A Failed Gas Tax Structure Sets the Stage for Hybrid/PHEV Fees

4 years ago by Marc Lee 11

Averaged local, state and federal gas taxes as of Jan. 2013  (Source: API)

Averaged local, state and federal gas taxes as of Jan. 2013 (Source: API)

As you may have read here the Virginia General Assembly, recently approved a $100 annual fee on all hybrids and plug-ins.  They also did the following:

  • Replaced a flat 17.5 cents per gallon tax with a 3.5% tax on gasoline at the wholesale level
  • Set the rate on Diesel at 6%, however there was talk of a provision for tax on light duty diesel use to be refundable to the same level as gasoline
  • Increased the sales tax from 5.0% to 5.3%.
  • Raised the motor vehicles sales tax from 3.0% to 4.3%
400 More Of These Now Needed For Plug-In Owners

400 More Of These Now Needed For Plug-In Owners

Like most states,  the Virginia transportation system is funded primarily by the tax on gasoline.   However, that 17.5 cents per gallon had not been raised since 1987 when gas was hovering around $1.00/gallon, leaving our road construction budgets underfunded.  Since the price of oil is one of the biggest drivers of road construction cost, the gas tax should have been fixed to the price of oil or gasoline itself.  The problem is further compounded by a motor vehicle fleet increasing in fuel efficiency, and therefore using less gas per car.

The states in red above have figured out that a fixed rate per gallon tax does not work and have for the most part put in place percentage based gas taxes that fluctuate with the prices of gas.  Raising the gas taxes is a concern because doing so tends to effect lower income households greatly.  Tax credits for gas taxes, targeted at lower incomes has been suggested.

Bob McDonnell Has A Plan For Getting Revenue For Virginia's Transportation Infrastructure...But Not A Good One For Plug-In  Drivers

Bob McDonnell Has A Plan For Getting Revenue For Virginia’s Transportation Infrastructure…But Not A Good One For Plug-In Drivers

In Virginia,  Governor McDonnell wanted to abolish the gas tax altogether and increase the sales tax on all goods except gasoline.  What passed was a pro tempore lower gas tax.  Critically, the lower 3.5% tax on gas is predicated on the passage of the Federal Marketplace Equity Act (FMEA) that authorizes states to collect taxes on Internet sales to residents in its state.   In Virginia, a substantial portion of projected revenue from Internet Sales Tax is to be used to make up any lost revenue on the new lower gas tax.  If the FMEA legislation fails to pass then the gas tax will automatically rise to 5.0%   With gas at $3.40/ gallon this is more or less equal to the flat 17.5 cents per gallon already in place, but if gas rises above that level, the 5% gas tax would obviously result in a tax increase.

Governor McDonnell had pitched abolishing the gas tax as saving consumers money, and most major media have stated the same, but the example of our neighbors just to the south shows clearly this is not the case.  North Carolina pays nearly 58 cents per gallon when federal, state and local taxes are averaged in.  In Virginia that figure is 38 cents per gallon.    We should have gas that is 20 cents per gallon cheaper.  The pricing info is convoluted, so an exact number is hard to give, but it varies between two and nine cents per gallon cheaper in NC.  Where does the missing 11 to 18 cents per gallon go?  A Virginia petroleum lobbying organization was asked by the Richmond Times Dispatch where that money goes and the response was basically “that information is proprietary.”

Even if the elimination of gas taxes resulted in a penny for penny drop in the price of gas, it is very likely that the higher sales tax would cost most consumers more money.

This idea of abolishing gas taxes is one the oil industry likes very much, because they take the lion’s share of any “savings.” Business in general likes the idea as well, because a cost they used to absorb is typically passed on to consumers in the form of higher sales tax.  In the end Governor McDonnell did not get the gas tax abolished but he did succeed in getting a plan through which will raise the needed money for road construction.

Hybrid owners encircle the Richmond VA capitol to protest a proposed $100 annual fee (WTOP Richmon)

Hybrid owners encircle VA capitol in January to protest proposed $100 annual fee (WTOP Richmond)

The $100 annual fee on hybrids/EVs is bitterly disputed.   People without a hybrid or plug-in feel like those with a plug-in are free loading by not paying their fair share at the pump, and some are more than just a little bitter about the large state and federal tax credits available to plug-ins.

Those with traction batteries in their cars feel like they pay more up front and therefore more sales tax and this more than makes up for any lost revenue from gas taxes. Not to mention going out on limb to buy new, expensive technology that presumably helps the environment and reduces dependence on foreign oil and pollution.  Efforts they feel are punished by this fee.

In Virginia, despite an impressive turnout out of protesters against the fee, it was included in the recently passed legislation with apparently very little resistance from legislators.

Depending on your mileage the $100 annual fee may be a bargain or a rip off, but as more states struggle in a weak economy to get funds to meet their needs, owners of hybrids and plug-ins who tend to be more affluent appear to be an easy target for politicians.  Expect to see more states follow suit.

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11 responses to "A Failed Gas Tax Structure Sets the Stage for Hybrid/PHEV Fees"

  1. James says:

    Bob McDonnell is just another cookie-cutter Republican trying to make a name for himself. Republicans have long been trying to shift the tax burden further and further toward the poor by raising sales tax and excluding investment income, but I think the tax on hybrids and EV’s is fine. As a liberal, I think taxes are useful, not theft, as Speaker Boehner has suggested, and if they don’t set a precedent for EV’s now it will be harder to create the tax later. Plus, as a bonus, even though I assume Republicans are doing it as some kind of perverse punishment, they are in fact violating their twisted pledge to Grover Norquist by raising taxes!

