Michigan’s fuel tax revenues are projected to begin a long-term decline due to improved vehicle fuel efficiency and the increasing use of electric vehicles. This is despite the recent increase in the fuel tax rate and the indexing of that rate to inflation that began in 2022.
Ed Regan, a long-time transportation analyst recently retired from CDM Smith, a global engineering and construction firm that works on transportation and public infrastructure projects, developed the projection of Michigan fuel consumption shown in Graphic 4. Regan modeled three forecast scenarios. The first is used as a reference and based on a 2021 Energy Information Administration estimate of future fuel economy. EIA projects increasing average fuel economy as older, less fuel-efficient vehicles are replaced with newer, more fuel-efficient ones between now and 2050. This projection is based on the Trump administration’s light vehicle fuel efficiency standards.
The second scenario assumes that the Obama-era fuel efficiency standards are restored by the Biden administration. These are more aggressive than those imposed by the Trump administration, so the impact on average fuel efficiency should be greater.
The third scenario assumes an increased use of electric vehicles over-and-above the Obama-era fuel efficiency standards. This scenario is adapted for U.S. conditions from Bloomberg New Energy Finance’s global projections. This assumes that electric vehicles grow so that they comprise nearly half of all vehicles on the road by 2050. In contrast, the EIA’s projection assumes only 8% of the vehicles on the road will be electric by then. The Bloomberg forecast is more in line with the stated goals of the Biden administration and most of the auto industry.
Finally, a baseline scenario is also calculated that assumes, counterfactually, that there would be no change in average fuel efficiency between now and 2050. This hypothetical case is presented only for purposes of comparison and calculation of net impacts. There is little likelihood that there will be no increases in fuel efficiency.
Graphic 4 also includes a projection of vehicle miles of travel for Michigan, in addition to the projected annual fuel consumption under the previously described scenarios. After several years of recovery from depressed travel levels in 2020 due to COVID-19, Michigan VMT is assumed to increase by less than 1% a year through 2050.
If there were no change in average mpg (the red line), annual fuel consumption would rise from five billion gallons now to about seven billion in 2050. Under the EIA reference case (the green line), annual fuel use remains largely unchanged between now and 2050, with only a slight increase in 2022 and 2023 as VMT recovers from the pandemic. This is consistent with EIA announcements related to their 2021 Annual Energy Outlook report, noting that the 2019 level of fuel sales would likely never again be achieved in the United States, at least not through 2050.
If the previous Obama-era fuel efficiency standards are restored (the orange line), annual fuel consumption falls from five billion gallons now to less than 4.5 billion gallons in 2050. If the adapted Bloomberg EV projection is accurate, and electric vehicles comprise 47% of vehicles on the road by 2050, fuel consumption falls to three billion gallons. If fuel consumption falls as in the initial three scenarios, fuel tax revenue will be constrained.
Graphic 4: Estimated Michigan Travel and Fuel Consumption
Michigan’s fuel tax rates are now adjusted annually based on inflation. The 2022 rate was increased by 3.3%, to $0.272 per gallon. Our projections for future years assume further inflationary adjustments of 3.1% in 2023, with annual increases then gradually declining to 2.1% per year by 2025. Annual inflation increases in 2026 and beyond are conservatively assumed to average 2% per year. Actual inflation has many ups and downs, but there is no way to simulate those in a 30-year projection. The long-term trend appears to be for modest annual inflation.
Graphic 5 applies these assumed fuel tax rates to the fuel sales shown in Graphic 4, taking into account both the projected growth in Michigan VMT and annual inflation adjustments. Hypothetically, if there were no change in average fuel efficiency, Michigan fuel tax revenue would increase from $1.3 billion now to about $3.3 billion in 2050. Under the EIA reference scenario, fuel tax revenue increases to only $2.4 billion. With restored Obama-era mpg standards, fuel tax revenue would be only $2.25 billion by 2050. Under the Bloomberg EV scenario, fuel tax revenue hardly grows at all between now and 2050.
