Vehicle miles traveled (VMT) taxes 101

Introduction: what are vehicle mileage traveled taxes?

Electric vehicles (EVs) and sustainable transportation modes are all the rage. In many ways, that’s a good thing. Still, this shift to environmentally-sound travel solutions has diminished the returns of most pre-existing taxation systems and sent shockwaves through federal and state-level governments in the United States. While the motor fuel tax[1] has served its purpose by prioritizing alternative fuels over petroleum and mitigating the negative impacts of pollution and traffic congestion, its relevance dwindles as fuel consumption declines. 

As per the infrastructure measure signed by President Biden in November 2021, the federal government is preparing to pilot a mileage-based tax, although the specifics of this program are yet to be unveiled.[2] The vehicle mileage traveled (VMT) tax proposes taxing drivers based on the miles they travel instead of their fuel consumption. This innovative approach collects mileage data and allocates taxes accordingly. Theoretically, the revenue generated from this tax would be directed toward improving the country’s roads. The timing for a new VMT is suitable, with the Fixing America’s Surface Transportation Act (FAST Act) having already expired in October of 2021.[3] 

The question arises about the efficacy of this type of tax: is it a pragmatic and equitable approach to infrastructure funding, or does it engender more challenges than it claims to solve? In this article, we look at the far-reaching implications VMTs have for the broader American populace.

Implementing VMT taxes

Implementing the vehicle mileage tax is complex and requires significant staffing and financial resources. However, considering its focus on infrastructure improvement, it is a more suitable approach for modern vehicles. There are two primary arguments for implementing VMT fees:

• Basic implementation: The rationale behind this approach is simple—the heavier the car, the more damage it causes to the roads, while wear and tear decrease with increased axles. However, the flat rate approach presents certain drawbacks. It would be challenging to levy taxes on individuals who travel across state lines, as they would cause damage to the roads of multiple states but only pay taxes in the state of their residence. 
• Complex implementation: A more layered approach involves detailed GPS tracking. Although this method would require additional resources, it offers greater efficiency. Residents of rural areas would bear higher tax burdens due to their more significant road damage and increased pollution, forcing them to evaluate the necessity of their travels. However, a complex approach risks becoming excessively convoluted for states and taxpayers, reducing transparency and hindering effective tax collection. The optimal solution may lie in striking a balance between these two approaches, although achieving such a compromise will be challenging. 

Examples of VMT taxation

• Oregon: Oregon’s OreGo pay-per-mile system has been lauded as a way to maintain road and bridge funding while gas-based taxation diminishes. The program, which aims to reduce greenhouse gas emissions, is still fully recouping fees to offset the reduction in gasoline taxes.[4] 
• Utah: In Utah, a voluntary program was launched in 2020, allowing EV drivers to pay per mile instead of a flat fee during annual registration. 
• Virginia: Virginia’s Department of Motor Vehicles introduced the Highway Use Fee to compensate for reduced fuel taxes from fuel-efficient and electric vehicles.
• Hawaii: Hawaii enacted mileage-based road usage legislation on July 1st, 2023. The state’s Senate Bill 1534 abolishes the $50 annual registration surcharge for electric vehicles (EVs). It introduces the option for owners to pay a registration surcharge or a per-mile road usage fee until June 2028. Those selecting the per-mile cost must provide odometer readings to the state.
• Texas: While a VMT has not yet been approved in Texas, an unexpected collaboration between Republicans and Democrats has put the prospect of a mileage tax in a positive light.[5] Additionally, a Texas House panel has put forward a truck tax pilot program that would impose tariffs on commercial trucks, with the generated revenue specifically catering to road repairs.[6] 

