Get Ready For Heavy Taxes On Electric Vehicles

Right now, everyone is talking about the need for incentives to help everyone switch to electric cars. The recent UK announcement of a ban on new petrol and diesel car sales by 2030 has been top of the conversation in Britain. But there was also the announcement of the ZETA lobby group with similar intentions in the USA and the European Green Deal was in the news over the summer. One thing that hasn’t been so much discussed, however, is just how much money will be lost when nobody is buying fossil fuel for their vehicles anymore. It will be a big hole in public revenue and will cause a change in the currently very benign tax regimes towards electrification.

Here are some figures that reveal how real the problem will be. For 2019/20, the UK tax revenue from fuel duty was £27.57 billion ($36.57 billion). Putting that into context, it’s a quarter of the budget of the National Health Service, three quarters what the UK spends on defense each year, and more than a quarter of the yearly spending on pensions. It’s also 50% more than the UK’s gross spending on EU membership, and about 3% of the overall annual public spending in a non-COVID year. Losing this income will be a significant dent in the public purse, and you can add to that the £6.5 billion lost in VED, formerly known as road tax, which EVs don’t currently pay either.

The US isn’t much different. The taxation on fuel, like most American taxes, is split between federal and state levies. This varies considerably by state, with Alaska levying the least and California (unsurprisingly…) the most, at four times the rate of Alaska. The federal levy on the top is, naturally, the same for all states. The overall revenue from local forms of fuel taxation was $49.84 billion in 2018 and federal income was $36 billion. This is a smaller proportion of the US federal budget than it is in the UK, at a little over 2%. Road tax is devolved to the states in America, with an annual vehicle registration fee that varies greatly by state. Some states charge a flat fee and others add variables like car value, weight and age. Total revenues from these were around $23 billion in 2013.

These are just two national examples. Every country taxes domestic fuel use, and usually quite heavily. There’s also usually a vehicle tax of some sort, although not always an incentivized reduction for EVs. But in most cases, the tax on domestic power usage is at a much lower rate – just 5% VAT on electricity in the UK, for example, compared to 20% on vehicle fuel. In most countries, therefore, a wholesale switch to EVs, particularly if they are charged predominately at home, will mean a major drop in tax revenues from vehicle usage – which is used to maintain the roads those vehicles drive upon.

How will the shortfall be made up? South Australia has been rather premature by adding a purchase tax as well as one based on distance travelled to EVs. The UK is also considering a switch to paying by the mile for vehicle taxation as well. Even without the battery-electric vehicle revolution, it’s clear that a change in car taxing will be essential. Vehicles have become a lot more economical, so even existing fuel tax revenues have fallen per mile travelled both in numerical and real terms. Electric vehicles produce no air pollution and are more efficient than other vehicle types in power consumption terms, but they use up the roads just as much, or even more, since they tend to be a lot heavier due to the weight of batteries.

A wholesale, global shift in car taxation is therefore inevitable. Fuel tax as a proxy for taxing road usage is going to be increasingly broken as EVs become more common. There has been some talk about singling out electricity destined for EV charging and taxing that in some countries, but without more standardization and unity amongst how the public charge point services are run, particularly considering the free charging business models provided by services like Volta’s, this seems like a non-starter. More likely is a mileage-based tax system, possibly with a differentiation based on vehicle weight. Most EVs are Internet-connected in some way, so it could be possible to track miles driven and bill accordingly. Heavy users, such as travelling salesmen, would pay a lot more, and this would act as an incentive only to use a car when you really need to. Whatever system ends up being used, governments around the world will have to make up for the money they have traditionally obtained from fossil fuel usage. After a few more years of incentives for early adoption, that is going to have to come from EVs. So enjoy the cheap electric driving while it lasts, because EVs will be taxed a lot more as they become the dominant type of car.