Tom Heintjes: Hello, and welcome to another episode of the Economy Matterspodcast. I'm Tom Heintjes, managing editor of the Atlanta Fed's digital magazine, Economy Matters. Today, we're sitting down with Julie Hotchkiss, a research economist and policy adviser at the Atlanta Fed, and we're going to discuss her recent research into the complex dynamic that exists among electric vehicles [EVs], the gasoline tax to build and maintain roads and bridges, and the unequal impact of that sort of taxation. She and her coauthor, Kalee Burns, have written a recent article in our Policy Hub series, and it's that research we're here to discuss today. So, without further ado, let's say hi to Julie Hotchkiss. Julie, thanks for being here today—it's great to have you back on the podcast.
Julie Hotchkiss: Thanks for inviting me, Tom. It's always good to chat with you about my research.
The Atlanta Fed's Julie Hotchkiss. Photo by Stephen Nowland
Heintjes: Julie, you would think EVs would be a good thing, with little downside. But as your research shows, that's not really the case, is it?
Hotchkiss: Well, thanks, Tom. The question sounds like you're setting me up for some hate mail. [laughter] But of course, it's not the fault of electric vehicles that policymakers have long relied on the gasoline tax to fund infrastructure maintenance. So, just to be clear: no judgment on EVs here.
Heintjes: None taken. But can you briefly describe the gas tax and what it pays for, and maybe what it doesn't pay for?
Hotchkiss: Well, it might not be a surprise to you, but both the state and federal governments put a tax on each gallon of gas that you buy at the pump. The federal gas tax is about 18 cents per gallon, which is what it's been since 1994—and state taxes also don't change very often. In 2021, they ranged from a low of 15 cents per gallon in Alaska to a high of about 67 cents in California. Georgians pay about 36 cents per gallon in state gasoline taxes.
Heintjes: So all of the money collected by the gas tax goes to roads and bridges and such?
Hotchkiss: Well, for the most part. Actually, the vast majority of the federal tax collected goes to pay for highways, road repair, and maintenance, but about 14 percent of it goes to a mass transit account. And in addition to the gasoline taxes, the federal government also taxes other forms of fuel, such as diesel and liquefied natural gas. Consumers of those two fuels pay about 24 cents a gallon.
Heintjes: Right. Well, Julie, to have this conversation, do we need to separate the national gasoline tax from the state-level fuel taxes, or do we not need to make that distinction? I don't want to get lost in the weeds from the very start of our conversation here.
Hotchkiss: Well, that's a good idea. But from the perspective of the consumer, there's really no distinction between federal and state-levied gas taxes. All you really see is what you pay at the pump. But the difference in state taxes is what explains a lot of the different gasoline prices that you see traveling between states.
Heintjes: You know, I suspect everyone who buys gasoline knows that they're paying a fuel tax of some sort. But are there other taxes in addition to the gasoline tax that we need to know about and talk about today? In other words, are there flat taxes that don't fluctuate with the cost of a gallon of gas? And why don't they change very often? Why not, for example, index the gas tax to inflation?
Hotchkiss: Let me take one of those questions at a time. To your first question: in addition to the gasoline tax, states also charge a variety of fees that are not related to gasoline. For example, the vehicle registration fee that you pay every year—by the way, I need to remember to renew mine—this contributes to the maintenance of roads. Fees from toll roads, or the fee that I pay to drive in the HOV lane, are additional fees going to the cause. Even though these fees add up quickly—I mean, $70 billion from the federal tax alone—they only make up an average of about 41 percent of all of the money that's needed to repair and maintain the roads. And if you haven't noticed lately, it's not nearly enough to fill all the potholes.
Heintjes: Now that you mention it...[laughter] As to my second question, why don't they change very often?
Hotchkiss: Well, you can probably answer this one, Tom, if you think a minute about how the average voter feels about increasing tax rates.
Heintjes: Oh, yes, absolutely—let's not go there. But, what about indexing it to inflation? That seems like an easy way politicians can sort of remove themselves from the decision to raise their constituents' taxes.
