As Vehicle Efficiency Evolves, So Do Fuel Taxes

The shift toward better fuel economy is causing governments around the world to reconsider long-standing systems for taxing road travel.

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In a world that is aiming to use less fuel, governments have begun to realize that fuel taxes don't stretch as far as they once did.

Increasing fuel economy of vehicles and a federal gas tax untouched since the Clinton Administration in the United States have left holes in state and federal road maintenance budgets, which are fueled almost entirely through gas taxes.

(Related: "With Oil Prices High, Taking Aim at Industry Tax Breaks")

Europe, meanwhile, is sensing that its scheme of famously high fuel taxes is outdated. The rules have created a paradox where the very fuels that governments are trying to discourage—heavily polluting fossil fuels—face the lowest taxes.

But new proposals have emerged to change the way fuels are taxed and highways are financed. Although the approaches vary and have differing goals, one consensus seems to be emerging on both sides of the Atlantic. For governments trying to encourage cuts in carbon emissions, while integrating alternatives such as electric cars into the mix, it may no longer make sense to tax by the gallon or liter.

"Taxation based on volumes of energy products consumed cannot address EU's energy and climate change targets," said a European Union statement accompanying a new proposal from Algirdas Šemeta, EU commissioner in charge of taxation.

And U.S. Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat who is slated to retire next year, sees a "big problem" looming: "The gasoline tax is more and more disconnected from the reality of modern transportation, with electric cars, with hybrids, with renewable fuels, with all of the rest that is happening to change the way we transit."

Electric Car Fees?

Leading the movement to transform fuel taxes are a pair of states in the U.S. Pacific Northwest, where automakers are planning to release some of their earliest electric vehicles.

Lawmakers in Oregon are considering taxing electric cars at 1.43 cents per mile, beginning with cars in the 2014 model year. And just north in Washington, where an infrastructure project touted as "the nation's first electric highway" is under way, legislation that could win approval as early as this month would levy a flat $100 annual fee on electric cars—the first of its kind in the United States.

If passed, the $100 fee would raise an estimated $1 million for the state in its first year, the measure's sponsor, Washington State Senator Mary Margaret Haugen, a Democrat, said in an interview. "That's real money," she said, at a time when road preservation and maintenance are "the hardest thing for us to find funding for."

Besides, a motorist driving a conventional vehicle of a size comparable to electric passenger cars available today has to pony up. With the state's 37.5-cent-per-gallon gas tax, Haugen says the average in state fuel taxes would be about $179 per year based on a projected average of about 10,000 to 12,000 miles (about 16,000 to 19,000 kilometers) per year for Washington state drivers.

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In Washington, D.C., where the federal highway fund relies on a levy of 18.4 cents per gallon (about 4.86 cents per liter), some are even wondering whether all American drivers should be asked to pay based on the number of miles they drive. A Congressional Budget Office analysis of alternative approaches to funding highways, ordered up earlier this year by Conrad, found advantages in the idea of per-mile charges. After all, the "larger share of costs—for pavement damage, congestion, accidents, and noise," the authors wrote, is more directly tied to the number of miles traveled than to fuel use.

But controversy broke out when the publication Transportation Weekly published an undated working draft of the Obama administration's Transportation Opportunities Act, which included such a per-mile fee proposal. Opponents, including potential GOP presidential candidates, seized on the idea as another example of federal taxation run amok. Former Arkansas governor Mike Huckabee dismissed the idea as "ridiculous," and U.S. Rep. Michele Bachmann of Minnesota tweeted that a per-mile tax would "hurt my constituents & millions more." The White House quickly disavowed the draft, saying it did not reflect the views of President Obama.

