As Returns from Gas and Diesel Taxes Decline, States Look to Alternative Models

Photo of a one-hundred dollar bill sticking out of a fuel receptacle on a red car.

What are the alternatives to traditional state fuel taxes?

Nearly all of us regularly use and access public roads, infrastructure, or transit services. As you may have read in the July blog post, Feeling Pain at the Pump? Factors That Affect Fuel Prices, it’s common practice for federal, state, and local governments to tax motor fuels on a per gallon basis to fund transportation infrastructure and increase revenue. Returns from gasoline and diesel taxes are on the decline due to a number of factors, including rising construction costs, general inflation, and greater vehicle efficiency, which reduces fuel use per mile. To make up for this deficit, a number of states are evaluating and implementing alternatives to traditional motor fuel tax models through the use of vehicle miles traveled (VMT) fees, annual fees for vehicles that use certain fuels, such as electricity, or adjusting or establishing fuel taxes for certain alternative fuels.

VMT Fees

VMT fees are designed to charge drivers based on the number of miles they drive, rather than the fuel they consume. The concept seeks to base taxes on use rather than fuel consumption, which provides a fuel neutral approach and offsets decreasing revenue from increased vehicle efficiency. Concerns have, however, been raised over program administration and individual privacy. Several states, including Vermont and Oregon, have studied or implemented VMT fee pilot programs. In July of 2015, Oregon began a road usage charge program for 5,000 volunteers and is encouraging participation by plug-in electric vehicle (PEV) drivers. The Oregon Department of Transportation (ODOT) collects $0.015 per mile and issues gas tax refunds to participants. Vehicle miles will be monitored through a vehicle transponder.

Annual Fees

As alternative fuel use has grown, a number of states have established annual fees or decals to recover revenue that would have normally come from motor fuel taxes. These programs also provide a mechanism to collect revenue from those that charge or fuel at home and, in some cases, are used to incentivize alternative fuel vehicles (AFVs). Fees have traditionally been imposed on fuels such as natural gas and propane, but are now being considered and implemented for PEVs. Establishing the appropriate level for such fees can be tricky, as different vehicle classes use very different amounts of fuel. In addition, some AFVs, such as plug-in hybrid electric vehicles and bi-fuel natural gas vehicles, may already pay motor fuel taxes for their gasoline or diesel use. Examples of fees in place include:

  • Colorado requires a $50 annual fee for a PEV decal.
  • Georgia requires a $200 annual fee for non-commercial PEVs and $300 annual fee for commercial PEVs.
  • Louisiana requires an annual fee of $120 or a percentage of the current special fuels tax rate for compressed natural gas (CNG) and propane vehicles.
  • Nebraska requires a $75 annual fee for PEVs and other AFVs not covered under state motor fuel tax regulations.
  • North Carolina requires a $100 annual fee for all-electric vehicles.

Alternative Fuel Taxes

Many states have passed regulations to either tax certain alternative fuels for the first time or to structure motor fuel taxes to account for energy content variations between alternative fuels and gasoline or diesel. For example, Arkansas, Idaho, Kentucky, New Mexico, Oklahoma, Tennessee, and Utah are among the states that have enacted legislation or regulations in 2015 to define the energy content of CNG and liquefied natural gas on a gasoline gallon equivalent or diesel gallon equivalent basis. Wyoming updated regulations related to alternative fuel excise taxes and dealer license fees for natural gas, propane, electricity, and renewable diesel. Kentucky and Utah enacted excise tax requirements for hydrogen and South Dakota increased excise taxes for certain fuels, including ethanol. Look out for the September Question of the Month blog for further information on efforts to equalize federal fuel taxes across fuels.

Until motor fuel tax revenue shortfalls can be adequately addressed, states risk underfunding our roads and infrastructure. While no single approach has emerged as the preferred choice, creative solutions, such as those discussed above, may help states adequately adjust for continued sales of AFVs and other fuel-efficient vehicles. With the exception of VMT fees, these approaches, however, only address a small portion of the nation’s fleet and are not likely to resolve broader funding issues in the near-term.

Refer to the following Alternative Fuels Data Center websites for more information on alternatives to traditional state motor fuel taxes:

Also watch for an upcoming paper from the National Renewable Energy Laboratory on motor fuel excise taxes.