Fixing A Bad Fuel Tax Through Digital

Fixed EV tax favours Amazon and Uber

Fixing A Bad Fuel Tax Through Digital

A fossil fuel-producing jurisdiction has decided to tax electric cars because they exist. What does this mean for the future of transportation?

Fuel Tax

Recently I posted an article about energy transition and four unanswered questions, one of which was how would governments replace taxes on gasoline at the pump in a world of electric cars. In some economies, gasoline tax is a reliable revenue generator for government, and is used to pay for road building, maintenance and upkeep. Electric cars don’t need gasoline, but still use the road system, leading to a free-rider effect—gasoline car owners will subsidise electric car owners’ use of a public good (the road system).

This past week I had an early answer to the question, from that center of advanced economic thinking, Saskatchewan.

The boffins at the provincial tax authority, taking note that, as more consumers buy electric cars, the flow of tax dollars from gasoline will erode over time, and decided to place an annual levy on electric cars of $150.

This seems like a laughably small amount, and frankly, given the costs of today’s electric vehicles and few electric vehicles in the fleet, it’s a tax on Saskatchewan’s greenies, nerds and the rich. Predictably, the local electric car lobby launched into a tone-deaf rant about their entitlement to charge up where ever. But eventually the tax will raise a lot of money. There are around 917,000 vehicles plying the monotonous roads of Canada’s flattest province, and they will all turn over during the next 20 years. At $150 each, the future electric fleet will generate $137.5m for the provincial coffers.

But is it enough for its intended purpose?

Of the 917,000 vehicles in Saskatchewan I reckon the majority are pickup trucks, which have notoriously lousy fuel economy. The IEA, in a study from 2017, reported Canada’s fleet as sporting the lowest fuel economy of any country in the world, at around 8.9 liters/100 km. There’s no reason to assume Saskatchewan is somehow better than this average, and very good reasons to believe it’s worse.

Assuming the fleet drives around 15000 km/year (a silly estimate since Saskatchewan is a big and sparsely populated place), those 917k vehicles drive 13.8 billion kms per year, and at 8.9l/100km (another silly estimate as trucks have much worse mileage), with a $0.15/l tax, drivers generate $183m in gasoline tax revenues.

It appears that $150/vehicle levy is too low to fully replace lost gasoline revenues, so electric car and truck owners should brace themselves for this amount to ramp up. But $150 is in the ball park ($200 would do), and as a policy matter, governments can easily tune it to suit their needs. I would also not be surprised to eventually see levies on other electrified transportation that uses roads (bikes, motor cycles, scooters, delivery vehicles, drones), and levies to appear on those assets that will become electric and represent lost tax revenues (off road vehicles, farm equipment, mining and forestry kit, yellow goods, boats, snow machines, etc).

Flat Tax vs Variable Tax

The wrinkle in this new tax model is that it replaces a consumption tax (you pay a little tax for every liter of fuel you use) with a flat tax (you pay in advance per vehicle you own). This might be fine in some instances, but there’s a risk of inadvertently introducing unintended consequences from policy choices.

I fear in this case that all kinds of perversions are about to be unleashed on the good people of Saskatchewan. Here’s just a few.

The government will gain a wind fall. By collecting $150/vehicle annually, the government will have a guaranteed revenue stream that is not sensitive to consumer behaviour. I might chose to drive less (as has happened in the pandemic) but the revenue take by the government will not go down. If I chose to drive less, I’ve still paid for my road miles in advance, which is pretty irritating, and unfair. Use it or lose it.

The state will become less economically sensitive because its revenues are based on private assets and not economic activity. Government revenues will show less volatility or uncertainty, and mandarins will be relieved of having to manage within the economic activity level of the province. This isn’t a good thing.

A flat rate per vehicle means high mileage cars win. The more you drive the lower the cost. From a road tax standpoint, this doesn’t make a lot of economic sense since more driving means more road wear and tear against a fixed income. Also, electric vehicles (and in particular trucks), are going to be heavier than gasoline vehicles because batteries are heavy and they don’t lighten when you drive, adding to road maintenance needs. Heavy vehicles are really hard on road surfaces, bridge decks, level crossings, and intersections.

