In his first week in office, President Joe Biden has made it clear that climate change is one of his top concerns, with plans to address issues like tailpipe emissions, fuel economy and the push for battery-electric vehicles on his agenda.
The new president’s call for rapid adoption of battery cars could complicate the challenges facing Pete Buttigieg, his nominee to become head of the U.S. Transportation Department, which the former South Bend, Indiana touched on during his confirmation hearing on Thursday.
The Federal Highway Fund is teetering on insolvency, according to the Congressional Budget Office (CBO), even as studies warn the nation’s highways and bridges are in increasingly poor condition. And, with federal gas taxes providing the vast majority of the fund’s revenues, there may be no other option but to increase those taxes, Buttigieg signaled — or find a complete new way to raise funding.
There is “a lot of work to do to improve the infrastructure in this country, a mission that will not only keep more people safe, but also grow our economy as we look to the future,” Buttigieg told a U.S. Senate panel, adding, “We need to look at any responsible, viable revenue mechanism we can all agree on” to replenish highway fund coffers.
This could mean moving away from charging motorists by the gallon and focusing on per mile revenues, some transportation planners have suggested.
Experts in and out of government widely acknowledge the need to increase funding for infrastructure projects, especially as the federal highway program’s funding has been drawn down. But any efforts to raise the gas tax – frozen at 18.4 cents since 1993 – have been met with resistance.
Just to keep up with inflation, however, that figure would have needed to jump to around 48 cents per gallon by now. Several other factors complicate the situation:
- The typical vehicle sold in 1993 got about 21 miles per gallon, while the number jumped to 25.7 mpg last year, lowering tax revenue on a per mile basis;
- And, after years of growth, the number of miles motorists have been driving has been leveling off and, in 2020, plunged sharply due to the coronavirus pandemic;
- Then there’s the issue of electrified vehicles. Hybrids, like the Toyota Prius, use significantly less gas than conventional vehicles, plug-in vehicles even less, further reducing tax revenues. And battery-electric vehicles contribute nothing at all to the Federal Highway Fund.
The situation appears to be growing more dire and some of the reasons may be beyond anything the White House or Congress could address. The rise in the number of Americans working and shopping from home soared due to COVID-19 and is expected to mean significant changes in driving patterns, even after the pandemic ends.
President Biden, meanwhile, has signaled he will address a number of climate-related moves made under former President Donald Trump. He signed an Executive Order committing the U.S. to rejoin the Paris Agreement on his first day in office and another prompting federal agencies to “consider revising vehicle fuel economic and emissions standards.”
It’s not clear whether the new Commander-in-Chief will simply negate that rollback or implement something different after the review. Few observers anticipate Biden will accept the Trump formula which called for a 1.5% annual mileage increase compared to the original 5% target set during the Obama administration.
What seems certain is that the new president will take steps to foster “accelerating deployment” of electric vehicles, as his climate change proposal recommended, especially plug-based models. Among the plan’s specifics, Biden called for having 500,000 charging stations in place across the U.S., about 20 times as many as are now available, according to Department of Energy statistics.
There is also the possibility that the one-year extension of tax credits for installing home chargers could be extended, as happened under Trump as part of the pandemic stimulus package.
New tax incentives for EVs have also been discussed. Buyers today qualify for up to $7,500 in tax credits – but those phase out when an automaker hits a sales threshold – as already has happened for several manufacturers, including Tesla and General Motors. Some EV backers want the credits reinstated for all brands and even increased.
Electrified vehicles have so far had only minimal impact on revenues as sales remain modest – about 6% of total U.S. vehicles sold in 2020 used some form of battery assist, with 2% all-electric. But that is widely expected to accelerate, a new study by ABI Research anticipating rapid growth to be triggered by the rollout of products like the Ford Mustang Mach-E, Volkswagen ID.4, Tesla Cybertruck and GMC Hummer this year. IHS Markit estimates pure battery models accounting for a 6% share by 2023 and 11.28% by 2029.
At that point, the impact on tax revenues could be substantial. Already, a handful of states have begun searching for ways to make up lost gas taxes, Oregon, South Carolina, Utah and Tennessee among those enacting unique fees on BEVs and, in some cases, plug-in hybrids.
Whether the Biden administration would want to send mixed signals, adding new fees for electric vehicles even while incentivizing sales, is uncertain. But the need to come up with new highway fund revenue is clear, as the CBO warned last year that outlays from the fund will exceed its reserves by a cumulative total of $134 billion by 2030. And that’s just for the highway account, the mass transit account expected to go $54 billion into the red.
Even so, raising gas taxes caused massive problems for then-President George Bush nearly three decades ago and is still seen as something of a third-rail issue. During Buttigieg’s confirmation hearing, Utah’s Republican Senator Mike Lee urged the nominee not to raise taxes.
For his part, the nominee suggested on Thursday that there are “different models” for addressing the highway fund shortfall which, “In the short to medium term … could include revisiting the gas tax, adjusting it and or connecting it to inflation.”
There could be another option, however, Buttigieg signaled, adding that as “vehicles become more efficient and we pursue electrification, sooner or later there will be questions about whether the gas tax can be effective at all.”
One possible alternative is already in use, to a degree, by the insurance industry. A survey by Nationwide Insurance released last month found 10% of American motorists have opted for usage-based programs that factor both in both driving behavior and the number of miles driven by tapping into a vehicle’s onboard diagnostics system.
A number of states have been exploring such a system to replace their own gas taxes, California running a pilot program. A study by the Mineta Transportation Institute appears to indicate potential public support, finding 49% of respondents indicating they support the idea of a flat mileage fee to a gas tax.
Such an approach would be far more fair than charging by the gallon, backers contend, and would be less regressive as wealthy drivers tend to own newer, more efficient vehicles than the poor.
Whether there will be any changes to the revenue stream for the Federal Highway Fund is uncertain. The White House and Congress have punted year after year since watching the backlash to the Bush increase nearly three decades ago.
But today, the fund is being depleted rapidly, even as the nation’s infrastructure is in increasingly bad shape. Cars continue to get more efficient and EVs currently contributing nothing to the fund are set to become more commonplace.
As the topic of discussion at the Buttigieg nomination hearings indicated, it may be impossible to sit out the debate any longer.