Avalara Tax Changes 2022: Energy tax trends

Electric cars and hybrids have become status symbols in the suburbs of blue-tinged coastal states.

But if automakers are reading the market right, in the very near future we’ll start to see increasing numbers of electric pickup trucks across America’s heartland begin to displace the big gas- and diesel-powered machines that have long been the main form of transport for work and play in rural America.

All that is going to have significant near-term implications for government agencies that rely on gas tax revenues for funding — as well as the companies that are paying those taxes — says John Beaty, an oil industry veteran who is Avalara’s general manager for excise tax solutions.

“Every state relies heavily on motor fuel excise tax for revenues to run their state,” Beaty says. “The Departments of Revenue are going to have to figure out a way to offset the loss of revenue. They’re not going to be able to sustain their states if they don’t do that.”

For decades, the Consumer Electronics Show (CES) has been the place where tech companies unveil their newest gadgets and games and discuss their vision for a future where interconnected smart devices perform more of our mundane chores. (“Alexa, turn up the thermostat two degrees, add a dozen eggs to my shopping list, and set an oven timer for one hour.”)

But earlier this month, the keynote speaker at 2022’s CES was General Motors CEO Mary Barra, who announced that her company will launch an all-electric Chevrolet Silverado for 2024, along with an all-electric Chevy Equinox SUV, which will be out next year.

She was far from the only auto industry executive making announcements of that type at the show.

Ford, which already has an all-electric version of its best-selling F-150 on the market, announced that by 2023, it would double annual production of the pickups because buyers have placed reservations for almost 200,000 of them.

Also, global car conglomerate Stellantis announced it’s converting its entire Chrysler brand to electric power by 2028, starting with a new Chrysler Airflow crossover in 2025.

Aside from the Big Three U.S. automakers, global electronics giant Sony also announced it was forming a business unit that will focus on electric vehicles. And U.S. electric vehicle startup Fisker said it remains on track to launch its all-electric Ocean SUV later this year.

The takeaway from this seems clear: While there’s still debate in U.S. political circles about climate change and what to do about it, automakers have decided they need to take action now to produce lower-emission and zero-emission vehicles — perhaps driven by mandates in California, New York state and the European Union that call for ending sales of internal combustion-powered vehicles in both those major markets by 2035.

There are valid questions about whether American car buyers are ready for this. Survey data shows that a majority of Americans favor ending sales of carbon-powered vehicles by 2030, but at the same time, more than two-thirds of Americans aren’t ready to buy electric vehicles.

Most of us are still concerned about the range of electric vehicles, the surveys suggest. This is particularly true in the heartland, where charging stations are few and far between, making electric vehicle ownership less practical.

But once the ball starts rolling, the pace of technological change accelerates. We saw this at the dawn of the internal combustion age, Beaty notes, when gas-powered trucks quickly replaced horse-drawn wagons. We could potentially see something similar, if the new electric Silverados and F-150s catch on.

And that will likely complicate the already complex world of fuel excise taxes.

“Fuel is possibly the most complicated product for taxation in the world,” says Beaty.

Fuel taxes are levied at the federal level and state level. Many U.S. counties and cities tax fuel as well, and in some places, special-purpose districts add their own charges — often in the form of environmental fees. The taxes are levied at various points in the stream, from pipeline to gas pump, and those taxation points vary between jurisdictions. Some states levy fuel taxes by volume; others have fuel taxes set based on price.  

According to Beaty, it’s complex to track it all and stay in compliance.  

(And pity the poor convenience store operators who not only have fuel excise taxes to navigate, but all the varying sales tax requirements in each jurisdiction they operate in — including the arcane tax rules for defining and taxing candy and the different tax rates for food — plus excise taxes on cigarettes and vaping products, and all those varying state beer and wine regulations.)

According to the Urban Institute, state and local governments collect about $55 billion a year in excise taxes on fuel. That’s about 1.5 percent of all revenue they collect — a small proportion of governments’ overall revenues.

However, fuel taxes have an outsized impact on government services because they traditionally have been the funding source for transportation and infrastructure projects. While carbon-powered vehicles have become more fuel-efficient in recent decades — and increasing numbers of electric and hybrid vehicles have hit the roads — revenue coming in for road and transit projects hasn’t kept up with those projects’ increasing costs. This has created traffic problems that are very visible.

In response, states have experimented with new ways to tax gas and diesel. Maryland, in 2013, tied future gas tax increases to the consumer price index. Eight other states (plus Washington, D.C.) followed suit. Other states include different factors when setting tax rates: North Carolina, for example, uses population growth while Georgia includes fuel-efficiency standards in its calculations.

Some states took the legislatively easy but politically difficult way out by simply raising their tax-per-gallon rates — Indiana raised its gas tax 10 cents per gallon in 2017, for example.

Meanwhile, other states are seeking non-fuel-tax revenues to fund transportation. Toll roads, for example: Revenue from tolls grew 76% nationwide between 2008 and 2018, according to the Urban Institute. Separately, Oregon and Utah are trying out taxing the miles a resident drives each year, rather than the amount of fuel they purchase.

There’s also the perennial debate over raising the federal excise tax on fuel, which has sat at 18.4 cents per gallon for gasoline since 1993. (Adjusted for inflation, the original 1-cent-per-gallon federal gas tax Congress first imposed in June 1932 would be 20 cents today, according to the U.S. Bureau of Labor Statistics’ official CPI Inflation Calculator.)  

Last summer, the Biden administration stated the president does not favor raising the federal excise tax at the pump — to the dismay of some who see higher fuel taxes as a way to use market forces to discourage fossil fuel use. (The administration has proposed changes to federal tax rules for Big Oil companies, however.)

Which takes us back to electric vehicles.

If the survey data is right, even if two-thirds of us aren’t ready to buy electric or hybrid vehicles  — at least a quarter of us are. That represents more than 25 million U.S. households.

If even a fraction of those car buyers follow through, the next two or three years are going to bring increasing sales of new hybrid and electric cars, and a real reduction in the gallons of fuel sold at the pump. That’s particularly true if Ford and GM are right and middle American truck buyers start replacing their 12 mpg rigs with all-electric F-150s, Silverados, and SUVs in significant numbers.

If it all happens the way Detroit thinks it will, that will force the hand of policymakers in state capitals, who will have to come up with new ways to find revenue for under-funded roads, bridges, and transit projects — and do it within the next few legislative sessions. That certainly holds the potential for further complicating an already complex area of tax compliance for businesses.

We’ve taken an in-depth look at all the recent changes that matter to players in the energy sector — including the potential return of the Superfund and options for refueling the federal highway trust — in our Avalara Tax Changes 2022 report, which you can read here.

Cover photo by Canva