Governor of Pennsylvania commits to phasing out state fuel tax

The Governor of the US State of Pennsylvania, Tom Wolf, has announced on his website that the state fuel taxes ("gas tax") are unreliable and will have to be phased out.  He is understood to be the first Governor of a US state to say this and is possibly the first jurisdiction in the world to have done so. 

The key part of the statement reads as follows:

“Our economy, our communities, and our future rely on a strong transportation system that supports our safety and growth. We have more than $9 billion in annual unmet needs across our state-maintained transportation system alone. At the same time, Pennsylvania is relying too much on outdated, unreliable funding methods, and the federal government hasn’t taken meaningful action in decades,” Gov. Wolf said. “Phasing out the burdensome gas tax, coupled with seeking long-term reliable funding solutions that will keep pace with our infrastructure needs, deserves a close examination. Forming this bipartisan commission will bring multiple, bipartisan voices to the table to ensure that we can examine reliable, sustainable revenue solutions to address both near-term and long-term funding needs.”

In other words, there is insufficient revenue now from the gas tax to meet the state's demands, with the US$9b shortfall estimated to rise to US$14.5b by 2030.  He puts the unreliability of the gas tax down to the rapidly increasing fuel efficiency of vehicles and the rise of new motive power technologies (electric and hybrids) that render the gas tax increasingly unreliable.

It is of course also increasingly unfair. It is only those who can afford to buy a relatively new vehicle who get the benefits of new vehicle technologies, so over time it means those who don't have the financial means to buy such vehicles that would increasingly pay a higher proportion of the gas tax.  This argument has been critical to the success of states such as Oregon and Utah in starting a transition towards distance based road user charging. 

The Governor has announced establishment of a "Transportation Revenue Options Commission (PDF for the executive order), to investigate how to progress away from the gas tax.  It's main responsibilities are to:

• Study  and  prepare  a  comprehensive  list  of  potential  revenue  sources  available  for  current  and  future  funding  of  transportation  in  the  Commonwealth  for  all  modes  of  transportation.    The  funding  sources  must be reliable, dedicated, inflation sensitive, and adaptive to changing environmental factors; and 
• Prepare  a  comprehensive,  strategic  Commonwealth  transportation  funding proposal.

This is a wide open mandate, but this should be expected. The modes referred to are not just roads, but also public transport, Amtrak, rail freight and airports/heliports, so it will include public transport fares and airport user charges, as well as the road based options well known on this blog.

So I fully expect Pennsylvania to consider:

• Tolls on major highways and crossings;
• Full network distance (and weight) based road user charging;
• Congestion pricing on congested corridors or at major centres;
• Motor vehicle registration/licensing fees;
• Taxes on energy;
• Taxes on land related to it benefiting from transport infrastructure;
• Other direct user charges;
• Non-transport related taxes (sales taxes, income taxes).

The Tax Foundation reports that 56% of Pennsylvania's state transportation tax revenue is raised by the state gas tax, and to replace this with distance-based RUC (also known in the US as Vehicle Miles Tax (VMT) or Mileage Based User Fees (MBUF)) would need to be an average of US$0.08 per mile, but rightfully points out that any such fee would have to vary by vehicle weight.  Heavy trucks should pay much more than that, and cars much less, to more closely reflect their current fuel consumption, or better yet to actually reflect the costs they impose on the network (as is done in Oregon).

Pennsylvania currently has one of the higher state gas taxes in the US at US$0.576 a gallon (that's US$0.152 per litre for the metric world).  In July 2020 it was the second highest, so perhaps it is an admission that it isn't just the rate that is the issue, but the yield. Noting that this is significantly higher than the Federal gas tax at US$0.184 per gallon (US$0.049 per litre) which itself hasn't increased since 1993.

Whatever comes out of Pennsylvania, it demonstrates that there is growing political recognition at the higher levels of government in some US States that the status quo is unsustainable.  It is encouraging to see these emerging on the eastern states, given that the western seaboard states (Oregon, Washington, California and Hawaii) have all embarked on pilot programmes (and in the case of Oregon revenue-collecting) to explore RUC. There are bigger challenges in the east, due to the smaller states and much higher interstate traffic movement, but these challenges can be overcome, since they all face the same issue.

In the long term, the gas tax is not only unsustainable, but is unfair.

Would RUC for EVs harm sales?

With the State of Victoria's announcement of road user charging (RUC) for electric (EV) and plug-in hybrid vehicles (PHEV) there have been quite some claims from various circles about how allegedly damaging RUC could be for sales of such vehicles. 

