Will electric vehicles face tax increases?

As the share of electric vehicles sold and used increases, governments around the world may be forced to consider new tax measures to make up for the shortfall caused by the decline in the number of heavily taxed ICE vehicles.

We spoke to Pete Kelly, an analyst at LMC Automotive (a GlobalData company), about this emerging tax issue, with particular reference to the situation in the UK.

As governments set aggressive targets for phasing out fossil fuel engines, this is an important emerging fiscal black hole to manage, isn’t it?

Yes, it seems likely to become much more important. At the start of the expansion of the battery electric vehicle (BEV) market, this always seemed likely to become a problem, but it was something that governments could focus on later, once the market had reached a significant size. Obviously, with BEV sales taking off strongly in the UK and elsewhere, we have now reached this point and making decisions about it has become unavoidable.

Zero-rate annual circulation charges (in the UK, called Vehicle Excise Duty, or VED) for BEVs will become increasingly costly in terms of government revenue, even if they support the adoption of BEVs, it this is therefore probably the first action on this front.

In the case, for example, of the United Kingdom, where is the potential shortfall in tax revenue most acute? Is it in the fuel tax at the pump?

This year, VED is expected to bring in around £7 billion in tax revenue, which is no small amount. But by far the largest sum – at £28billion – comes from fuel taxes, mainly for petrol and diesel consumption. Stronger BEV adoption will affect both VED government revenue streams and fuel taxes. We estimate there will be 1.6-1.7 million BEVs on UK roads by 2025, when the government would seek to remove zero-rating of VEDs. This represents approximately 5% of the total vehicle fleet. And it will grow every year. Also, although some tax is paid on electricity, depending on where you charge it, it will generate less revenue than ICE vehicles. The tax impact is therefore only partially taken into account by the proposed modification of the VED.

It is also important to note that the UK is not the only country where certain incentives are likely to weaken or be removed. Norway is withdrawing from some of the world’s most generous incentives for electric vehicles, while Germany is dropping its plug-in hybrid incentive next year and will likely reduce support for BEVs as well. However, France and Germany seem to be sticking to the original BEV incentives, at least for now. The UK was among the first to remove its initial subsidy for a BEV purchase and, with an increase in annual fees, could again be an indicator of what others will follow.

What type of solutions can the tax authorities envisage to fill the gap in public revenues?

Road pricing is perhaps the fairest way to manage overall taxation for road users. In a way – and before working BEVs became a real proposition – the fuel tax fulfilled the role of taxing road use. The more kilometers you traveled on the road, and/or the more polluting your vehicle was, the more you paid. But the possibility of being less taxed when using a BEV is a strong incentive to switch, if the use case allows it. Road pricing also has the advantage of being able to incentivize off-peak travel, with a pricing mechanism to alleviate congestion, which fuel tax cannot.

Are technical problems or technologies an obstacle?

The likely technology for road pricing – an on-board black box surveillance system, which can log location and time – could be relatively easy to deploy quickly. Similar technology is being offered as a way to reduce car insurance premiums. But there may be a refusal to mandate such technology, especially for privacy reasons. In many countries, strong user protections would need to be built in, which could delay or even block such solutions.

If EV taxes go up, will some argue that such a move goes against encouraging greater adoption of EVs on the path to a zero-carbon economy?

There’s little doubt that in markets like vehicles, if you’re making something more expensive, unit sales will be lower than without that price increase. Of course, BEVs are already relatively expensive, and reducing one of the elements that made the total cost of ownership more favorable would slow the growth of BEV markets.

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