minute walk of every home in the city.

Getting more electric vehicles on the road can help reduce emissions, but it can create other problems. For one thing, you can’t drive an electric car if you can’t power it, and generating enough power to meet rising demand can prove problematic.

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Gail Cole is Senior Writer at Avalara. Her mission is to uncover unusual tax facts and make complex laws and regulations easier to understand for accountants and business professionals.

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