Sunday, June 30, 2013

The Prius Tax -- Seriously??

North Carolina is currently considering levying a tax on hybrid and electric cars.  Virginia and Washington already have similar taxes, and more states may follow.

The idea is that the owners of hybrid and electric cars consume less gas, and end up paying less in gas taxes than their neighbors.  So, to recoup the missing taxes, North Carolina would like to tax an extra $50 a year on hybrids and $100 a year on electric cars.

As a Prius owner, I am surprised at this idea of a misplaced tax.  Why create a disincentive to drive a fuel-efficient car?  Stephen Colbert had the following to say (starting at around time 2:20) ...

As a concerned citizen, I resolved to write a letter to my local representatives.  Here is the letter that I sent ...

Dear <representative>:

As you work to finalize the 2013-2015 state budget, I hope you would seriously reconsider removing and keeping out the “Prius tax” … that is the proposed annual $50 registration tax for hybrid cars and $100 for electric cars.  I believe this is an unfair tax – one that penalizes rather than one that makes things “fair.”

I understand the underlying concept behind the proposed tax.  The idea is that owners of fuel-efficient cars consume less gallons of gas and pay less in total gas taxes each year.  But at the same time, they drive the same number of miles as other drivers, and cause the same wear-and-tear on the roads.  So, the less efficient car owners end up subsidizing the owners of more efficient cars.  The idea is to make things “fair” by charging an extra flat fee on hybrid and electric car owners.

Let’s do some quick math.  Assume a car travels 10,000 miles a year.  A hybrid gets an average of 45 MPG, and a conventional car gets 25 MPG.  The hybrid owner uses 222 gallons during the year and pays (around 37 cents a gallon) $82 in taxes.  The conventional car uses 400 gallons and pays $148 in taxes.  At first this doesn’t seem fair, as the conventional car owner is paying $66 more in taxes than the hybrid car owner.

To make things fair (according to the idea behind the proposed Prius Tax), the hybrid owner pays an extra $50, so as to bring him up to $132 for the year … much closer to what the lower-gas-mileage car owner paid.  And then everyone would be paying their “fair share.”

However, there are some other factors to consider – the sum of which demonstrates how the Prius Tax would shift an unfair burden of taxes and punish a consumer for trying to save money through obtaining higher fuel efficiency.

Incentives Against Fuel Efficiency
When I first heard of the “Prius Tax,” my first gut reaction was, “Why in the world would my elected representatives institute a disincentive against fuel efficiency?  Why would they reward the gas hogs?”

During a time when Republicans and Democrats alike are promoting fuel efficiency, it’s a surprise that anyone would consider any disincentive such as the Prius Tax.  A consumer considering whether to buy a hybrid/electric car vs. a conventional engine car may choose to buy the conventional car to avoid paying an extra annual tax.  This would slow down the sales of hybrids/electrics and would increase fuel consumption and our reliance on foreign oil.  This situation would be against the urgings of both President Obama and former President Bush.

Similarly, because of the recent economic downturn, many families have “hunkered down” and have become more efficient in their general spending.  They have given up eating out and have learned to cook their own food.  They have given up buying luxury items.  They now make existing items last longer.  These families end up paying less in sales taxes, thus being subsidized by the other families who haven’t cut spending.

Would it then be correct to reward our frugal families with a “frugal tax” so as to get them to pay their “fair share” of the sales taxes?  It should be clear that the answer should be no.  If the family were charged an extra tax, then perhaps they would have been better off not being frugal … thus an incentive is created to be wasteful.

If one can see the ill-placed incentives and/or harmfulness of levying a “frugal tax” then hopefully one can also see the similar ill-placed incentives and harmfulness in levying a “Prius Tax.”

Most hybrids (and some electric cars) are purchased by middle class families hoping to save money in the long run through paying less in gas consumption, while at the same time doing their own part to help conserve gas and cut down on pollution.  Is this the constituency you really want to hit with an extra punitive tax?

Hybrid and Electric Car Owners Pay More in Other Taxes
Additionally, while hybrid/electric car owners pay less in gas taxes annually, they pay more in other taxes, which helps make up most of the difference.

Hybrids and electric cars cost more to make.  A consumer considering to buy a car will find that hybrids cost on average around $3,500 more than a comparable conventional engine car.  The premium for an electric car is much higher … around $15,000.

When cars are first registered, North Carolina charges a one-time Highway Use Tax of 3%.  The hybrid owner pays an extra $105 more than a conventional car owner.  The electric car owner pays an extra $450 … most of which goes into improving North Carolina roads.  Assuming a person owns a car for ten years, this would translate into a $10 annual tax on hybrids and $45 for electric car owners.

North Carolina residents also pay annual property taxes to their local city and county governments.  These moneys go into local public services, including the upkeep of local non-state roads.  (And it so happens that most drivers drive most of their miles on non-state roads.)  With an average rate of 1%, the hybrid owner will pay an extra $35 a year in property taxes, and the electric car owner will pay an extra $150 a year.

