LAO Report: Declines in Gas Tax Revenue from EVs Will Reduce Transportation Funding
Climate initiatives could reduce the current $14.2 billion in state fuel tax and vehicle fee revenue by $4 billion over the next decade.
State initiatives to reduce greenhouse gas (GHGs) emissions from the transportation sector will reduce state transportation tax revenue by more than $4 billion, according to a December 2023 report from the Legislative Analyst’s Office (LAO). “[P]olicies aimed at increasing the adoption of [zero-emission vehicles (ZEVs)] will decrease the consumption of gasoline and diesel fuels, and consequently reduce the associated tax revenues that currently support the state’s transportation system,” the LAO wrote. This will reduce financial support for state and local transportation projects and activities and result in a decline in the state’s road conditions.
Reducing Transportation Emissions Reduces Tax Revenue
The California Air Resources Board’s (CARB) 2022 Scoping Plan emphasizes reducing GHG emissions from the transportation sector as a key factor for the state in meeting its overall climate goals. These emissions reductions plans included transitioning all new vehicle sales to ZEVs by 2035 for light‑duty vehicles and by 2040 for medium‑ and heavy‑duty vehicles and reducing vehicle miles traveled statewide.
LAO Revenue Projections
State fuel taxes and vehicle fees historically have accounted for roughly one‑third of total transportation funding, including $14.2 billion in 2023‑2024, according to the LAO. The revenue trends for the three key fuel taxes that support state transportation programs are projected to decline significantly under the Scoping Plan scenario. Compared to 2023‑24, by 2034‑2035, revenue from the state’s gasoline excise tax will decline by $5 billion or 64%, revenue from the diesel excise tax will decline by $290 million or 20%, and revenue from the diesel sales tax will decline by $420 million or 20%.
These declines are likely to be partially offset by projected $1 billion increase in revenues from an existing annual registration fee levied on battery‑electric and hydrogen fuel cell vehicles. On net, the LAO estimates that the transportation initiatives in the Scoping Plan will reduce annual transportation revenues by $4.4 billion, or 31 percent, from current levels over the next decade.
The LAO notes that total revenues would decline even under a baseline forecast due to ongoing increases in fuel efficiency and greater interest in ZEVs. The recently adopted and planned policies, however, will expedite these underlying trends significantly.
Without other funding sources, the projected revenue declines will result in state transportation programs having less capacity to support state and local transportation projects and activities. Funding for these programs is projected to drop by roughly $1.5 billion, or 26%, over the next decade, from $5.7 billion to $4.2 billion.
The LAO identifies several options for addressing the revenue declines by either increasing revenues to help partially or fully offset the projected loss of from existing fuel taxes or reducing the state’s existing support for transportation programs. Specific options could include: (1) increasing existing fuel taxes and vehicle fees, (2) shifting transportation costs to other fund sources, (3) reducing and reprioritizing spending for transportation programs, and (4) generating revenues from new transportation‑related charges.