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Decreased fuel tax revenue, an unintended consequence of increased fuel efficiency
25 April 2019
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
