More EVs, Less Gas Tax Revenue Create State Transportation Budget Issues

This is part of a series of five articles examining key debates that will unfold in the nation’s statehouses in the year ahead.

Transportation funds in many states are running low, and the next few years will be critical to their future sustainability. Policymakers in some statehouses will have to act quickly because their funds face imminent deficits. Other states show longer-term funding gaps that will only grow if they are not addressed.

The problems have been percolating for some time. State decision-makers have long known that stagnant gas tax rates, inflation, and increased fuel efficiency are eroding gas tax revenue, the dominant funding source for their transportation funds. As the demands on roads increase from users who don’t pay gas taxes—including those with high-efficiency vehicles or bicycles—transportation funding models are diverging from their original “user pays” revenue strategies.

In recent years, the accelerated adoption of electric vehicles (EVs) and hybrid alternatives has made it painfully clear that states’ reliance on gas taxes is increasingly tenuous. Although EVs make up only 1.3% of current vehicle registrations nationwide, sales accelerated in 2023 and accounted for more than 9% of all vehicles sold that year. That’s up from around 2% in 2020.

State and federal incentives to drive up EV ownership have played a direct role in this trend, but they also create a confounding situation: What’s good for the environment and states’ emission reduction goals is also harming states’ ability to keep transportation networks safe and functional.

“The legacy approach to funding our nation’s surface transportation infrastructure through a fuel tax will soon be far too insufficient,” warned a 2024 Syracuse University report commissioned by The Pew Charitable Trusts. “States across the country must quickly develop new transportation funding strategies, or we will face a significant national crisis.”

Although states have been chipping away at the problem for years—primarily through increased vehicle fees—the issue is reaching a critical point in some places. As these states seek more fiscally sustainable solutions to transportation funding, others will be watching closely.

Transportation budget deficits

In addition to addressing long-term sustainability problems, lawmakers in several states are working to resolve significant transportation budget deficits in the upcoming fiscal year.

For the second straight year, Maryland officials are navigating major transportation funding cuts—this time about $1.3 billion—to the state’s six-year, $20 billion plan. Washington state’s Transportation Department is anticipating multibillion-dollar budget shortfalls in the coming years. And Oregon’s Department of Transportation says it needs an additional $1.8 billion just to keep up with ongoing projects and maintenance in its next budget.

Dealing with immediate deficits can delay the more difficult but fiscally sustainable decisions required to stabilize these funds. For example, Maryland lawmakers last year approved car registration fee increases to partially make up for funding cuts.

But the state’s transportation secretary has warned that annual operating costs will continue to outpace revenue in the long term. “That has been a historical issue, a structural issue that we’ve had in the department for decades,” Paul Wiedefeld told reporters in the fall, adding that inflation and construction costs have exacerbated the situation.

In Oregon, the State Legislature’s Joint Committee on Transportation held a dozen hearings across the state in 2024 to gather input as lawmakers prepare to draft a new transportation funding package in 2025. State forecasts have repeatedly cited increased fuel efficiency as a key reason for declining gas tax revenue, and the most recent outlook projects annual revenue declines through 2033 for all but one year.

State Representative Susan McLain (D), who co-chairs the transportation committee, told Pew that the issue has reached a critical mass largely because of the state’s almost exclusive reliance on gas taxes and vehicle fees to raise money for transportation. Although policymakers added new funding streams in 2017 through a 0.1% employee payroll tax and a fee on new car purchases, Oregon has not implemented significant structural changes to its funding model.

“We are at the point where the gas tax has gone down so much, there’s a real need for urgency to ensure that our foundational funding for the state … and its infrastructure is sufficient, stable, and diversified,” McLain said in an interview. “We're not going to put it all in one basket again.”

Unsustainable revenue models

Elsewhere, gas tax revenue is already declining—or will soon—but has not yet led to immediate budget shortfalls. For example, New York’s budget office projects that gas tax revenue will start declining through 2027 after peaking in 2024. West Virginia’s gas tax revenue is expected to fall by as much as 20% through 2030.

In California, which has the nation’s highest rate of EV ownership and most aggressive zero-emissions policies, the numbers are more dramatic. A Legislative Analyst’s Office report predicts that annual transportation revenues will fall $4.4 billion, or 31%, over the next decade and notes that the state’s recent rule banning new gas-powered passenger car sales after 2035 will significantly accelerate the gas tax revenue decline.

The federal Highway Trust Fund, which provides grants to states and local governments for maintaining highways and roads, also faces challenges. Spending from the fund has long exceeded revenues. In fact, the Congressional Budget Office estimates that it could be depleted by 2028 if spending increases at the rate of inflation while taxes remain the same.

