Rise of electric vehicles raises tax concerns
All passenger cars and trucks sold in Canada must be emissions-free by 2035 (Dan Parsons)
Is there an EV in your garage? Probably not . . . yet.
In the first quarter of 2021, Canadian drivers registered 17,285 new electric vehicles (EVs)—either battery electrics or plug-in hybrids—accounting for a mere 4.6 per cent of all newly registered vehicles. If that seems small, just wait. It’s a statistic with an upside.
The federal government has declared that by 2035 100 per cent of passenger cars and trucks sold in Canada must be zero-emission. With the transportation sector accounting for a quarter of this country’s total greenhouse gas emissions, the sun is setting on the internal combustion engine. While this may be good news for the environment, it brings with it another policy dilemma. For, if the gas-powered car is on the way out, then so too is the gas tax.
The federal government collects nearly $6 billion per year in gas and diesel excise taxes, not including the GST or HST on those purchases. Add in provincial fuel taxes and over $16 billion in annual government revenue that will disappear once Canadian drivers are weaned off the gas pump. It’s enough to rip a large hole in public finances. “Governments are going to have to figure out how the heck they are going to make up for all that money,” observes Harry Kitchen, professor emeritus of economics at Trent University, in Peterborough, Ont. For a glimpse of what the future might hold, look south.
In Canada, some federal and provincial gas tax revenue is allocated to public transit or local infrastructure, but most goes into general revenue. In the U.S., however, federal and state gas taxes must be used exclusively for road construction and maintenance—with drivers essentially paying for the wear and tear they inflict on the road system whenever they fill up their tanks. This tight connection means the looming disappearance of gas taxes constitutes an existential crisis for American roads.
“Electric vehicles are not purchasing fuel, yet they are driving as many miles as other users,” says Michelle Godfrey, public information officer with the Oregon Department of Transportation. “Their impact on the road system is much more than their contribution to road maintenance. And that’s unfair.” Oregon is the early leader among U.S. states in figuring out how to replace the gas tax it will lose once EVs take over.
Currently, all EV owners in Oregon must pay an extra US$184 annual vehicle registration fee to make up for the gas taxes they aren’t paying. It’s a simple system, but Godfrey acknowledges it’s also unfair. Charging EV owners the same flat rate means those who drive a little are subsidizing those who drive a lot. “You should pay for what you use, the same as your electricity bill or other public utilities,” she says. The solution is OReGO.
Introduced in 2015, OReGO is the first fully operational road-usage charge system in the U.S. Drivers who join are billed 1.8 cents (US) per mile (approximately 1.4 cents Cdn per km) wherever they drive. The program is entirely voluntary, and open to drivers of both gas-powered and electric vehicles; participants can opt out from paying either the state gas tax or the extra EV registration fee. Mileage data is gleaned from a GPS device inserted in the car or via regular odometer readings.
The prospect of paying directly for every mile (or kilometre) driven is a revolutionary concept for most car owners. And one that raises some obvious concerns—chief among them, the fact government now appears to be tracking your every move. “Privacy is one of our top issues,” stresses Godfrey. To ease privacy concerns, OReGO participants can choose between a variety of private companies or the government to handle their mileage data and collect fees owing.
A GPS-enabled road-usage payment system such as OReGO is widely considered to be superior to flat EV fees. Besides being fairer, it’s also much more robust. In addition to tracking miles driven, the technology can incorporate congestion fees or road tolls, pro-rated fee sharing between jurisdictions and differential rates for rural and urban driving. Utah unveiled its own voluntary road usage charge in 2021 and is planning to make it mandatory for all drivers by 2031. Then, Utah will eliminate its gas tax forever.
Things are less advanced in Canada, but there’s good reason to believe the same factors at play in the U.S. will eventually make their way north. Saskatchewan, for example, recently became the first province to require that EV owners pay a new annual road-use fee of $150. Consider it the first step on a long journey toward universal road-usage charges. “If you want to generate taxes from the people who are using the roads, then you need an efficient mechanism,” says economist Kitchen. “Charging people by the kilometre fits that purpose. And the technology is already here.”
THINK GREEN
Read about why Canada needs a green economy and what Mark Carney, the United Nations special envoy for climate action and finance, thinks about the future of business. Plus, see what the key takeaways for CPAs are from this year’s COP26 conference.