Skip to content

Electric and Hybrid Licensing Fees: Distortive Infrastructure Funding Tools

2 min readBy: Lyman Stone

Previously, we’ve written about Virginia’s law (effective July 1) to lower the gas taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. and change its structure, replacing it with higher sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. es in Northern Virginia and Hampton Roads (where, presumably, infrastructure investments are most in demand) and increases in auto registration and licensing fees. At the time, we focused on the shift away from user-fees on the whole.

However, one indirect form of user-fee did increase: registration and licensing. While it’s debatable whether these fees are generally considered “transportation funding” (because they have primarily financed safety, the DMV, and policing) some states, like Virginia, Washington, Oregon, and North Carolina, have proposed using them to finance road maintenance and construction.

And even as we cover North Carolina’s other tax reform proposals, the Tar Heel State is also considering a proposal in its budget to create an additional fee on hybrid and electric cars, with proceeds being used for road maintenance. This new fee is based on the premise that such high-mileage cars, by reducing their gas consumption and thus gas taxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline. liability, aren’t paying their fair share of just as much use of infrastructure, or miles driven. This policy, and others like it, is becoming increasingly common as states grapple with more and more high-mileage vehicles and major infrastructure costs.

Uses of special fees for electric or hybrid cars could partially compensate for lost gas-tax revenue (and thus lost transportation funding) insofar as they are earmarked for infrastructure, like many gas taxes are. Such fees or taxes could also serve to place at least some of the burden of funding transportation infrastructure on its users, which is fair and efficient.

But blunt fees on arbitrary types of vehicles are a poor substitute for simpler user feeA user fee is a charge imposed by the government for the primary purpose of covering the cost of providing a service, directly raising funds from the people who benefit from the particular public good or service being provided. A user fee is not a tax, though some taxes may be labeled as user fees or closely resemble them. s like tolls, or possible experimental new “vehicle-mile taxes,” both of which can more directly target infrastructure use without creating rigid new technology standards and extra taxes: taxes which actually discourage consumers from purchasing high-mileage vehicles. Furthermore, hybrid and electric cars are not alone in having low gas-tax “incidence” relative to miles driven. Conventional high mileage vehicles pose the same problem. A choice to place fees, not based on a car’s gas-tax-paid-to-miles-driven-ratio, but based on the general technological category of its motor, is unnecessary, inefficient, and distorts the decisions facing both investors in new auto technologies and the consumers buying new vehicles.

If states need to close revenue gaps for infrastructure (as they undoubtedly do), there are better tools available than blunt fees on whole categories of cars. Tolls and per-mile taxes are two such tools, and both could be less distortionary.