Hotchkiss: Yes, that's right. Indexing to inflation would be useful, as it takes the tax increase decision out of the hands of future legislatures. And actually, I've seen some states indexing some of the annual registration fees to inflation, but I haven't seen it applied to gasoline taxes. I can only think, maybe doing that would be more of a burden on gas stations, record keeping, or something.
Heintjes: Julie, you touched on this before, but what is it that these revenues go toward, specifically?
Hotchkiss: What the money is spent on depends on who ultimately has responsibility for the infrastructure. The federal government has jurisdiction over maintenance of the interstate highway system, whereas states are responsible for state highways. And local governments, which would be like your city or your county, pay to maintain the local roads.
Heintjes: We see virtually every carmaker introducing EVs and hybrids, with the goal of reducing air pollution—or, with the goal of making money while reducing air pollution, I guess I should say. But as your article makes clear, there's a set of unintended consequences: greater difficulty in paying for upkeep and construction of roads and bridges around the country.
Hotchkiss: You're absolutely right that all major car manufacturers, responding to growing demand, plan to have at least one electric vehicle in their fleet to offer to consumers by the end of 2024, and most are planning to be carbon neutral by 2035. So while electric vehicles still only make up 5 percent of cars sold in the US, this ramping up of electric vehicles will put a serious dent in gasoline sales—which, of course, is causing pain already being felt by policymakers.
Heintjes: Right. Julie, your Policy Hub article focuses on two solutions to lower gas tax revenues from fewer people purchasing gasoline. How does charging a lump sum differ from just raising the gasoline tax?
Hotchkiss: There are a few options that states are exploring to try to make up for this lost gasoline tax revenue. The goal that we have in this paper is to simply highlight how one specific alternative to raising the gasoline tax compares in terms of its regressivity. The alternative that we explore is called a lump-sum tax.
Heintjes: Let me stop you there. What do you mean by "regressivity" in this context?
Hotchkiss: Sorry about that. A tax is considered "regressive" if it represents a higher share of income for a poor family than for a rich family. And we know that a lump-sum tax is regressive—much like the sales tax on gasoline, which is also regressive. But we also illustrate in the paper that the way that the lump-sum tax is assessed also matters for where the greatest burden is felt by families at different income levels. For example, a lump-sum tax can be charged to families in equal shares, so everybody pays the same share, or it can be based on, say, miles driven or on family income, for example.
Heintjes: Would a lump-sum approach to infrastructure funding be roughly analogous to the way the UK government charges people a flat fee on each TV they own, so they can fund the BBC? So, if you buy an EV, you know you're going to pay this sum—and if you don't, you won't?
Hotchkiss: Yes, I hadn't really thought about it that way, Tom, but you're right—the BBC charging a flat fee to fund the operation of their public broadcasting is similar to one of the lump-sum alternatives that we explore: the one where each family who owns a car pays the same fee. This is like each family who owns a TV paying the same amount per TV. As we illustrate in the paper, this equal share lump-sum option is actually the most regressive option, placing the greatest burden on the poorer families.
Heintjes: I don't want to belabor the notion of lump sum, but it's an interesting thing to think about. Depending on how it's assessed, as you just said, it could even be more regressive than a per-gallon gasoline tax, couldn't it? And how can this be avoided, or at least minimized?
Hotchkiss: Well, let's go back a minute, Tom, and let me tell you about the other two options that we explore in terms of how to assess the lump-sum tax. Then I'll get to that question.
Heintjes: OK.
Hotchkiss: The second option that we explore is basically basing the lump-sum tax paid on an approximation of the number of miles that a family drives or uses the road—and this would be analogous to the BBC charging families based on how many programs they watch, or how many hours during the day they watch television. And then the third lump-sum option is based on income, as if the BBC just split their operating expenses across families, and they have richer families paying a larger share. And this, perhaps obviously, turns it into a progressive tax, with richer families paying more of the burden. And then I think you're asking about the regressivity—even if the lump-sum tax is better, that you can vary a lot in the degree of regressivity. And so that's true—the equal share, lump-sum option is highly regressive. So, if a poor family and a rich family pay the same amount of money to the government for some purpose, that money is a greater share of the poor family's income. And so, the big takeaway from our paper is that there exist all these alternatives to raising the gasoline tax or charging families an equal amount to raise revenue. We aren't suggesting that one is necessarily better than the other, but that policymakers have alternatives to just sticking with the status quo or something that they're more familiar with.
