Electric Vehicles

The Gas Tax is Running on Empty. How Governments Plan to Target Electric Vehicles Next

Peter Shawn Taylor
October 5, 2021
What are the attractions of an electric vehicle? Beyond the cool aura of modernity and virtue-signaling, there’s also the financial angle. Buyers of gasoline-powered cars and trucks pay sticker price in the showroom and then shell out for hefty fuel taxes once they’re on the road. EV owners get massive subsidies and then pay nothing to zip around town. But what happens when EVs become as commonplace as smartphones? Peter Shawn Taylor looks at the experience in jurisdictions already wrestling with the disappearance of gas tax revenue and warns Canadian drivers to brace themselves for some big changes in how they use the roads.
Electric Vehicles

The Gas Tax is Running on Empty. How Governments Plan to Target Electric Vehicles Next

Peter Shawn Taylor
October 5, 2021
What are the attractions of an electric vehicle? Beyond the cool aura of modernity and virtue-signaling, there’s also the financial angle. Buyers of gasoline-powered cars and trucks pay sticker price in the showroom and then shell out for hefty fuel taxes once they’re on the road. EV owners get massive subsidies and then pay nothing to zip around town. But what happens when EVs become as commonplace as smartphones? Peter Shawn Taylor looks at the experience in jurisdictions already wrestling with the disappearance of gas tax revenue and warns Canadian drivers to brace themselves for some big changes in how they use the roads.
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Canada’s first electric car made its debut in 1893, just seven years after German engineer Carl Benz patented the world’s first gasoline-powered automobile. Owned by Toronto patent lawyer Frederick Featherstonhaugh, Canada’s contribution to the late 19th century revolution in personal transportation was designed by engineer William Sill and built by a local carriage-maker. It had a tiller for steering, a top speed of 24 km per hour and could go for about an hour before its battery required recharging.

As such, it appears to have little in common with the electric road marvels of today, such as the 2022 Tesla Model S, which not only comes with a conventional steering wheel (plus autonomous driving mode) but can rocket from 0-100 km per hour in a mere 2.1 seconds and has a driving range of 637 km.

And yet there is one way in which Featherstonhaugh’s early electric runabout was identical to its high-tech descendants. Featherstonhaugh paid nothing to drive on the roads in the 1890s, and neither does a Tesla owner today.

Can you spot the difference? Toronto lawyer Frederick Featherstonhaugh’s 1893 electric car (left) would be no match for the performance of a 2022 Tesla Model S (right), yet they’re identical in gas taxes paid.

The Disappearing Tax

In the 21st century, motor vehicles are once again in the midst of a revolution, although this one is being driven as much by government fiat as by engineering feats. Demands from climate change activists have pushed governments to promise they will begin eliminating conventional fuel-powered cars and trucks in short order. Prime Minister Justin Trudeau has said he will ban the sale of all light-duty internal combustion vehicles by 2035, with other countries imposing even earlier mandates.

Gas-guzzlers, your days are numbered: The federal government plans to end the sale of light-duty internal combustion vehicles by 2035. (Source of bottom image: Shutterstock)

Car manufacturers are responding in kind. Inventor Benz’s successor company, Mercedes-Benz AG, for example, claims its lineup will be entirely electric by 2030. Whatever these commitments may mean for the environment or the economy, they will forever change the type of vehicles Canadians can buy and drive. And this in turn will have a major impact on government coffers. For if the gas-powered car is on the way out, then so too is the gas tax.

The federal government collects nearly $6 billion a year in gasoline and diesel excise taxes, not including the GST and HST it adds on top of those purchases. In 2019, total fuel tax revenue collected by all levels of government in Canada was estimated at nearly $18 billion. This money is paid directly to government by drivers based on how much fuel they use, and thus how far they’ve travelled (although fuel economy varies from vehicle to vehicle). While fuel taxes were once a stable and reliable source of revenue, such is no longer the case.