In the past, state lawmakers have responded to their transportation funding problems by increasing the gas tax or indexing it to inflation. New Jersey is raising its gas tax incrementally, starting with 2.6 cents per gallon in 2025, and it’s the latest of 34 states to do so since 2013. But as more consumers began purchasing EVs and not paying gas taxes, states have turned to increased registration fees as a way to recoup revenue.

These fixes, however, are largely temporary. For example, Michigan already charges additional EV registration fees, but a 2022 analysis found that the electric vehicle transition in Michigan cost the state $50 million in lost revenue from 2019 to 2021. If EVs reach 25% of new vehicle sales by 2030, the report said, the annual shortfall would rise to $95 million under current tax policies.

Although additional fees for EV owners were politically unpopular at first, 39 states have taken this approach as ownership climbs, potentially paving the way for more fiscally sustainable policies that capture revenue from electric vehicles. The incoming presidential administration’s statements about eliminating the federal incentive for EV purchases have introduced some uncertainty on future adoption rates. But the big picture for gas taxes remains unchanged.

“States are really getting to that point [where they are looking at] the use of the system because an EV still does drive on the roads and contributes to maintenance needs,” said Susan Howard, policy director for the American Association of State Highway and Transportation Officials. “So the thinking really has become, ‘We’ve got to capture something from these folks because we’re not getting anything on the gas tax revenue side.’”

Transportation experts point to other user-based funding substitutes for the gas tax such as charging drivers based on road user charges (RUC) or taxing kilowatt usage at public charging stations. At least 30 states are studying or piloting mileage-based charges in a limited capacity while four—Hawaii, Oregon, Utah, and Virginia—have enacted statewide programs that give all drivers the option to participate.

Diversifying transportation funding models while keeping a “user pays” system will test lawmakers’ ability to navigate the politics and fairness issues involving fees and taxes. While a mileage-based system effectively captures all users, some lawmakers worry about a disproportionate impact on rural and low-income drivers who tend to travel farther to meet their daily needs. In addition, RUC pilot programs don’t capture usage from out-of-state drivers.

Taxing public charging station transactions, a more recent policy development, does have the benefit of capturing pass-through drivers. Montana, for example, has low EV ownership, but its national parks draw millions of tourists every year. Since late 2023, the state has taxed use of public charging stations, and a working group is now reviewing potential amendments.

But for places with more EVs on the road year-round, the taxes capture only a slice of their usage because most owners charge their vehicles at home. Frank Jimenez, the author of California’s legislative report, said applying taxes only on public charging stations also has potential fairness issues. “The individuals that are using public charging more than home charging are generally renters or those who live in multifamily units,” he told Pew. “It’s something that the state could do, but there are definitely equity and implementation issues to consider.”

In Oregon, lawmakers could consider a slate of short-term funding fixes such as indexing the gas tax, charging additional fees that encompass all road users (such as bicycles and EVs), and even instituting a fee on deliveries. McLain said the committee is also dedicated to pursuing longer-term solutions, but those will require more coalition building and support from local governments and the public before moving forward. The funding options could include a permanent shift to a RUC system that takes ability to pay and other potential equity considerations into account as well as different types of road tolling for certain projects.

Looking ahead

The future of the gas tax isn’t just a transportation funding challenge; shortfalls in gas tax revenue and rising construction costs affect a state’s overall fiscal health. During prior recessionary periods, for example, lawmakers tapped transportation funds to help solve budget deficits—an option that may now be out of reach. On the other end of the spectrum, weak gas-tax revenue in Colorado has led policymakers to siphon more than $1 billion from the general fund over the past five years to pay for transportation projects.

Instead of juggling funds—and sometimes along with it—policymakers have juggled deadlines, postponing planned investments or limiting maintenance and repair to high-priority projects. But such delays are costly: In 2021, the total backlog for transportation repair and maintenance was an estimated $435 billion.

As the pace of EV adoption quickens and states’ efforts to reduce emissions test traditional funding models, more legislators will be forced to reconsider how to pay for a transportation network that is safe and efficient. This is no small thing overhauling a decades-old model takes years. Even so, facing the economic realities of a problem of this magnitude requires a level of political grit and stakeholder buy-in that tends to coalesce when time is running out.

For states with declining gas tax revenue and higher EV uptake, that deadline is fast approaching.

“We’ve known [the funding model is] broken—it’s been breaking all this time,” Annadiana Johnson, a disabilities advocate in Oregon, told state lawmakers in September as she described the impact that transportation funding shortfalls have had on accessible transportation. “Now it’s just dead. Please, let’s [make a move] and decide what we’re going to do next.”

Liz Farmer is an officer, Fatima Yousofi is a senior officer, and Mollie Mills is an officer with The Pew Charitable Trusts’ state fiscal policy project.