The vertical arrows in Graphic 5 show the annual difference in fuel tax revenue under this scenario compared to if there were no change in fuel efficiency, at five-year intervals. Especially for the Bloomberg, high-EV projection, these are worst-case estimates compared with the hypothetical case of overall fuel efficiency remaining unchanged and no growth in EV market share. The actual difference in fuel tax revenue will fall somewhere within the range marked by these arrows. The arrows diverge rather quickly, likely due to the reinstatement of the more aggressive Obama-era CAFE standards.
Graphic 5: Estimated Michigan Fuel Tax Revenue Under Alternative Scenarios, 2020-2050
Regan’s calculations can be used to calculate how high the fuel tax rate would need to be to make up for the reduced revenue resulting from fuel efficiency improvements and EV growth. Given the indexing to inflation, Michigan’s fuel tax is projected to be $0.32 per gallon in 2030, $0.39 in 2040 and $0.48 in 2050. If policymakers wanted to prevent a decrease in road funding as a result of increased fuel efficiency and EV use, they would have to raise the fuel tax to $0.40 per gallon in 2030, $0.53 in 2040 and $0.68 in 2050, based on the EIA 2021 projection.
Under the scenario where Obama-era fuel economy standards are restored, the fuel tax would have to increase to $0.42 per gallon in 2030, $0.52 in 2040 and $0.73 in 2050. Under the scenario where electric vehicles comprise 47% of all cars on the road by 2050, the fuel tax would have to increase to $0.43 per gallon in 2030, $0.70 in 2040 and $1.08 in 2050.
Raising fuel tax rates that high would likely be difficult politically. In addition, it would leave electric vehicle drivers, by 2050 accounting for nearly 50% of VMT, not paying their share of the cost of maintaining Michigan’s roads. Attempting to remedy this, Michigan introduced an increased electric vehicle registration fee. Beginning in 2017, it established supplemental rates for four categories of EVs:
- Full-battery electric vehicles: $100 per year for light vehicles; $200 for heavy vehicles.
- Plug-in hybrid electric vehicles: $30 per year for light vehicles; $100 for heavy vehicles.
The rate is recomputed each year based on the new indexed fuel tax rates, with the full-battery rates increasing by $5.00 for each one cent increase in the fuel tax rate. The plug-in hybrid rate increased half as much, by $2.50. This resulted in an annual rate of $135 for light full-battery electrics and $47.50 for light plug-in hybrids in 2021. The rate will continue to increase in proportion to indexed fuel tax hikes in future years.
The program will likely generate $4-5 million in supplemental revenue in 2022, but this could increase rapidly over the next several decades if EV usage rapidly increases. Under the Bloomberg scenario, electric vehicles in Michigan are estimated to reach almost one million by 2035 and almost four million by 2050. If these levels of EV penetration are reached, revenue from the annual fee could exceed $150 million by 2035, reach almost $500 million by 2040 and top $900 million by 2050.
While the supplemental EV fee is well-designed, its revenues will only partly offset the impact on fuel tax revenue from fuel efficiency gains and increased EV use. The $900 million from EV fees in 2050 amounts to slightly less than half the total difference in projected fuel tax revenue if policymakers aim to hold road funding harmless from declining fuel sales.
Equally important, the EV fee structure does not reflect actual vehicle miles traveled. If EV drivers use the roads more, the registration fees they pay, even with indexed increases, are unlikely to keep pace with the corresponding wear that these vehicles cause Michigan roads. This is further removed from the basic users pay/users benefit principle of the fuel tax — the more a vehicle travels, the more it pays toward the cost of the roadway system.
 “Electric Vehicle Outlook 2021” (Bloomberg New Energy Finance, 2021), https://perma.cc/4WTX-8BTC.
 “Annual Energy Outlook 2021” (U.S. Energy Information Administration, Feb. 3, 2021), https://perma.cc/MVQ4-8VGA.
 MCL § 257.801(7)-(8).