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How Prius and Tesla drivers are draining state tax coffers

Steve Mendelsohn  Senior Vice President, Global Tax and Accounting Market Development, Thomson Reuters

Steve Mendelsohn  Senior Vice President, Global Tax and Accounting Market Development, Thomson Reuters

Inside Oregon’s ambitious plan to limit emissions without crimping gas tax revenue.

Oregon has a fuel economy problem. It may sound like a cliche that would be lampooned in a sketch on the show Portlandia, but it’s true. Oregonians love their Priuses, Teslas and vintage bicycles, and, as a result, they consume much less fuel than most other states. According to the latest data available from the U.S. Department of Energy, Oregonians consume roughly 372 gallons of motor gasoline per capita, while the U.S. average is 423 gallons per capita.

From an environmental perspective, that’s a good thing. From a tax collection perspective, not so much. You see, states derive a great deal of tax revenue from surcharges and taxes on fuel. As cars have gotten increasingly fuel efficient – many of them not requiring gasoline at all – tax revenues have declined.

Is gas tax an issue for all states?

While the pinch is being felt hardest in places like Oregon that have a disproportionate amount of hybrid and electric vehicle drivers, it is part of a larger nationwide trend. According to the Environmental Protection Agency’s 2015 Fuel Economy Trends report, the average fuel economy for all U.S. automobiles was 24.7 mpg last year, up from 24.3 in 2014. Longer-term, these are up from just over 19 mpg as recently as 2005 and about 13 mpg in 1975. It doesn’t take a math whiz to recognize that states with tax systems rooted in gasoline consumption are losing money on fuel efficiency.

To combat this, Oregon wants to tax you on how much you actually drive.

The hybrid mileage and gas tax

Effective July of last year, residents could enroll in the program. If they qualified, they could choose among three devices that track their mileage and charge them a 1.5 cent fee for each mile they drive on public roads in the state. The gas tax they pay at the pump would then be deducted to avoid double taxation.

I recently spoke with Chris Hagerbaumer, the deputy director at the Oregon Environmental Council. She joined OEC in 1996, and leads the organization’s transportation work. She told me this type of tax could be fairer than a straight gasoline tax, but only if the fee reflects fuel efficiency as well.

“Our suggestion is an overlay on the mileage tax, so a gas guzzling vehicle pays more per mile and a gas-sipping vehicle pays less,” she explained. “Like a fuel tax, but done from the mileage end, and adding the fuel efficiency.”

What isn’t said, of course, is that it also puts cleaner vehicles on the taxation radar. Eventually, entire fleets may not require gasoline, making the existing gas tax obsolete. Hagerbaumer agrees that’s a factor.

“At some point the majority of the vehicles on the road will be highly efficient or won’t use fuel at all,” she concurred. “And then that mileage tax base will be important.”

A wasp perches on the charging cap of Tesla Roadster electric car during a demonstration in Rome October 28, 2009.
REUTERS/Alessandro Bianchi

Oregon’s experiment with a vehicle mileage tax – or what it’s calling a “road usage charge” – will be the largest in the nation so far. But with just 5,000 drivers, it’s still modest in size and, for now, entirely voluntary. While Hagerbaumer supports the pilot, she hopes the state will consider the broader impacts of driving, not just the miles driven.

“When you tax something you get less of it, and when you think about driving, there is more cost to society than just the cost of using the road. When you talk about adding capacity to the roadway, you’re talking about addressing rush hour in cities,” she said. “And if we factor in the variable that some of these cars being added to the roadway aren’t fuel efficient, the simple act of driving becomes a big problem.”

Is this a truly fair tax program?

Of course, the tax isn’t favored by everyone. Naturally, some Oregonians are not comfortable with the government tracking their every move. And higher mileage drivers don’t enjoy the idea of shouldering more of the load. Hagerbaumer says, though, that it’s only fair that we all pay our fair share for the roads and for the pollution we create.

“By taxing the amount people drive – if that does influence behavior – it may get people to think about changing their trips – there’s a great social benefit,” Hagerbaumer concludes.

“It means we’ll actually be putting out less pollution because we’ll have fewer cars on the road as a whole, whether they are fuel efficient or not. You’re going to get more desirable environmental effect generally if people think more about how they’re driving.”

This story was originally published on Inc.com.


Learn more

Follow developments in sales and use tax on our Tax & Accounting blog.

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