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Jun 04, 2023

Texas’ New EV Tax Should Fix the Bridges, Not ‘Own the Libs’

This is a regular column from tax and technology attorney Andrew Leahey,

This is a regular column from tax and technology attorney Andrew Leahey, principal at Hunter Creek Consulting and sales suppression expert. Here, he shares why Texas’ tax on electric vehicles could be effective—as long as it's implemented the right way, with more buy-in from public infrastructure.

Beginning this September, registering an electric vehicle in Texas will now cost $400 initially and $200 each renewal year. Ostensibly, this fee would offset the portion of the gas tax allocated to infrastructure and road maintenance, which EVs don't pay.

In reality, the bill implements a tax that does nothing more than protect the oil and gas industry and score a culture war win for Gov. Greg Abbott. It's replete with logical inconsistencies and obvious half-thoughts. A tax on EVs should be well-considered and tailored to policy goals that amount to more than retaliation against a voting bloc.

The bill implicitly excludes hybrid vehicles, defining an EV as "a motor vehicle that has a gross weight of 10,000 pounds or less and uses electricity as its only source of motor power." It explicitly excludes autocycles, mopeds, motorcycles, and "neighborhood electric vehicles," which are essentially golf carts.

From a tax perspective, one advantage of EVs is that the amount of energy in their batteries correlates well to the distance the vehicle can travel before depletion, so the tax can be narrowly targeted to use of infrastructure. Driving style affects battery life, but not as much as in a gas engine. Thus, one can get a pretty good idea of the amount a given EV has "used" the roads based on how much energy remains in a presumably once-full battery and the location of the charger being used.

Put differently, a tax on the amount of kilowatt hours used at a public charger would be much closer to a functional vehicle-miles traveled tax than the gas tax ever was. It wouldn't come with the big brother connotations of tracking vehicles directly and could be used to finance public charging infrastructure at the same time.

The solution seems clear: a nationwide network of public chargers that charge EV users at cost plus a tax for maintaining infrastructure, including costs currently paid for by gas taxes and the overhead for rollout. States could also experiment with initiatives such as making the kilowatt-hours tax responsive to income, potentially ameliorating the regression inherent in these regimes.

However, if Abbott's tax targets EVs to offset wear and tear on roads and bridges that can be apportioned to them, then hybrid vehicles—which get substantially more miles per gallon than gasoline-powered cars—would reasonably need such an offset tax as well.

The cutoff of 10,000 pounds barely captures the truly titanic GMC Hummer EV SUV, which has a curb weight of more than 9,000 pounds. That additional weight and reduced stopping distance is obviously more impactful on transportation infrastructure. And yet, no distinction between vehicle curb or battery weights is made for purposes of the tax.

Gas-powered vehicles have a shadow infrastructure cost for every mile driven in the fuel they burn. Gas generally is trucked to gas stations using a tanker that rolls on—you guessed it—roads and bridges. Those vehicles pay their own taxes, fuel and otherwise, but impact infrastructure more than smaller passenger vehicles, and wouldn't be on the road but for the demands for the gas they’re transporting.

Let's do some back-of-the-envelope math with the initial $400 fee and $200 yearly renewal. Estimates vary, but the thought is an average EV battery will last about 200,000 miles and/or at least 10 years. Over 10 years, the initial fee in addition to the yearly renewal would come to $2,200. Assuming a driver did exactly 20,000 miles per year for 10 years, for a total of 200,000 miles, you’re coming in right around a penny per mile for the EV fee.

Texas’ gas tax is 20 cents per gallon, 15 cents of which goes toward the state's highway fund, and an average car gets 24 miles per gallon. For every 15 cents paid into the fund, Texas gas-powered car drivers are traveling on average 24.2 miles—or approximately 0.62 cents per mile. This means drivers of gas-powered cars, even before accounting for the shadow fuel delivery cost, now pay substantially less toward road maintenance than their electric counterparts under this new regime.

That said, if you imagine a future where all or most vehicles on the road are electric, and costs associated with their production have come down to levels equivalent or below their gas-powered counterparts, some sort of tax would need to be levied. The portion of state and federal gas taxes allocated for infrastructure maintenance would at that point be substantially diminished and need an offset. And as noted, EVs are disproportionately purchased by higher-income households, rendering the gas tax increasingly regressive.

Texas has it partially right—the state is just taxing the wrong thing, at the wrong time, with the wrong rate, and for the wrong reasons. Other than that, the EV tax is a great idea.

Look for Leahey's column on Bloomberg Tax, and follow him on Mastodon at @[email protected].

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