Demand for ride sharing and taxi services will go up, because it will be much cheaper to run taxi services with a fixed annual levy and not a mileage-based levy. Taxi services based on electric cars are already growing because the maintenance costs of electric vehicles is already much lower than for comparable gasoline vehicles. A flat tax just reduced their costs hugely. A 100k km/year Uber in Regina just saved $1300 in gasoline tax by converting to electric and paying $150.

Home delivery services will benefit as delivery costs will fall. This isn’t good for retailers who are dependent on things like drive in traffic. Then again, property tax tends to be local to the community and not a provincial matter, so the impacts on retail may not be that material to the province. Did the province really intend to reward Amazon and hurt local businesses?

Private car ownership hence becomes less attractive since the costs of car hire, purchase delivery, and ride sharing will go down while the costs to own go up. Owning an electric car also requires an investment of $5000 to retrofit the garage or parking spot with a high voltage line for the car battery. Not sure I would want to own a car dealership under this model.

Fuel prices will have to rise. The costs to administer fuel tax collection at the pumps is fixed regardless of how much fuel is purchased because the fuel retailers are highly automated, but this admin technology and equipment still requires regular maintenance, the costs of which must be spread out over fewer gasoline car owners and less fuel revenue.

The tax policy has created an arbitrage opportunity between Saskatchewan and the adjacent provinces of Alberta and Manitoba, who do not have a similar tax. It will make economic sense to locate delivery assets just across the borders to avoid the ownership tax, and to reap the benefits of lower in province operating costs. Driving through the province and not being based there, just got cheaper. Was that the plan?

Finally, SaskPower was always poised to win in an electric car world, but this tax policy might make it very difficult for the provincial utility to plan for the future. It would have been far easier to anticipate today’s driving behaviour in an electric world without the potential of these perversions upsetting things.

A Digital Tax Solution

This tax policy is out of step with a fast-evolving future. It is data poor where it could be data rich. It is regressive when it could have been progressive. It leaves the province bereft of consumer insight, when it could have been used to harvest very valuable information about true road usage and road condition, for free. It leads to fewer cars driving a lot more for a lot less, and a revenue shortfall. It runs the risk of setting the province back on its agenda to be an investment destination.

Meanwhile, automakers are furiously trying to reinvent themselves for a digital world. Vehicles of all kinds are becoming connected, autonomous, shared and electric (or CASE for short). In other words, cars are quickly becoming more like smart phones on wheels and less like cars. It also means that they are becoming more flexible and amenable to software advancement than today’s clunky dumb metal cars.

Why not enrol the electric car owners of Saskatchewan in some trials of new technology deployments to create a usage based model to mimic the current fuel tax? Many of the building blocks for creating alternatives are in place:

  • Cloud computing provides the data storage and analytical horsepower.
  • Blockchain provides the mechanism for trusted record keeping.
  • Smart phones in the pockets of drivers and in car apps can capture the necessary data about usage.
  • Encryption technologies can hide the identity of drivers, routes and timing to keep hackers at bay and meet confidentiality rules.
  • Wireless networks cover much of the province, and certainly in the cities where electric car owners are likely congregated.
  • GPS technology can determine if the miles driven were on or off road, where they were driven, and where charging technology could be deployed.
  • Billing can be fully automated via Visa and PayPal.
  • Global communities, including MOBI, are keen to see these trials and possibly raise funds for them.

Electric car owners are already organised through their clubs, and are perhaps a bit more open to trying new things.

I’m sure the local digital ecosystem is well-placed to build out the solution trials and very keen to play a role in building it out. Such a system could eventually become an export revenue generator as this problem becomes apparent to other jurisdictions.

Conclusions

Electric car owners are right to call into question the thoughtfulness of this tax policy, but fossil fuel car owners shouldn’t cheer either, nor should car dealerships, land owners, and small retailers. The winners are Amazon and Uber, which is frankly a very odd tax policy.

***

Check out my book, ‘Bits, Bytes, and Barrels: The Digital Transformation of Oil and Gas’, available on Amazon and other on-line bookshops.

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email: 📧 geoff@geoffreycann.com
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