Heintjes: Well, as anyone who has shopped for cars can attest, EVs are currently on the pricey side, leaving those who can't or won't buy an EV to continue paying the gasoline excise tax. And people with lower incomes often have to drive farther to get to work, because intown housing is more expensive—which means they're paying even more. And in your article, you note that the gasoline tax is regressive, as we've discussed here—that is, it falls more heavily on those with lower incomes. I assume this has always been the case, but is its regressive nature laid more bare with the growth of EVs?
Hotchkiss: Well, you're right that there's really nothing special about the gasoline tax that makes it so regressive. All sales taxes are regressive. For example, let's say that a family in the lowest quintile of the income distribution in the US and a family in the highest quintile both spend $1,000, for example, per year on gasoline—or groceries, or clothing. That $1,000 represents nearly 7 percent of the annual income of someone in the lowest quintile of the income distribution in the US, but it accounts for only half of a percent of those in the highest quintile. But I do believe that the regressivity of the gasoline tax does warrant special attention. I think that it's fair to say that car travel is a basic necessity—especially in much of the US, where reliable, convenient public transportation just doesn't even exist. But with the emergence of electric vehicles, a segment of the population—those who are rich enough to do so—can avoid one of the major expenses of car travel: buying gasoline.
Now, I know I'm just rambling on here, but I want to come back to something you mentioned in your question that raises another important factor that increases the burden of the gasoline tax on poor families. Many lower-income families experience what's been referred to as "low job proximity"—which means they can often only afford housing farther away from where jobs are concentrated. So, it means they have to drive further and buy more gasoline just to get to work.
Heintjes: It's a great point. And Julie, as you noted earlier, EVs are a fairly small share of car sales these days, but they've already moved the needle in terms of the impact on the gas tax—and I guess we're also talking about hybrids, since although they use gas, they use less of it. This must also contribute to the situation you've researched.
Hotchkiss: Well, I agree, and the strongest indication that EVs and hybrids are moving the needle is the evolution of all of these alternative taxing schemes that states are coming up with in order to counteract the lost revenues from gasoline sales. So as a side note, as you mentioned the low percentage of sales, I want to point out that the US is actually behind most of the world in adopting electric vehicles. In 2021, EVs made up more than 15 percent of car sales in both Europe and China. So here, at 5 percent in the US, I think we've seen only just the tip of the iceberg.
Heintjes: Let's turn our attention to some road-funding strategies that are perhaps not as dependent on gasoline purchases. What sort of changes are governments considering? In general, not going through each state or anything like that. But I assume states are considering alternatives that are different from the federal government?
Hotchkiss: Absolutely, yes, and it's often the case that policy change at the federal level follows innovations that are taking place at the state level. And I found there's three primary ways states are getting back some revenues that electric vehicle owners are not paying at the pump. The first way, which seems to have been implemented in most states, according to the National Conference of State Legislatures, are additional flat fees charged each year for electric vehicles that someone owns. These fees are on the order of $100 to $200 per year. In fact, a colleague of mine was just complaining about this extra fee.
Heintjes: Would you call that regressive?
Hotchkiss: Yes, absolutely. Flat fees, flat taxes, are notoriously regressive. In other words, the additional $100 that a state might charge EV owners is a much larger share of income for a family at the low end of the income distribution than a family at the upper end. Now, the second most popular state policy is to charge drivers based on the weight of their vehicle. In most states, this is applied to both electric and gasoline-powered vehicles—and of course, charging by weight acknowledges that heavier vehicles do more damage to the roads. And since electric vehicles weigh more than a similarly sized gas-powered car, electric vehicle owners will pay a larger weight tax.
Heintjes: And what would the third policy option be?