“Revenues have already been dropping as cars became more fuel efficient and due to changing trends in urban driving,” says Harry Kitchen, professor emeritus of economics at Trent University in Peterborough, Ontario in an interview. His research predicts that by 2040, Ontario’s revenue per capita from fuel taxes will be half of what it was in 2006. “Now with the projected increase in electric vehicles, that trend is becoming even more dramatic,” he adds. As electric vehicle mandates start to bite, Kitchen says government revenue from the gas tax will eventually wither away to nothing.

A precipitous decline: Harry Kitchen, professor emeritus of economics at Trent University, predicts Ontario’s per capita fuel tax revenue will fall by half between 2006 and 2040 as electric vehicle mandates take hold.

And yet it seems axiomatic that no government would allow an ample source of revenue to disappear without replacing it with something else. Taxes are the lifeblood of the public sector, after all. Or as Kitchen puts it: “They’re going to have to figure out how the heck they are going to make up for all that money.” So what will the disappearance of the gas tax mean for Canadian EV drivers? For a glimpse into the future, look south of the border.

Road Crisis, American-Style

In Canada, federal and provincial fuel taxes are part of general revenue, although some provinces allocate part of their proceeds to public transit or other priorities. Since 2006 a portion of Ottawa’s share has been given to Canadian municipalities through the Canada Community-Building Fund (known until June 2021 as the Gas Tax Fund), to be spent on local infrastructure, which can include everything from roads and bridges to tourist attractions and broadband internet service.

Things are quite different in the U.S., where legislation requires most federal and state gas taxes to be allocated exclusively to road construction and maintenance; in some states, fuel tax revenue comprises nearly two-thirds of the entire state highway budget. This legal obligation has turned the disappearance of gasoline taxes into an existential crisis for American roads.

A bigger problem south of the border: Baruch Feigenbaum, senior managing director of transportation policy at the Reason Foundation, points out the U.S. highway system depends much more heavily on gas taxes than does the Canadian system.

“Because we rely more heavily on gas taxes to pay for our road system, the effect of greater fuel efficiency and electric vehicles is a much bigger problem here than in Canada,” advises Baruch Feigenbaum, senior managing director of transportation policy at the Reason Foundation, a market-based think-tank in Washington, D.C. Feigenbaum has been following the disappearing gas tax issue closely. And with their minds suitably focused, he notes that legislators in many U.S. states are now seeking other, more reliable sources of income to keep their roads in good shape – Oregon and Utah are two early-movers to watch. And both states are directly targeting EV owners.

The easiest solution to the problem posed by electric vehicles paying no gas tax is to charge each owner a flat fee as part of their annual vehicle registration process to make up the difference. In Oregon, electric car owners must shell out US$306 a year to register their vehicle, as compared to US$122 for all other drivers. “Electric vehicles are not purchasing fuel, yet they are driving as many or more miles as other users,” says Michelle Godfrey, a public information officer with the Oregon Department of Transportation. “Their impact on the road system is much more than their contribution to road maintenance. And that’s unfair.”

While 28 states currently charge a separate EV registration fee, Godfrey acknowledges that simply slapping an extra US$184 per year on every electric vehicle is also unfair in its own way. With a gas tax, the more you drive, the more you pay; charging a flat rate means people who only drive a little end up subsidizing those who drive a lot. “You should pay for what you use, the same as your electricity bill or other public utilities,” she says, pointing out that back in 1918 Oregon became the first state to institute a gas tax for similar reasons of fairness.

Oregon’s OReGO program requires drivers who enroll to pay US1.8 cents per mile (approximately Cdn1.4 cents per km) for every mile driven; both electric and gasoline-powered vehicles are eligible to join. (Shown bottom, a freeway interchange in Portland, Oregon.)

Pay for What You Drive

Oregon’s solution to restoring road-use equity was to introduce OReGO in 2017, the first fully-operational road usage charge system in the U.S. Drivers who participate in OReGO are billed US1.8 cents per mile (approximately Cdn1.4 cents per km) whenever and wherever they drive. The program is entirely voluntary and open to both internal combustion and electric vehicle owners. To entice drivers, conventionally-powered cars receive a rebate on fuel taxes paid, while electric car owners are exempt from the additional registration fee. Despite these perks, however, enrolment in OReGO remains quite modest; out of 7 million registered drivers in the state there are a mere 765 active accounts. “The question is how do you entice people to volunteer to pay an additional tax?” Godfrey offers, when asked to explain the low take-up rate.

