My teenaged son and I just watched the science-fiction thriller "The Tomorrow War," in which a future government drafts present-day civilians to travel forward in time and fight an alien invasion. It turns out (spoiler) that the extra-terrestrials had crashed into one of Earth’s glaciers centuries ago. Climate change melts the ice and thaws out the visitors, too.
My 14-year-old drew a sad conclusion: “They could go back to their present-day and either kill the frozen aliens or be better to our planet. It’s probably easier to kill the aliens.”
When it comes to the planet, Americans, and our beloved cars, he might be right. Our fossil-fueled vehicles produce as much as one billion metric tons of greenhouse gases in a year. That’s a fifth of our country’s total carbon footprint. How can we do better? It’s an important question globally, but personally, too—I’m in the market for a new car.
If we want less of some bad thing—and need some tax revenue—we tax it. Think of the federal gas tax, which makes driving cars that generate greenhouse gases more expensive.
On the other hand, if we want more of a good thing, don’t tax it. So how should we think about the vehicle-mileage tax (VMT) that drivers of all kinds of vehicles would pay, raising the costs of driving planet-friendly hybrid or electric vehicles? They pollute less than gas-guzzlers, but they still help wear out roads.
Taxing gasoline: Simple, but stuck.
The federal 18.4-cent-per gallon federal excise tax on gasoline funds highways and mass transit. The tax, and others like it, discourages driving and encourages the use of mass transit. Raising the tax could boost those effects. But Congress has not increased the federal gasoline tax rate since 1993.
The Congressional Budget Office (CBO) projects that if the tax remains the same and spending increases at the rate of inflation, the Highway Trust fund will face a shortfall of nearly $140 billion over the next decade, because of vehicles’ increasing fuel economy and slow growth of miles traveled.
There’s an easy, theoretical fix. According to CBO, raising the tax by 15 cents in October 2022 and increasing it at the rate of inflation could generate an extra $291 billion over ten years, making the Federal Highway Trust Fund solvent for the first time since 2008.
In reality, there will be no federal gas tax increase in the near future. Neither the Senate’s $1 trillion bipartisan infrastructure bill nor its $3.5 trillion budget resolution touch the federal gas tax. But the federal government still needs revenue.
Taxing miles driven: Clever, or counter-productive?
A vehicle-mileage tax is a small fee—a penny or two—per mile driven. The idea was born out of expected necessity about 20 years ago in Oregon, when state lawmakers began to imagine transportation funding that didn’t rely on a tax on fossil fuels.
In 2015, Oregon became the first state to launch an experimental VMT program. Utah followed suit and twelve other states are exploring similar efforts. These small-scale endeavors earned some support in Congress. And now, the Senate’s bipartisan infrastructure bill includes funding for a national pilot program to test the design, acceptance, implementation, and financial sustainability of a VMT.
The Washington Post calculator shows how a VMT might work, based on your vehicle’s annual mileage and fuel economy. It’s based on a VMT equal to the total amount one pays in gas taxes, divided by miles driven—or about nine-tenths of a cent per mile.
In my fossil-fueled minivan, a VMT would save me about $10 less a year, compared to a gas tax. But I’d be punished, tax-wise, for driving a hybrid minivan: I’d pay $40 more with a VMT. In an all-electric vehicle, a VMT would cost me an extra $97. Does that mean I should keep driving my old polluting minivan?
It sure feels like it, except for one thing: The government absolutely wants more hybrid and electric vehicles on the road. In fact, the federal government and my state offer me tax incentives to purchase a hybrid or electric vehicle.
These incentives have been around for a while. Sales of hybrid vehicles have been surging and sales of electric vehicles may soon follow suit. President Biden issued an executive order last month calling for half of all new vehicles sold to be electric by 2030 and Congress is likely to adopt additional subsidies for hybrid and electric cars.
Granted, if I buy a hybrid or electric car, I’ll still contribute to wear and tear of our roads. I’ll still consume energy and probably even release some greenhouse gases (electricity has to be generated somehow). So I don’t mind the idea of a pay-as-you-go system for our infrastructure, even if it hits my wallet harder.
But I’m just one person. Hybrid and electric vehicles will be more expensive than fossil-fueled cars for at least five more years. If other consumers have to pay a VMT, they might decide against buying a hybrid or electric vehicle, despite those tax incentives to buy them that would more than cover the cost of the VMT, and reduce the overall cost of those vehicles.
Is that policymakers’ desired outcome? One day soon, they will need to signal to drivers whether their goal is more tax revenue for roads or more planet-friendly vehicles. Until then, killing aliens might be a lot easier than levying a VMT.
The Tax Hound, publishing once a month, makes sense of tax policy for those outside the tax world by connecting tax issues to everyday concerns. Have a question or an idea? Send Renu an email.
