Beatrice Lang
Electric vehicles (EVs) are growing in popularity, but they present a problem for governments that have long relied on fuel taxes as a source of income. With no tailpipe emissions, EVs are better for the environment, but they also contribute to a loss of revenue for governments, which has led to the introduction of new taxes and fees for EV owners. These vary from state to state and country to country, and in some cases, they are higher than what drivers of equivalent gas-powered vehicles pay, which could discourage people from making the switch to EVs. However, there are also tax credits available for some EV buyers, and the shift to EVs could be an opportunity to make car tax more equitable.
How are Electric Vehicles Taxed?
| Characteristics | Values |
|---|---|
| Electric vehicles (EVs) don't pay gas taxes | Gas taxes are used to fund road construction, maintenance, and repair |
| States are facing funding gaps due to lost gas tax revenue from EVs | 33 states have laws requiring additional registration fees or other revenue mechanisms for EVs |
| EV fees should be calculated to replace gas tax as closely as possible | EV fees can be based on average mileage, vehicle weight, or a "use tax" based on the number of miles driven |
| Governments could lose billions in fuel tax revenue from the shift to EVs | Governments may need to find new ways to tax EVs, such as through road user fees or vehicle excise duty (VED) |
| EV tax credits are available in some countries | In the US, a federal tax credit of up to $7,500 is available for qualifying new and used EVs |
| Some states charge extra fees for EV ownership | Illinois, Michigan, Minnesota, Mississippi, Missouri, and other states have annual fees ranging from $75 to $250 |
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Electric vehicle tax credits
Electric vehicles (EVs) are taxed differently from conventional vehicles, which are taxed on fuel and vehicle excise duty (VED). Since EVs do not use fuel, governments are seeking alternative ways to tax these vehicles.
In the US, tax credits are available for those who purchase or lease an EV. The federal government offers a tax credit of up to $7,500 for new electric vehicles and up to $4,000 for used ones. To qualify for the full tax credit, certain requirements must be met, such as the final assembly of the vehicle occurring in North America, a cap on the manufacturer's suggested retail price, and income limits for the buyer. Additionally, tax credits of up to $1,000 are available for installing home charging equipment and energy storage solutions.
The process of claiming the tax credit can be facilitated by the dealership at the time of purchase. Alternatively, individuals can submit IRS Form 8936 when filing their taxes. It is important to note that leased vehicles have different considerations, with the tax credit typically going to the leasing company or automaker.
In the UK, the combination of VED and fuel tax contributes significantly to government revenue. As EVs become more prevalent, concerns have been raised about the potential loss of revenue for the government. However, this also presents an opportunity to reform car tax and make it more equitable, with drivers paying according to their usage.
Overall, as the popularity of EVs continues to grow, governments are faced with the challenge of balancing the need for taxation with the environmental benefits and consumer preferences for these vehicles.
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State-based fees
Electric vehicles (EVs) are taxed differently in different parts of the world. In the US, for example, it varies from state to state, not just in quantity but also in how it is calculated. California uses the current vehicle value, whereas New York State uses vehicle weight, and some states, such as Michigan, Minnesota, Mississippi, Missouri, and Nebraska, apply their own annual fees.
Many states have gasoline taxes to help pay for transportation projects, but EV owners do not contribute to these because EVs do not use gasoline. This has led to a funding gap, with states losing out on tax revenue. As a result, many states have developed funding gaps between gas tax revenues and available transportation funding. To address this, 33 states have laws requiring additional registration fees or other revenue collection mechanisms for EVs to offset lost gas tax revenue. However, these additional fees are often much higher than what a conventional vehicle would pay in gas taxes, which could discourage people from buying EVs.
Some states have proposed a "use tax" based on the number of miles a vehicle is driven, but privacy and fairness issues have prevented such programs from being implemented.
In the UK, the combination of vehicle excise duty (VED) and tax on fuel make up a significant proportion of government income. As EVs become more popular, the government will lose out on this revenue, and new forms of taxation will be required.
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Federal fuel tax revenue
However, the purchasing power of fixed-rate gas taxes has declined over time due to increasing fuel economy and improving vehicle efficiency. This has resulted in a funding gap for both state and federal governments, as they are collecting less revenue from fuel taxes. The shift towards electric vehicles (EVs) is also contributing to this decline in fuel tax revenue, as EV drivers do not pay gas taxes.
To address this funding gap, some states have proposed additional registration fees or increased costs for EVs to offset the lost gas tax revenue. However, these additional fees for EVs are often much higher than the gas taxes paid by conventional vehicles. As a result, there is a growing recognition that a new approach to vehicle taxation is needed, with a focus on fairness and equity, where drivers pay more directly according to their usage.
While there are challenges to taxing EVs in a similar way to fuel-powered vehicles, especially for those charging at home, the shift to electrification provides an opportunity to rethink how governments collect revenue from transportation.
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Gas tax
As the market share of electric vehicles (EVs) grows, the gas tax's ability to fund road projects and decrease traffic congestion is diminishing. This has created a fiscal gap for road expenditures, and states are now looking for ways to replace the lost gas tax revenue.
Some states have implemented higher registration fees for EVs, which can be much higher than the average driver pays in gas taxes. For example, Illinois initially proposed a $1,000 fee on EV owners, which was later reduced to $250, which is still $100 more than the average gas-powered car owner pays. Other states, like Oklahoma and Utah, have implemented electric vehicle charging taxes, while Georgia, Iowa, Kentucky, and Montana have imposed taxes on public EV charging stations.
Another approach to replacing the lost gas tax revenue is to tax EV drivers for the miles they drive, also known as a Vehicle Miles Traveled (VMT) tax. This would directly link the miles traveled to public road and infrastructure spending. However, there are privacy concerns with the administration of such a tax.
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Use tax
Electric vehicles (EVs) do not pay gas taxes, which have long been relied on to fund road construction, maintenance, and repair. This has resulted in a funding gap for governments as they are losing out on tax revenue.
To address this, states and governments are considering or implementing new ways to tax EVs. One option is to impose additional registration fees or other revenue collection mechanisms for EVs to offset lost gas tax revenue. These additional fees are often much higher than what a conventional vehicle would pay in gas taxes.
Another option is to implement a road usage or user fee for EVs, which would be calculated based on average mileage and vehicle weight to replace gas tax as closely as possible. This would ensure that EV drivers contribute to infrastructure costs in a fair and equitable manner.
In the US, there are also federal and state tax credits available for those who purchase or lease EVs, which can help offset the cost of the vehicle. These tax credits are offered to taxpayers who purchase qualifying electric vehicles, with certain requirements such as price caps and manufacturing guidelines.
In the UK, new electric and zero-emission vehicles registered on or after 1 April 2025 with a list price exceeding £40,000 will be subject to the standard rate plus an expensive car supplement for the first 5 years from the start of the second license.
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Frequently asked questions
Electric vehicles (EVs) are taxed differently in the US depending on the state. Some states charge an annual fee for owning an EV, while others have increased registration fees or other revenue collection mechanisms.
In the UK, electric vehicles are subject to vehicle excise duty (VED) and tax on fuel, which make up a significant portion of government income.
Yes, there are federal tax credits of up to $7,500 available for purchasing a new, qualified plug-in EV or fuel cell electric vehicle (FCV). There are also tax credits available for used EVs priced below $25,000.
Electric vehicles are taxed differently because they do not pay gas taxes, which have traditionally been used to fund road construction and maintenance. As more EVs take to the roads, governments are looking for new ways to tax these vehicles to make up for the loss in revenue.
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