With EVs on the way, what comes after the gas tax?

Gas-guzzlers, your days are numbered. This summer the Trudeau government declared it will ban the sale of all light-duty gasoline-powered cars and trucks by 2035. Drivers might object, but car manufacturers are already falling in line to make it happen.

Whatever this may mean for the environment or the economy, it will certainly change the type of cars parked in Canadian driveways. And that in turn will have a major impact on government coffers. For if the gas-powered car is on the way out, then so too is the gas tax.

The federal government collects nearly $6 billion a year in gasoline and diesel excise taxes, with provinces and municipalities raising another $10 billion, not counting HST and GST on top of that. Drivers pay these hefty sums directly to government based on how much fuel they use and hence how far they’ve driven. But the looming dominance of electric vehicles (EVs) threatens to end this connection between taxes paid and roads used.

With governments loathe to give up reliable sources of revenue, and EVs getting a free pass on the gas tax, what comes next? For a glimpse into the future, look south of the border.

Unlike in Canada, where most gas taxes disappear into general revenue, U.S. legislation requires that they be spent on road construction and maintenance; in some states, fuel tax revenue accounts for nearly two-thirds of the entire state highway budget. This legal obligation has turned the disappearance of gasoline taxes into an existential crisis for American roads.

“Electric vehicles are not purchasing fuel, yet they are driving as many or more miles as other users,” says Michelle Godfrey, a public information officer with the Department of Transportation in Oregon, the first state to tackle this issue head-on. “Their impact on the road system is much more than their contribution to road maintenance. And that’s unfair.”

As a result of this unfairness, Oregon charges EV owners an extra US$184 in annual registration fees to compensate for the gas tax they aren’t paying; 27 other states now charge similar EV fees. But it’s not enough, Godfrey says.

With a gas tax, the more you drive, the more you pay; by contrast, charging all EV owners a flat fee means people who drive a little end up subsidizing those who drive a lot. “You should pay for what you use, the same as your electricity bill or other public utilities,” Godfrey says. To rectify this situation, in 2017 Oregon created OReGO, the first fully operational road-usage charge system in the U.S.; drivers who join pay 1.8 U.S. cents for every mile they travel  (approximately 1.4 Canadian cents per km).

OReGO is entirely voluntary. As an inducement to join, participants are exempted from gas taxes and the special EV fee, while private firms handle the data and payments to allay concerns about privacy.

Close behind Oregon but catching up fast is Utah, which recently introduced its own voluntary mileage-based fee program at 1.5 U.S. cents per mile driven (approximately 1.2 Canadian cents per km). By 2031 Utah plans to fully embrace the future by eliminating its gas tax entirely and shifting all drivers to a permanent, mandatory road-usage charge system. The state is currently debating whether this will involve annual odometer readings or the insertion of GPS-trackers in every vehicle. Expect other states to follow.

Things are not nearly as advanced in this country, although in October Saskatchewan did became the first province to charge an annual EV fee of $150. However, even this modest step prompted push-back from EV owners, who argue they shouldn’t be expected to pay to use the roads, given their virtue in contributing to a greener future. It’s a claim that will become increasingly difficult to maintain as 2035 approaches and EVs proliferate.

Is Canada fated to follow Utah and the rest of the states? Nothing about the future is certain, but some aspects of the gas tax conundrum seem comfortably predictable. As the tax fades into irrelevance, governments will be highly motivated to make up that lost revenue. And a system in which all drivers pay in proportion to their distance travelled seems the most likely substitute. As Utah’s current debate demonstrates, this could be accomplished with either low-tech odometer readings or high-tech GPS monitoring.

So far the smart money is on the tech-heavy approach, despite the obvious privacy concerns, since it promises to unleash a flood of new data that can be used in a myriad of novel ways. In particular, it would allow governments to add a host of additional driving charges directly onto any GPS-enabled mileage-based fee system. The most lucrative of these would be variable congestion fees and road tolls, which would further revolutionize how drivers pay for the roads they use.

By the time the future arrives, governments may find themselves wondering how they ever made do with boring old gas taxes.