Hotchkiss: Right. So the third option that I've seen is the one that's most novel. Some states are experimenting with charging road usage fees based on miles driven. As of fall 2022, all of the states that I could find that have this program allow drivers to sign up for that voluntarily.
Heintjes: You know, that idea—the idea of charging drivers based on the miles they drive—is certainly interesting. To get back to our BBC analogy: if the tax were based on the number of programs watched, I suspect some people would say they only watch one program—not many people, but surely some would.
Hotchkiss: Yes, not us. But anyway, yes—this road-usage or miles-driven option does pose some definite challenges. States who have these systems in place, as I mentioned, are all making them voluntary. People can opt into them rather than pay the higher fixed registration fee. But some states are having people report their mileage annually, and I believe that some states are toying with the idea of installing mileage monitors. Of course, this raises a whole other concern about privacy, because presumably if you know how many miles I'm driving, you know how often I stop at Starbucks to get a cup of coffee. And I haven't seen any statistics about how many people are opting into these programs, or how all these different revenue-raising schemes are doing to cover the needed infrastructure repairs, though.
Heintjes: Julie, before we continue this conversation, let's pause a second to listen to this important message from the Atlanta Fed.
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Heintjes: Welcome back to this episode of the Economy Matters podcast, where we're talking to Julie Hotchkiss about electric vehicles, the gas tax, and road maintenance. Julie, I guess we're seeing a situation where as EVs grow in popularity, fewer people pay the gasoline tax—so we'll have fewer people contributing to the maintenance of roads, and those people will tend to be those with lower incomes. But obviously, EVs drive on those same roads and bridges and put the same wear and tear on them.
Hotchkiss: Yes, and I think it's that realization of potentially declining gasoline sales that have led states to explore some of the alternative revenue-generating schemes that I mentioned before the break. And yet, not only are electric vehicles driving on the same roads, but because of their heavy batteries they also weigh more than an equivalently sized gasoline-powered car. The Ford Mustang Mach-E electric vehicle weighs 500 pounds more than a similarly sized Ford Edge, which is their gasoline-powered model. But even though the batteries are heavier, so far on average gasoline-powered vehicles—in the US, anyway—weigh slightly more than the average EV…only about 92 pounds more. But I think, really, it's only a matter of time until EVs as a whole overtake gas-powered cars as more full-size trucks and SUVs have electric versions available.
Heintjes: Well, this is kind of a tangent, but it came to mind as I was reading your article. During the pandemic shutdown, when many people weren't commuting to work, they were not taking as many discretionary road trips, etc., gasoline sales were down, and that would obviously do a number on gas tax collections. Are there data on the hit that road funding took during the pandemic, and what that impact might look like today after a lag?
Hotchkiss: Yes, that's a very interesting question, Tom, and thank you for giving me a heads up so I could look up some stats for you. But I found between 2015 and 2019, fuel tax revenues grew at an average of about 4 percent per year, but between 2019 and 2020, fuel tax revenues grew less than 1 percent. So there was growth during the pandemic in the amount of revenue received from gasoline taxes, but it was really only a fraction of what had been collected in the previous five years, And I'm afraid that 2020 is the latest year we have data for that. But I'll also point out two things. One, that the lower revenue during the pandemic clearly didn't improve the infrastructure maintenance issues we've been talking about. But as you know, there were also fewer cars on the road, so the roads were not likely deteriorating as quickly, either.
Heintjes: That's a good point. Julie, I don't want to make this conversation about you, but I have to ask: Do you own an EV? I ask this as the owner of two Priuses. I realize I buy a lot less gas than I used to, so I'm not contributing to filling those potholes either—at least, not like I used to.
Hotchkiss: No, I don't own an electric vehicle, but it is something that my husband and I have been talking about—and knowing even more now than I did before doing this research, I think I'm probably closer than I ever have been. But as more and more of my friends and family members have been purchasing electric vehicles, it occurred to me that this consumption trend would likely make lack of funding for pothole repair even worse before it got better. Also, I've done a number of other research projects looking at the implications for families at different income levels of the various tax reforms we've seen over the years, and this research just seemed like a natural extension to those earlier projects.