Still, Haugen in Washington State says a national mileage-based fee may be just the ticket to fix the old fuel tax system—eventually. "But the truth is the technology is not here," she said. Her bill contains a provision that would eliminate the $100 electric car user fee if technology were in place to track miles traveled, and if mileage-based charges were put into effect (something she believes would have to be done on a national basis.) "Until that time comes, we can put this very modest fee in place," she said. "Electric cars are the wave of the future, and I think that's a good thing, but we all need to pay our fair share to ensure that our roads are maintained."

(Related: "China's Electric Car Drive: Impressive, but Not Enough")

Tom Gage, chief executive of AC Propulsion, an electric vehicle technology developer in San Dimas, California, believes a better approach would be to simply raise the gas tax, in order to raise revenue and alter behavior. "A gradual, certain, steady increase tells people, 'next time I get a car, I'll get one that's more efficient, or I'll look for work closer to home, or find a house closer to mass transit.' "

(Related: "Crude Reality: Gas Prices Rocket Because They Can")

Gage emphasized that the number of electric vehicles on the road is not high enough at this point for taxes and fees like the Washington State' proposal to be more than a blip on the radar of state budgets. "They're really getting ahead of themselves," he said. "It's a knee-jerk reaction to, 'Oh no, we're losing revenue.' "

A Tax on Energy Content

The European Union does not face the same highway funding issue as in the United States, since its nations fund road maintenance under general budgets rather than with dedicated fuel taxes. But the EU, too, is looking at a motor energy tax overhaul.

Last month, the EU's taxation commissioner in Brussels proposed a minimum tax for fuels based on their energy content and carbon emissions, rather than on volume. In effect, such a change would increase the price of diesel fuel relative to gasoline (petrol), since diesel has higher energy content and produces more CO2 emissions. This would mark a turnaround in many European countries, which have sought to encourage diesel auto engines as more fuel-efficient, and therefore, have taxed diesel more lightly. For electricity, the tax based on energy content would be levied at the point of consumption—at the plug, in other words.

(Related: "Brazil Ethanol Looks to Sweeten More Gas Tanks")

The idea is to align fuel taxation with broader climate and efficiency goals. CO2 emissions from transport have been rising faster than emissions from all other major sectors of the EU economy, according to a 2009 report from the European Commission. Between 1990 and 2006, transport emissions increased by 25 percent in the EU, to make up nearly a quarter of all emissions, while industry and households reduced their emissions.

Germany, with a large car manufacturing industry, has already voiced opposition to the energy tax overhaul idea. But the European nations that have been struggling with debt—countries like Greece, Italy, and Spain—are seen as potentially more receptive—since a change in the energy tax structure could be used to help raise money without raising income taxes.

Konstandinos Diamandouros, head of office for the European Union Road Federation, a nonprofit alliance of road construction companies and road user groups, says Europe's economic crisis has helped spur reconsideration of energy taxes, including, as in the United States—the pay-per-kilometer idea.

Germany already has a truck toll based on distance traveled, and Slovakia and Austria have similar systems. To date, no such scheme exists for passenger cars in the EU, but the Netherlands is set to implement a pay-as-you-drive tax in 2012. Approved in late 2009, the plan calls for a tax starting at €0.03 per kilometer, with higher charges during peak travel times and on congested roads. GPS devices installed in cars will be used to monitor mileage and send data to a billing agency.

For more than a decade, Singapore has used an electronic system to charge motorists for road use during peak hours, based on a tiered "pay-as-you-go" scheme. The country also heavily taxes vehicles and enforces strict quotas for new car sales and permits, while investing in public transport. Not surprisingly, its air pollutant levels during the past five years have been 88 percent below limits recommended by the U.S. Environmental Protection Agency, according to Bloomberg.

In Europe, Diamandouros says, where roads face "chronic underfunding," it may make increasing sense to enforce a charge that "reflects the use of the infrastructure as well as what is referred to as externalities," such as the costs of pollution, noise and congestion.

"Given that the State will no longer be in a position to maintain the road network," he said, "there is a emerging consensus that pay-per-kilometer schemes are the way forward."

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