Governments slap taxes on EVs as $110bn fuel duty shortfall looms

Global policymakers are imposing new taxes on electric vehicles as the shift away from combustion engines threatens to leave a $110bn hole in government revenues owing to a drop in receipts from fuel duties. 

The UK, New Zealand, Israel and the majority of US states are among jurisdictions introducing tax changes and charges on EVs and hybrid vehicles designed to raise funds and compensate for declines in petrol and diesel excise taxes. 

The measures are varied, running from registration fees to road usage charges based on mileage and taxes on public charging points. EV owners and green campaigners say they will slow society’s switch from gas-guzzling vehicles to lower-emissions alternatives.

“It is more like a penalty,” said Jeff Shoffner, who drives an electric Chevy Bolt in Tennessee, where annual fees doubled this year to $200. “I’m not averse to paying the extra fee, but I think it’s too high.”

The new levies come at a tricky time for electric vehicle adoption. While global sales are expected to reach record highs this year, declining profit margins and slower growth are leading automakers to pump the brakes on their electrification plans. 

Last week, Tesla chief executive Elon Musk shut down the group’s entire supercharger division, laying off hundreds of staff in response to falling revenues at the EV maker.

“A lot of these policies are not politically popular. It’s hard to raise taxes, but it is needed,” said Rachel Aland, transportation director at the American Council for an Energy-Efficient Economy, a Washington DC-based think-tank.

She said fuel tax collection has been falling for some time due to increasing fuel efficiency of internal combustion engine vehicles. The growing prevalence of EVs on the road is putting extra pressure on an important source of government revenues. 

By 2030 EVs are forecast to displace 6mn barrels a day of global oil consumption, according to the International Energy Agency. Demand in 2023 was 102mn b/d.

IEA data shows the shift to EVs displaced $10bn in revenues from petrol and diesel taxes globally last year, net of modest gains from new electricity tax revenue. The net loss is projected to rise to $110bn by 2035 if countries meet their electrification targets, robbing governments of vital funds that are often ringfenced to pay for road maintenance and transport improvements.

Europe, where countries tend to charge higher taxes on petrol and diesel compared with the US and China, made up 60 per cent of global revenue losses last year. While countries will claw back some funding in electricity taxes, the revenue is marginal compared with the loss in fuel taxes, the agency said.

As a growing number of governments set deadlines for the phaseout of combustion engine cars, policymakers are being forced to consider unpopular tax reforms.    

Last month New Zealand introduced road use charges based on distance travelled for EVs and plug-in hybrid vehicles for the first time, saying the policy was badly needed to raise revenues for road maintenance as fuel tax collections fell.  

Owners of light EVs face charges of NZ$76 ($46) per 1,000km, a fee in line with equivalent diesel-powered vehicles. Plug-in hybrid owners must pay NZ$38 per 1,000km, a lower charge because they already pay tax on fuel.

“This transition to road user charges is about fairness and equity. It will ensure that all road users are contributing to the upkeep and maintenance of our roads, irrespective of the type of vehicle they choose to drive,” said Simeon Brown, New Zealand’s transport minister, when justifying the policy change.   

The charges were slammed by EV lobby groups and green campaigners, which have warned they will slow uptake of non-polluting vehicles and result in plug-in hybrid EV drivers paying more than those driving standard cars. 

Israel tax authorities are proposing a similar travel usage charge for EVs, which is intended to come into force in 2026 to tackle congestion and the budget deficit, which has soared due to the war with Hamas. 

But many governments facing a similar drain on fuel tax revenues, such as the UK and Ireland, have so far baulked at introducing unpopular mileage-based road user charges for EVs. Instead, they have begun to phase out or reduce tax breaks for EV drivers to bolster tax collection.    

David Metz, honorary professor, Centre for Transport Studies, University College London, said road user charges were not really being talked about by the UK government because they were such a “hot topic” and there had been significant protests linked to previous attempts to raise fuel excise taxes.  

“All the politicians and civil servants feel it’s just too difficult at the moment,” he said.

But Metz added that a new system of road user charges was needed, not only to replace the “big chunk” of fuel tax revenues lost through the uptake of EVs but also to reduce road congestion and take polluting vehicles off the roads. He said congestion charges in Stockholm and London, which are levied using CCTV and automatic number plate recognition technology, provided a potential model that could be expanded.  

In the US at least 38 states have annual registration fees for EV and hybrid car owners, including some states that otherwise offer incentives to buy or charge EVs that extend beyond a $7,500 federal subsidy for eligible vehicles.

Last month New Jersey signed into law a $250 annual fee for EV drivers, requiring new buyers to pay four years’ worth of fees up front, totalling $1,000. The Democrat-led state separately offers up to $4,000 in tax credits to buy an EV, plus rebates for home-charging systems.

“It’s discouraging. We were glad to be at the forefront with incentives and adoption rates . . . This particular thing with the registration fees seems to go against that,” said Patrick McDevitt, a Tesla driver in New Jersey.

Corey Cantor, an electric vehicle analyst at BloombergNEF, said the annual registration fees had come at an early time in EV deployment and risked hampering their growth. 

“Any time you’re increasing that upfront cost of an EV, it will by definition be problematic for growth,” Cantor said, calling costs one of the main “barriers to adoption”. 

But slapping registration fees on EVs will not solve the challenges facing US states and federal authorities posed by dwindling petrol taxes. In February the Congressional Budget Office forecast the US Highway Trust Fund, a federal transportation fund financed by fuel taxes that pays for road and mass transit projects, would be insolvent by 2028 without policy reforms.