What happens when EVs replace ICE cars and gas taxes decline

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Canadians have been standing at filling stations for decades, so they’re probably not thinking too much about the taxes they pay on their gas or where that money goes, but that may change as more electric vehicles are sold.

Alberta this past spring slipped EV owners a bill for $200 — due every year on top of the standard registration fees — to account for the wear and tear on roads their cars cause. In doing so, it joined Saskatchewan and a number of jurisdictions in the United States that have imposed additional fees on EV drivers to compensate for the fact that they’re not paying taxes on gasoline.

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Alberta also said it’s because EVs are heavier on average, so they cause more wear and tear on roads.

The $200 annual fee is meant to offset the estimated fuel tax that EV drivers would have paid if they were filling up at the pump.

Such policies are generating a lot of discussion and raise a question for politicians: As more EVs roll away from dealerships, how will governments replace the revenue they once raised by taxing gasoline? 

Billions of dollars are at stake

There are a lot of taxes on gasoline. There’s the 10 cent per litre federal excise tax (four cents for diesel), the five per cent goods and services tax, the provincial harmonized sales tax, provincial fuel taxes, plus federal and provincial carbon levies.

It’s not clear exactly how much money is raised from all those taxes, but there are some estimates. For example, the federal excise tax raised about $4 billion in each of the past two years, according to a Department of Finance official.

Statistics Canada data shows that consumers have paid $2 billion on average per year between 2018 and 2022 in federal GST tax on gasoline and other fuels, as well as on some lubricants for tools and equipment for recreational vehicles. The provinces raised $2.4 billion on average per year during those years. But that does not include what businesses pay in GST and HST on gas and other fuels.

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Still, those taxes total $8.4 billion, but that doesn’t account for carbon levies and some other taxes.

Where does the money go?

Not all the money raised from taxing gasoline is spent on road maintenance and construction.

“You kind of have to look at the bigger picture,” Devin Arthur, director of government relations at the Electric Vehicle Society, a national consumer advocacy group, said. “The reality is that the revenue from gas taxes isn’t all put into road repairs.”

At the federal level and in many provinces, regardless of where taxes are collected, the taxes are deposited into a consolidated revenue fund to help pay for a range of programs, from health care to education to roads.

There are exceptions. Ontario earmarks two cents from its nine-cent flat tax to its Dedicated Gas Tax Fund for Public Transportation program. It is projected to distribute nearly $380 million this year to 102 municipalities.

Regardless, the federal, provincial and municipal governments, plus businesses spent a total of $14.6 billion on average on road construction each year between 2018 and 2022, according to Statistics Canada’s most recent data. That includes building new roads and resurfacing old ones, but it doesn’t include repairs such as filling potholes, so the actual dollar amount is even larger.

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A weighty issue

Some EV owners say it’s unfair to charge them extra fees as the average weight of vehicles has been increasing for years and heavy gas-powered auto owners aren’t being charged extra fees. Consider that a Tesla Model 3 weighs 3,872 pounds to 4,072 pounds, whereas a Ford F-150 weighs between 4,021 pounds and 5,740 pounds.

In some cases, it may come down to the weight of the driver and passengers on board, but so far, no one is calling for people to pay extra fees based on their personal size.

“EVs should, of course, pay their fair share because they are using the roads,” Arthur said. “One of the big concerns from EV drivers is that the price they’re paying is set arbitrarily.”

For example, he asked if it would be fair for the owner of a GMC Hummer EV to pay the same fee as the owner of a Nissan Leaf even though the former weighs far more. Similarly, an EV owner who drives less than the average amount each year may not deserve to pay the same as other drivers who are on the road more.

Drivers of internal combustion engine cars pay taxes in proportion to how much gas they use, not necessarily the distance they drive, which varies based on fuel efficiency.

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In the U.S., Utah has started a voluntary program for electric- and hybrid-vehicle owners to pay a flat 1.06 cents U.S. per mile driven, with a cap on fees depending on the vehicle type.

Some policy analysts have suggested that a system that charges drivers based on how much they drive could also be implemented in Canada.

Electricity is from Mars; gas is from Venus

Electric and internal combustion engine vehicles differ in many ways, including how they are used.

So far, the government has raised money by charging taxes at filling stations. But simply putting a tax on electricity may not work because not all electricity is used to recharge vehicle batteries, and not all EV drivers use public charging stations.

Although raising taxes on electricity to replace declining gas taxes may be possible, it might not be politically feasible.

“Raising taxes is generally not a way for our political decision-makers to become popular,” Luc Godbout and Michaël Robert-Angers at the Université de Sherbrooke said in a paper earlier this year.

They said fuel taxes have been declining relative to the size of the economy since 1981, and that the federal excise tax on fuel could be automatically indexed on an annual basis to inflation to stabilize this revenue stream.

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“Road maintenance and development is a major expense for provinces,” they said. “It is desirable that specific taxes be levied in line with the user-pay principle, if only to relay the price signal associated with road infrastructure maintenance and development to those who exert pressure to build roads.”

What to do about electric vehicles?

But that still doesn’t solve the question of how to make up for the impact on gas revenues as EVs increasingly make up a larger portion of the country’s overall fleet.

At the moment, EVs account for a small portion of the cars cruising Canadian roads. Just one of eight, or 12.5 per cent, of all new cars registered in Canada in the first three months of 2024 were EVs.

But the federal government wants 100 per cent of all new vehicles to be zero-emission vehicles by 2035, which means policymakers better get cracking on a solution on how to replace the revenue from taxing gasoline.

Charging EV owners a flat fee is one idea, but Arthur said he would prefer a fee-based system that considers the automobile’s weight or the distance driven. Either way, he said it’s not too early to start trying ideas.

“There is a lot of discussion about how we can put something like this in place to pay into a road tax without ‘penalizing’ people who drive EVs,” he said. “The sooner people grasp that this is something they need to pay into, the better.”

• Email: gfriedman@postmedia.com

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