Electric car owners pay a further tax on the extra electricity they use in charging their cars.

Revisiting the original scenario, the conventional car owner still pays $148 taxes a year in gas taxes.  However, the hybrid owner is now up to paying $127 in gas taxes (including the other additional taxes on the hybrid car premium).  The electric car owner is now paying $195 a year in additional taxes on the electric car premium (not even including taxes on the extra electricity they consume).  The hybrid owner’s total gas bill is now much closer to everyone else.  And the electric car owner is actually paying more.

If we were to add the Prius Tax, the hybrid owner would then pay $177 a year (more than the conventional car driver), and the electric car owner would be paying $295 a year, which is double of what the conventional car owner pays.

State Gas Taxes Cover More than Wear-and-Tear on the Roads
North Carolina has one of the highest state gas taxes in the nation.  As of 2012, North Carolina ranked 8th with around 37 cents.  This isn’t far behind New York, the 1st state, with around 50 cents.  It’s remarkably higher than Alaska, the last state, with around 8 cents.

The taxes are so high partly because funds from North Carolina’s gas taxes are allowed go to other expenditures other than those related to transportation.  For example, funds are allowed to transfer from the Highway Trust Fund and Highway Fund into the state’s General Fund.  Governor McCrory’s proposed budget calls for the transfer of 6.63% of transportation funds into “Other State Agencies,” which is much more than the anticipated gain from the Prius Tax.

If funds are really lacking for the purposes of repairing wear and tear, then in my opinion, the North Carolina legislature should first disallow transfers from the transportation funds before they even consider asking for the Prius Tax.

Incidentally, Governor McCrory’s proposed budget does not include a Prius Tax, and even goes so far as to say one goal is for “no new taxes” (on page xvi “Highlights of the 2013-15 Budget”).

Not All Cars Are Created Equal
Finally, please consider these last considerations.

Hybrids and electric cars are not the only fuel-efficient cars on the road.  There are several conventional-engine and diesel cars that have higher MPG ratings than do some hybrids.  For example, the diesel engine 2013 Volkswagen Passat averages 37 MPG, while the hybrid engine 2013 Lexus LS 600h averages only 21 MPG.

Without the Prius Tax, the hybrid Lexus is “subsidizing” the Passat.  Would it be fair to levy a $50 tax on the Lexus who is already paying more in gas taxes than the Passat?

If anything, North Carolina should consider using the car’s MPG rating in deciding whether to levy this new tax (rather than based on whether or not it’s a hybrid).

And if paying the fair share of “wear and tear” is really an issue, then the Prius Tax fails to recognize the extra damage caused by trucks.  These huge 18-wheeled vehicles cause much more damage to our roads in proportion to the gas taxes the drivers pay.  If we were to continue the logic behind the Prius Tax, then we would also need to levy a Truck Tax, so as to make sure everyone pays their “fair share.”

With all these factors under consideration, I hope you can see how unfair and misplaced the Prius Tax is.  It would unfairly target a specific type of car that may or may not have better fuel economy than the average conventional car, while ignoring eighteen-wheelers, which cause much more damage to the roads.  The tax would primarily hurt middle class families who are trying to conserve fuel and save money in the long run.  It would create an incentive against buying fuel-efficient cars.  And it already is fuel for comedians, as evidenced by Stephen Colbert when he recently said, “I think North Carolina should go after all freeloader transportation that uses public roads but doesn’t pay into the system. Pedestrians should be hit with a walking tax. Bicyclists should be hit with a bicycle tax.”

Alternatives to the Prius Tax
There are several alternatives to the Prius Tax that would help North Carolina receive the funds it needs while also matching taxes more fairly with expenditures.

#1) Increase gas taxes: This would be easier to levy while maintaining proper incentives for everyone to not use as much gas.

#2) Repeal the gas tax entirely and levy a higher flat registration fee on all vehicles equally.  That is, if the legislature believes $100 is a fair tax to levy on electric cars that use no gas at all, then it should be equally fair to not charge anyone gas taxes and instead increase everyone’s annual registration fee by $100.

#3) Instead of being repealed, the gas tax could be reduced, and a flat extra registration fee levied on all vehicles.  This would maintain some income still coming from out of state.

#4) Increase the Highway Use Tax for everyone … after all, isn’t that what the tax is created for?

#5) Replace the gas tax with a miles-driven tax for every vehicle.  There are several ways to determine/estimate miles driven in a year.

#6) Tax tires more.  The use of tires is somewhat proportional to miles driven.

#7) Increase other taxes so that funds going to “Other State Agencies” would come from the appropriate taxing vehicles instead of from the transportation funds.

Thank you for taking the time to consider my concerns.  I wish you luck in settling the budget as soon as possible, but I also hope that you will do so while considering what is the most fair.  Please do not institute the Prius Tax.

Mel Windham