According to The Guardian:

A coalition of car manufacturers, industry groups, infrastructure companies and environmentalists have branded the Victorian government’s proposed electric vehicle tax the “worst electric vehicle policy in the world”.

The more recent announcement about incentives to purchase EVs should help ameliorate this concern, but it remains a moot point as to whether RUC actually disincentivises purchases of EVs.

The incentives package is as follows:

• Subsidies for 20,000 EVs to be purchased, of up to A$3,000 per vehicle for vehicles priced under A$69,000;
• A$19m to be spent on EV charging infrastructure across regional Victoria;
• A$20m for a zero-emissions bus trial;
• A$10m to purchase 400 new ZEVs for the State's own fleet;
• A$5m for a Commercial Sector ZEV Innovation Fund; and
• A$298k for a study on "EV-readiness" in new buildings.

A report by the ABC (Australia) noted that there are only 7,000 EVs registered in the State of Victoria and 20,000 across Australia (for comparison this is about the same number as New Zealand, which has one-fifth of the population of Australia).

The criticism about the RUC came from an advertisement placed by a group consisting of Hyundai, Volkswagen, Uber, Jetcharge, the Clean Energy Council, Solar Citizens, Doctors for the Environment Australia and the Australia Institute.  

There may be legitimate concern about a lack of adequate incentives to purchase EVs in Australia, and that point is worthy of debate. Luxury car tax imposes a 33% penalty on "fuel-efficient vehicles" with a retail price of A$77,565, and could well be waived for such vehicles as it effectively penalises the mid to larger size EVs.  However, can a RUC of only A$0.025 per km really harm sales of EVs?

The Driven reports on a "preliminary study" from the University of Queensland that claims just that, claiming that it could hit sales by 25%. This report deserves some critical scrutiny. After all, when New Zealand RUC exemption for EVs ends (currently scheduled on 31/12/2021, but it may be extended), NZ (light) EVs will be paying the RUC of NZ$0.076 per km (about A$0.07). In Utah such vehicles are charged US$0.015 per mile (A$0.012 per km) up to an annual cap of US$120 (about A$155). In Oregon they are charged US$0.02 per mile. Hawaii, California, Washington State, Colorado, Minnesota, Delaware and Pennsylvania have all piloted (or are currently piloting) such charges, are they all about to do something that could dramatically undermine EV sales? 

Is RUC factored into the purchase price of a vehicle by consumers?

Jake Whitehead "an electric vehicle research at the University of Queensland who also works on the global stage with the International Panel on Climate Change (IPCC) and the International Electric Vehicle Policy Council" is cited as claiming that Victoria's EV RUC will be "perceived" as a A$4,000 disincentive to buying an EV.  This claim is highly questionable.  The report claims:

It would mean that, for example in the case of the petrol Hyundai Kona which costs $24,300 before on-road costs, the all-electric version would in effect cost $63,990 instead of its manufacturer recommended $59,990 price.

At a rate of A$0.025 per km, it is taking the cost of the RUC over 160,000km as a factor that vehicle purchasers take into account when buying a vehicle.  There is no evidence that this happens anywhere where RUC exists for EVs (or indeed any other vehicles now).  A parallel to this would be that purchasers of petrol powered vehicles make the same comparison when purchasing the car, based on the next 160,000km they drive based on fuel tax alone and the vehicle's average fuel efficiency.  So looking at a new petrol Hyundai Kona (which is actually listed at A$28,990)  its combined fuel efficiency is listed as 6.2l/100 (I'll assume the Smartstream G2.0 Atkinson engine not the Smartstream G1.6 T-GDi).  So for 160,000km it will use on average 9920 litres. At A$0.427 a litre, that means the price of the petrol Kona is "perceived by consumers" at around $4,235 more than the retail price (A$4658 if you include the GST on fuel duty). Who does this? I'd wager that next to no consumers do any sort of calculation like this, based on what taxes they pay on using the roads. Besides, the average car in the state of Victoria travels about 13,838km per annum according to Budget Direct.  So what this really means is that RUC on EVs will be a cost of around A$346 in a year (and for the sake of argument, for the petrol Kona it is A$367).  So the net impact is that the EV is still cheaper to own from a user tax basis.

At best this claim is only half-valid when it isn't compared to the fuel tax paid by other vehicles, but at worst it demonstrates that the real impact is a tiny increment, and certainly much less than the depreciation from simply purchasing the vehicle in the first place.  Note that Whitehead is quoted in the AFR as noting the average annual distance driven is around 13,000, so he is not unaware of this statistic.

Will EV RUC reduce the supply of EVs?