Heintjes: Julie, let me ask you—what takeaways would you like policymakers to come away with after reading your article? And by "policymakers," I guess I mean those who set up the funding strategies for roads, and not monetary policymakers, right?
Hotchkiss: Right, of course. The sort of policies we've been discussing fall into the purview of fiscal rather than monetary policy. But as an economist at the Atlanta Fed, I am concerned about how different fiscal policies also affect consumption decisions and expenditures of families at all income levels. I think the most important message from our research is that it's not enough just to think about where the money is coming from to fix the roads, but that policymakers also should think about the implications of how whatever policy they're considering is going to impact families at all income levels. And I guess what I would like to see is for policymakers to think about this problem of losing revenue from gasoline sales because of the increased EV adoption really as more of an opportunity rather than merely a problem. Changing technology is providing a great excuse to restructure the funding for infrastructure maintenance, to make the burden of raising the necessary revenues less for those at the lower end of the income distribution.
Heintjes: I hope I'm not putting you on the spot by asking you what you think the ideal solution or solutions would be—in other words, if you could just wave a magic wand, what would your approach be?
Hotchkiss: Well as an economist, I am obliged to ask how many hands I can use to answer this question.
Heintjes: I'm going to limit you to two hands.
Hotchkiss: Two hands—OK, fair enough. The answer depends on what the goal is, of course. If the goal is simply to raise enough revenue to pay for infrastructure maintenance, then I would suggest whatever method is least distortionary—in other words, which tax solution would generate the needed revenue at the lowest loss to consumer surplus.
Heintjes: OK, don't make me call the jargon police on you. What do you mean when you say "consumer surplus" in that context?
Hotchkiss: OK, sorry about that, again. "Consumer surplus" is the way we measure the happiness consumers get from purchasing a good. The higher the price, the less happy I am about buying something. So, a tax that raises the price means consumers get less consumer surplus from that purchase. And it's widely agreed among economists that consumers lose less surplus with a lump-sum tax than a sales tax. Again, this would be where we tell families how much each will contribute to raise the revenue needed to fix roads but would not be related to their purchase of gasoline, for example. The lump sum leaves consumers with the maximum amount of flexibility for each person to choose or make choices about how they will change their total budget in order to be able to pay for their share of the tax. Now, in contrast, the gas tax—or any other sales tax—distorts the price of one good relative to the others, which is likely to impact the decision to actually purchase that one good. In the extreme, behavior will change enough in response to the higher gas tax that less revenue than anticipated will be collected. This is an unintended consequence, and it does not happen with the lump-sum tax. If someone changes their consumption of gasoline in response to having to pay a lump-sum tax, it doesn't change how much revenue is raised to fill the potholes. If all we care about is raising revenue, then we're done. It doesn't matter how the government decides how much of the revenue you or I will pay as our lump sum.
Heintjes: But there might be considerations beyond merely raising revenue, right?
Hotchkiss: Absolutely, right. Maybe we want the burden, or loss of consumer surplus, of this lump-sum tax to be spread evenly across households. Our results suggest that a lump-sum tax based on a family's share of miles driven might be the most equitable. But if we're more interested in a structure that is the least regressive, then basing the lump-sum tax on income would be the answer. But to your question about what I would do if I had a magic wand, I think actually I'll leave something for the policymakers to do. However, I would just ask that they embrace this opportunity to reflect on how, again, whatever alternative to the gas tax they come up with impacts families at different income levels.
Heintjes: Right. And Julie, that sounds like a great note to end our conversation on, and I want to thank you so much for being on today and sharing your research insights with us.
Hotchkiss: Well, it was a pleasure, Tom, and I always enjoy these conversations with you.
Heintjes: And I should note that we have a link to Julie and Kalee's article on our website, and I encourage you to check it out. It's timely and it's interesting, and it's something we can all relate to as we drive around and dodge potholes. And that's all for this episode. I hope you'll check out the Atlanta Fed's Economy Matters magazine on our website at atlantafed.org, where we have lots of information about economics, the economy, banking and finance payments, and lots more. Thanks again for spending time with us today, and please come back next month for another episode.