    1. Jon B says:

      In Washington State it’s Democrats pushing our hybrid bill through.

  2. vdiv says:

    Depending on your mileage? As in over 16,000 miles per year to reach a parity between an ICE and a BEV, 18,000 miles per year to reach a parity between an ICE and a Volt, and over 30,000 miles per year to reach a parity between an ICE and a Prius in terms of gas/road taxes?

    https://dl.dropbox.com/u/15100233/New-VA-Taxes.xlsx

    And if one is thinking about a diesel hybrid, fugedaboudit!

    1. Marc Lee says:

      Good point. I was thinking more in terms of PHEV/EVS, but Prii owners really are getting the short end of the stick on this deal.

  3. Wood Foss says:

    Marc,

    As you pointed out in North Carolina, the reduction of the gasoline tax is a bonus for the oil companies. They simply charge more for the product. 17.5 cents should be a direct benefit to drivers, but it never is.

    Secondly, this gives non residents and neighboring states a free ride. If I drive throught the state of Virginia, on my way to N. Carolina, I will be certain to fill up with gas. I will probably not spend much money in your state.

    Finally, most sales tax is charged on a product. The sales tax revenue has stayed flat. The reason for this is the use of the internet, Amazonet et al, for product purchases. In RI there has been an extensive effort to widen the sales tax to include all services – Attorney fees, doctors visits, rental agreements, golf, haircuts, etc.

    I recognize the need to generate revenue, however, I am not real certain of the correct way to go. States seem to be grasping at dropping the gas tax. Personally, I feel it is the fairest way to charge people for the use of the highways. Those who drive the most pay the most. And, I am not opposed to a fair electic vehicle tax if based on similar conditions of distance driven. We early adopters may have paid big bucks but we are still banging up the roads.

    Thoughtful article….

    Wood

  4. Anthony says:

    “The pricing info is convoluted, so an exact number is hard to give, but it varies between two and nine cents per gallon cheaper in NC. Where does the missing 11 to 18 cents per gallon go? A Virginia petroleum lobbying organization was asked by the Richmond Times Dispatch where that money goes and the response was basically “that information is proprietary.””

    For an inelastic good like gasoline, when you reduce taxes, the seller sees most of the benefit (quantity sold goes up, but price doesn’t go down the full amount the tax was reduced). Likewise if you raise taxes, sellers see the increased taxes in their bottom line (quantity sold goes down, but price doesn’t go up nearly as much as the tax increase is).

    I knew I was getting this MBA for some reason 😉

  5. Bloggin says:

    It seems the best solution is to drop the fuel tax all together.

    Charge a tax based on vehicle type(commercial/light car, etc) and miles driven.

    This way a hybrid/plug-in/EV or gasoline car would pay the same road tax, to use the same roads.

    1. Anthony says:

      The problem is privacy – in order to deliver the revenue to the correct city/county/state, they want to track you with GPS to identify the city/state/county you’re in to pay them their share of taxes.

      IMO, I’d dump the GPS idea, and just tax on odometer readings (self-reporting when you register your car annually, with random audits, must report when transferring ownership of a vehicle and pay up whatever is due since your last registration). Wherever your car is registered (city/county) is where the revenue goes. VMT fees would be based on vehicle type – cars are cheaper, trucks more expensive, etc. based on road wear. We may have to re-balance taxes (especially between urban and rural counties) but its not insurmountable.

      For now I’d exempt diesel cars and trucks from the VMT and continue to tax per gallon. We can use GPS on large trucks/semis used for interstate travel eventually.

  6. MMcI says:

    I keep hearing about wanting drivers paying the “fair share” for “wear and tear” from xEVs on public roads… but don’t heavy semi trucks do the lion’s share of road “damage”? Gaining or losing a few cents from an EV doesn’t really seem like evening things out. Now if we see those semi’s switching to some amount of electrified powertrain, I suppose then we should consider a shift. A shift to a weight-based registration system perhaps?

  7. Pablo says:

    Question: Why the Governor is formulating it in terms of alternative fuel, including hybrids, but not in terms of miles per gallon?

    Answer: Because if you are 100% on gasoline, even at 60 miles per gallon, you are still hooked 100% to gasoline. Hybrids are still 100% on gasoline, but they are transition to plug-in hybrid end electric and that is why hybrids are dangerous to Koch Brothers who are pulling the strings, do your own search, sample: http://www.kochbrothersexposed.com/.

  8. Pablo says:

    You can not really save money without really improving the efficiency of the society as a whole. Anything else gimmicks to redistribute or hide cost.

    “The fuel tax also acts as an incentive to buy vehicles with greater fuel efficiency (a national objective) and to drive less (and hence reduce pollution and congestion).” – and cost.

    http://aneconomicsense.com/2013/01/10/the-virginia-governors-proposal-to-end-the-gas-tax-a-stupendously-bad-idea/

    When I have lower demand because of driving Prius I contribute to lowering the total demand of the society, and hence I contribute to lowering the gasoline prices for everybody else.