The report claims that a whole host of incentives would increase EV sales, mainly subsidies on electricity, exemptions from other taxes and tolls. However, the report has a series of claims that without seeing the actual paper itself are difficult to completely assess. One is that RUC would effectively mean that manufacturers would "withhold supply" of EVs to the Australian market because they would be "difficult to sell".  The evidence for this is unclear, but there is little sense from EV suppliers that would pull out of NZ when its RUC exemption lapses (and results in EVs in NZ being charged three times what they wil lbe in Victoria).  There is a disincentive for EU manufacturers selling outside the EU when they face penalties for selling internal combustion engine (ICE) powered vehicles (and get credits for selling ZEVs), outlined in this article by the ABC, but it seems unlikely Australia could fully offset this without parallel subsidies. In effect, Australia's market is fighting against governments with deep pockets, and that is a wholly different political issue.

The report claims that "EV owners already pay a significant amount in road taxes under the current model" which for an academic paper is really only a value judgment when it is clear that this "significant amount" is a fraction of what other vehicles are charged. A petrol Hyundai Kona will be charged A$834.80 in registration fees in Victoria, but an electric one will be charged A$100 less.  What the report claims is that they then pay a "significant" amount, when they pay nothing in fuel duty, whereas the petrol Kona will be around A$367 per annum based on average usage.  

What is the basis of this research?

The report from The Driven doesn't contain details of the methodology of the University of Queensland paper.  However, The Guardian in November 2020 did reveal that:  

Whitehead’s study, which has not yet been peer-reviewed and has been released earlier than planned in the wake of the state government announcements, included a survey of 500 Queensland households on their preferences on road pricing.

They found a 2.5c/km tax was seen as being equivalent to a $4,500 increase in a vehicle’s purchase price. By comparison, a $5 congestion tax charged on driving in inner-city areas, capped at $15 a day, was seen as equivalent to adding $2,800.

So the basis for the modelling in this report is a stated-preference survey (which has not been revealed) which has somehow led those surveyed to conclude that they would perceive EV RUC as being around the same as driving 156,000.  This is equal to 11.5 years of vehicle ownership. Do consumers also look at registration fees over that period?  Do they look at maintenance costs or indeed more important than all of these the relative fuel costs vs. electricity costs of a petrol vs. an electric vehicle, over this period?  Sure they will consider it in a shorter term, but over 11.5 years?

Even more absurd is the idea that the study could model a stated preference survey for congestion charging.  If this is seen as $2,800, assuming this is based on a similar period as the A$0.025 of RUC (11.5 years) then it is assumed the average driver enters the congestion zone, 49 times a year.  This is an odd figure, as a regular commuter to such a zone might be assumed to enter around 200 times a year, whereas most other drivers might enter it rarely (in London around half of all vehicles entering its congestion charge zone only do so once every 6 months).  The point then being "so what"? Why would it be a GOOD thing for EVs to be exempt from driving into downtown Brisbane or Melbourne?  They cause congestion, that congestion increases emissions for other vehicles (including commercial vehicles with fewer choices), and Australia's major cities are heavily focused on encouraging public transport and active modes for travel downtown, not cars?  London has announced that the ZEV 100% discount for its congestion charge will be abolished in the end of 2025. Cars generate congestion after all.

In short, the basis for the study that claims that Victoria's A$0.025 RUC would somehow devastate EV sales and emissions targets appears to be flimsy.  It isn't necessarily surprising that automotive companies are happy to go along with these claims, but for a "think tank" to align itself with such research is disappointing.

Conclusion

There is a valid debate to be had about how Australia at state/territory and Federal levels about incentives for purchasing EVs. Victoria's recent announcement seems to clearly indicate that its RUC for EVs and PHEVs is only part of its policy package, and should ameliorate concerns.  However, the case for RUC for EVs is clear, in that it is easier to introduce such a policy when vehicle numbers are low, so that the message that EVs do not get to use the roads for free is clear.  There are obvious benefits for replacing petrol and diesel vehicles with EVs and PHEVs, in terms of improving local air quality and reducing greenhouse gas emissions from vehicle use, but there are also benefits in sending direct road use cost signals to road users in the form of RUC.  This can be lower than fuel duty, and it is a step in the right direction for hypothecate such revenue initially to support capital spending on EV infrastructure and then the road network. Longer term such vehicles can reasonably be expected to be paying their fair share of the total costs of maintaining and developing the road network, and as such not to be cross subsidised by others, nor to have inappropriate signals sent about driving in an urban environment, such as having an exemption from any future congestion charges.