Decreased fuel tax revenue, an unintended consequence of increased fuel efficiency

The current turmoil around Federal vs. State fuel economy legislation in the US has many industry observers holding their collective breath. Analysts at IHS Markit believe that changes to fuel economy legislation will not alone delay the advancement of technology including hybridization and electric vehicles. Based on our analysis, many manufacturers are expected to miss compliance of both current and proposed miles per gallon (MPG) requirements in 2021. What does this mean? Traditional powertrain technology (the internal combustion engine) will need to continue to evolve. This trend will result in smaller engines, an increased number of hybrid and electric vehicles, and the increasing use of fuel-saving technology such as turbochargers, cylinder deactivation, lightweighting, and start/stop applications.

The resulting steady improvement in fuel economy with each new model year will significantly increase the MPG of the overall vehicle fleet, resulting in a natural decline in demand for gasoline at a national and state level. The unintended consequence is that as the fuel efficiency of a state's vehicle fleet goes up, the possible fuel tax revenue collected goes down. The amount of revenue collected varies greatly by state and is based on two main factors: the vehicle population and the amount of fuel tax collected per gallon. States rely on motor vehicle fuel taxes to fund road, bridge and highway improvements, school programs and other projects.

A reduction in fuel consumed and therefore state tax revenues collected leaves a deficit that must be generated by alternative methods. There is no 'one size fits all' solution. IHS Markit is uniquely positioned to help local and state governments as they consider this issue and its local impact. Our fuel tax revenue forecast enables quantification of the deficit for each individual state. IHS Markit can also offer a variety of customizable scenarios including understanding what it means to embrace the ZEV mandate or the impact of states and/or cities banning the internal combustion engine. It's going to be an interesting few years as this situation plays out and the impact becomes more widely discussed.

This blog was prepared by Rachel Shue, Automotive Advisory Services, IHS Markit