Following in Oregon’s tracks is Utah, which charges electric vehicle owners a flat US$120 per year in extra registration fees and recently introduced its own voluntary mileage-based fee program at the rate of US1.5 cents per mile driven (approximately Cdn1.2 cents per km). Participants in Utah’s program are also exempted from the special electric vehicle registration surcharge and their payments are capped at the cost of that fee. “If you drive less than 8,000 miles a year, you’ll actually save money by being enrolled in the road usage charge program,” says Mike Butler, a consultant with the Utah Department of Transportation. “And if you drive more, you’ll never pay more than $120 a year.” It seems a sweet deal and approximately 4,000 electric vehicles have already enrolled in the program. Internal combustion cars or trucks are not eligible to join.

What happens when Big Brother calls shotgun? Data privacy and choice remain major concerns with any road usage charge system.

Oregon and Utah have the only two permanent road usage programs operating in the U.S., although Virginia is set to roll out its own next year. As a result, both states are well-versed in selling the concept of road usage fees and rebutting the most commonly-heard objections – in particular privacy and choice.

“Privacy is our number one issue,” stresses Oregon’s Godfrey. Participants in OReGO can choose a private company, rather than government, to handle their mileage data and collect fees owing. Utah offers similar options, and neither state actively tracks their participants. Feigenbaum stresses that privacy protection and giving drivers a choice in who and how they pay will be crucial to convincing U.S. drivers to accept such a novel replacement to the familiar gas tax. “Americans are very concerned about Big Brother,” he warns.

First Canadian Response

While the goal of replacing gas tax revenue is far more advanced in the U.S., one jurisdiction in Canada is paying attention. Earlier this month Saskatchewan became the first province to require that electric vehicle owners contribute to their own road use by paying a new annual registration fee of $150. “Electric passenger vehicles are being purchased in ever-increasing numbers across Canada and around the world,” Saskatchewan’s Finance Minister Donna Harpauer said in a release, signalling her province’s awareness of the trend and its implications, as well as echoing earlier concerns from U.S. state legislators. “These vehicles contribute to wear and tear on provincial roadways, but because they do not consume traditional fossil fuels, their registered owners are not contributing to highway maintenance.” Harpauer noted the $150 fee is roughly comparable to the average fuel tax paid by drivers of non-electric vehicles.

Yet Saskatchewan’s modest attempt at bringing fairness to road costs triggered instant pushback from EV owners, who staged a rally against the move at the provincial legislature in April when the move was first announced. Wilf Steimle, president of Canada’s Electric Vehicle Society, told online magazine Electric Autonomy Canada it’s wrong to ask his members to pay an extra fee when they’re already contributing to a cleaner future. “Is this the optimum time to begin [an electric vehicle fee] when what matters now is accelerating the shift to sustainable transportation? No,” Steimle argued. Asking electric vehicle owners to pay for the roads they use will imperil the uptake of electric vehicles, he claimed. Rather, they should continue to drive the roads for free. Saving the planet, it seems, must always be subsidized.

Face-off in Saskatchewan: Provincial finance minister Donna Harpauer (left) recently imposed a new EV fee on fairness grounds, while Wilf Steimle (right), president of Canada’s Electric Vehicle Society argues now is not the time to ask EV owners to pay for their share of road usage.

Trent University’s Kitchen dismisses Steimle’s complaints as “self-interest.” With Ottawa moving to ban the sale of internal combustion cars in just over a decade, it is inevitable that electric vehicle sales will grow like topsy regardless of any new fees. In fact, the economist recommends bringing an immediate end to the many generous federal and provincial government subsidies offered to EV purchasers, which can amount to as much as $13,000 per vehicle. That’s a huge gift from government, especially when one considers that a brand-new 2021 Chevrolet Spark lists for a mere $10,198 and at least nine other gasoline-powered cars can be had for under $20,000.