Challenges and concerns

• Privacy: Data security concerns become particularly significant if GPS tracking is incorporated into the system. Understandably, individuals may be reluctant to agree to constant vehicle location monitoring by the government. However, these concerns can be addressed. For example, the OReGo pilot program deletes collected data after 30 days. Limiting data collection to essential information could mitigate privacy and security risks. Alternatively, a private company could act as an intermediary, collecting GPS data and controlling the information transferred to the government.
• Environmental issues: Support is growing for mileage-based fees, special rates for low-income drivers, and rates linked to vehicle pollution levels. Policies should align with efforts to reduce carbon emissions and combat climate change. At the same time, environmental groups worry that the vehicle mileage tax might discourage fuel-efficient and electric vehicles, potentially favoring petroleum-powered cars. While the motor fuel tax effectively addressed ecological issues, the new tax system may exempt high-emission vehicles from taxes, allowing them to qualify for tax allowances.
• Shift to fuel-efficient vehicles: If the new tax system becomes official or the federal government devises a hybrid model, fuel-efficient cars would bear the brunt of increased taxes, potentially hindering public support for the proposed legislation.
• Higher expenses: Implementing the new tax would incur higher costs than the motor fuel tax. States would need to distribute specific hardware to vehicle owners for mileage tracking, while the federal government would have to monitor over 268 million vehicles—an extensive undertaking. Critics argue that such a tax could burden the trucking industry and clear the way for increased pricing on consumer goods.
• Mileage fraud: There is a potential for individuals to resort to mileage fraud as a means of reducing their tax burden, primarily if the government relies on data collected directly from vehicles. Verifying the accuracy of mileage data would be challenging, and tools for altering vehicle mileage are readily available. Odometer fraud is already a prevalent issue, and implementing the pay-per-mile tax system could exacerbate the problem.

While these concerns should not be disregarded, they should not deter the government from pursuing the new tax system. Instead, awareness of these issues should prompt appropriate measures and preparations.

How VMT fees may impact vehicle reimbursement programs

A VMT tax is unlikely to have a significant financial impact on individuals who receive reimbursement for business-related mileage using EVs. Given the cost differential between gasoline and electricity, EV owners may find themselves with little to no out-of-pocket expenses – they are already required to contribute to road funding through other means, such as registration fees. In other words, incorporating the mileage charge into professional vehicle reimbursement programs with many EV drivers ensures that they contribute equally to rebuilding the country’s infrastructure without breaking the bank.

When it comes to reimbursing for VMTs, how employees receive reimbursement depends on the mechanism by which VMTs are implemented in a given state. If VMTs are levied as part of vehicle registration fees, then this would be reimbursed by an employer, if they were offering a reimbursement program like FAVR. However, if a VMT is implemented like a highway toll, these are not covered by employer-run reimbursement programs. Therefore, employees would have to look into claiming these expenses themselves on their taxes, as an unreimbursed work-related expense. However these expenses get covered, the process should be very easy and straightforward. If you’re curious about reimbursement programs, you can call our sales team, and they’ll be happy to help. 

Conclusion 

As fuel tax revenues decline due to EVs and improved fuel efficiency, exploring alternative funding mechanisms like VMT fees becomes imperative for sustainable transportation funding. The timeline of VMT tax initiatives, political acceptance from diverse stakeholders, privacy considerations, and the demonstrated benefits all contribute to the growing viability of this approach. While adopting a new law in the United States remains uncertain, the federal government will likely introduce changes given the erosion of the current motor fuel tax. 

Compromises and sacrifices may be necessary to implement a more effective tax system that ensures the sustainable funding of roads and infrastructure. Ultimately, educating the public about the diminishing returns of gas taxes and the need for alternative funding methods is crucial. Establishing a new approach to funding transportation requires shifting perceptions and understanding the relationship between road usage and payment.

Sources

[1] Fuel taxes in the United States – Wikipedia

[2] Biden signs $1T infrastructure deal with bipartisan crowd | AP News

[3] The FAST Act Expires; the Department of Transportation Initiates Shutdown Procedures

[4] OReGO

[5] Republicans Join Democrats Pushing Mileage Tax for Texas Drivers

[6] Texas House panel advances truck tax pilot program pursuit

^{Disclaimer: Nothing in this blog post is legal, accounting, or insurance advice. Consult your lawyer, accountant, or insurance agent, and do not rely on the information contained herein for any business or personal financial or legal decision-making. While we strive to be as reliable as possible, we are neither lawyers nor accountants or agents. For several citations of IRS publications on which we base our blog content ideas, please always consult this article: https://www.cardata.co/blog/irs-rules-for-mileage-reimbursements. For Cardata’s terms of service, go here: https://www.cardata.co/terms.}