“Why are we still subsidizing [electric cars]?” Kitchen asks, pointing out drivers will soon have no choice but to buy them. That said, the economist says he is disappointed with Saskatchewan’s flat fee on equity grounds: “It means everyone pays the same charge, regardless of whether you drive 100 km or 100,000 km a year.” He would prefer the province follow Utah and Oregon with a mileage-based system. It may only be a matter of time.

The Road Ahead

It seems unlikely that the final destination in the journey to replace gas taxes in North America will be either an EV registration fee or a voluntary road usage charge such as is currently on offer in Oregon and Utah. These should be considered temporary way-markers along a much longer road. The ultimate destination is almost certainly a system in which all drivers will be required to pay for every mile (or kilometre) they drive.

Here again, Utah is leading the way. By 2031 the state has announced plans to eliminate its gas tax entirely and turn its current optional road usage charge into a mandatory one.  The two options currently under consideration by Utah’s legislature reveal the policy choices Canadian drivers and politicians will likely wrestle with in the coming years. And point to some troubling hidden implications.

Utah’s first option is a yearly odometer reading accompanying annual vehicle registration. Fees owing on the miles driven over the past year would thus be paid in an annual lump sum. And while this approach will produce a big bill for some drivers, it is administratively and technologically quite simple. Utah figures it could enroll the vast majority of its drivers as early as 2024, with the remainder joining over the following six years as the gas tax eventually fades into oblivion.

Gas or electric? By 2031 it won’t matter for Utah drivers, as the state plans to transition everyone to a road usage charge system and then eliminate its state gas tax.

The other scenario includes the possibility of inserting a GPS-linked device in every vehicle to transmit mileage data and calculate miles owing on a monthly basis; as is the case with Utah’s current voluntary program, private-sector companies would handle all the data. This option “would be more difficult to implement,” admits Butler, with a slower rollout due to the complications of installing the devices. It would also mean lower state revenues in the first few years. “But it definitely opens new doors and provides the ability to do more with the technology,” he adds.

While it is unclear which path Utah will choose, it is readily apparent that all observers – from Department of Transportation experts to economists such as Kitchen to free market think-tank researchers such as Feigenbaum – are positively giddy about the second option. Why? Because applying GPS technology in this way will unleash a flood of new data about every driver that can be used in a myriad of novel and lucrative ways.  

Some of the opportunities created by all this additional data could be benign or even beneficial for drivers. With GPS tracking, for example, it could be possible to compensate drivers for time spent on roads in other states; this might mean a lower monthly fee payment if other states do not charge road-usage fees, or charge at a lower rate. Utah has also proposed that drivers may be able to access their own data, which could provide additional advantages for accounting or travel planning purposes. It could also be possible to charge drivers different rates depending on whether they drive on expensive-to-maintain urban roads and freeways or on cheaper country roads, offering a potential bouquet to the rural community. But by far the biggest attraction of GPS-connected road usage charges is that they open the door for a comprehensive system of congestion charges and road tolls.

Supply and demand in action: Congestion fees offer one solution to gridlock by forcing drivers to pay for the privilege of using an unclogged road; GPS-enabled road usage charges will make such a system much easier to implement.

Traffic congestion is widely regarded as a curse on modern urban drivers. In simple terms, it is the result of too many cars trying to squeeze into too few lanes. Congestion charges solve this problem of supply and demand by making drivers pay for the privilege of operating during peak periods or in perennially busy areas. Faced with these higher costs, some drivers will choose to stay home, take public transit or switch to a scooter or bicycle. This in turn opens up the roads and reduces travel times for those willing to pay. London, England was a famous early adopter of this approach. Toll roads have a similar effect. The 407ETR in Toronto, for example, offers relief from stop-and-go traffic for anyone willing to pay for a quick route across the top of the city.

“There is a lot to be said for congestion charges in large urban areas,” enthuses Kitchen. “You can vary the cost by the time of day or whenever traffic is heavier” to solve traffic problems city-wide. Feigenbaum is also excited by the prospect of using mileage-based user fees to fix traffic problems. “This is an opportunity to correct some historical mistakes with how we price roadway usage,” he says. “Congestion pricing is good because it actually improves how roads operate.”

Extra, Extra, Extra Fees

Despite the solid economic logic behind congestion fees and toll roads, however, using mileage trackers embedded in every car to impose a series of new costs on drivers opens a Pandora’s Box of other worries far beyond privacy concerns. There is, for example, no guarantee that the extra road usage fees will stop at congestion or location charges. Some groups in the U.S. have seized on the concept as an opportunity to impose a vast range of “social costs” on drivers, including such things as their effect on pedestrian mobility and public transit, plus the health care costs of collisions and other indirect impacts. Adding all this up could easily push penny-per-mile charges into the dollars-per-mile range.

 

Feigenbaum admits there is a risk activists may demand much higher per-mile fees to further their anti-car agendas, but he considers the advantages of an ideal road pricing system too great to forego. “I have no doubt that some people on the far left will want to use mileage-based user fees for nefarious purposes, such as trying to prevent driving altogether,” he says. “But from a free-market perspective, getting people to pay exactly what they are using is still the best system. We should be able to separate the benefits of this new technology from the prospects of what politicians might do with it.” Of course, it can be expected that those demanding that drivers pay the full cost of their share of the road system will vehemently oppose the idea of trimming subsidies for public transit or green energy schemes, or even charging cyclists and pedestrians for the use of specially-built (and often hugely-expensive) bike paths, trail systems and foot-bridges. “User pay” is generally a concept applied only to motorists.

From pennies per mile to dollars: Despite the advantages of a mileage-based user fee system, Feigenbaum admits that some anti-car activists may try to add on numerous extra fees and “social costs” to make driving entirely uneconomic.

Kitchen and Feigenbaum both admit that discussing congestion charges at the same time that a revolutionary new mileage-based user fee system is being introduced could be considered poor messaging. They recognize it could imperil the entire project by sparking widespread public outrage over the prospect of ever-increasing driving fees. “First we need to get people comfortable with the base technology,” says Feigenbaum. “Then down the road we can move to congestion fees.” Of course, many motorists might welcome early honesty on the topic so they can form their own opinions and engage in a more fulsome policy debate before electronic mileage metering is a fait accompli.

With the issue of creating new ways to pay for road use far from most radar screens in Canada, opposition to the concept in this country has been limited to tiny interest groups such as the Electric Vehicle Society. But as these plans grow and become more concrete, the looming prospect of steep new driving charges unleashed by a move to a mileage-based system could awaken and engage more influential groups, such as the Canadian Taxpayers Federation (CTF). Recall that the CTF has led a long and noisy campaign against federal, provincial and municipal gas taxes and, more recently, the Trudeau government’s carbon tax. To date, the CTF has been silent on Saskatchewan’s $120 annual electric vehicle fee.

Not (yet) on the radar screen: While the Canadian Taxpayers Federation has been active in pointing out the many flaws of Canada’s current gas tax regime, no one is paying attention to what might replace it. (Shown, a CTF media event marking Gas Tax Honesty Day, 2021.)

Finally, Feigenbaum stresses the need, in the U.S. at any rate, to continue to allocate all revenue raised by any new fees to building and maintaining the road system. This, he stresses, is necessary to build public trust in the entire concept. The risk to Canadian drivers that road usage charges in this country could become a tax Leviathan is clearly much greater, since fuel taxes go straight into general revenue and thus have no limiting factor.

Future Shock

The future is never certain, but some aspects of the looming fuel tax revenue crisis seem comfortably predictable. As bans on the sale of internal combustion cars and trucks begin to take hold, government fuel tax income will start a rapid decline. If, as expected, governments act to protect this important revenue source, we can expect new policies that seek to replace the gas tax – and these efforts will almost certainly include EV owners.

Experience in the U.S. suggests the simplest solution is an extra registration fee on every EV. But such a system is also inherently unfair, since it requires drivers who don’t drive a lot to subsidize those who do. This, as well as various other reasons, is likely to push governments to prefer a technology-based solution based on kilometres driven. And that could open the door to a host of new driving charges that will revolutionize how – and how much – we pay to use the roads.

Canadian drivers may soon find themselves wishing the future never comes.

Peter Shawn Taylor is senior features editor at C2C Journal. He lives in Waterloo, Ontario.

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