A vehicle fuel gauge shows a near-empty gas tank.
Gasoline and diesel taxes make up a big chunk of Ohio's transportation budget. Credit: Erik Mclean / Creative Commons

Ohio drivers’ switch to electric vehicles could leave a nearly $2 billion hole in the state’s annual transportation budget.

Gasoline and diesel taxes of nearly $2 billion per year make up a big chunk of Ohio’s $8.3 billion biennial transportation budget. They’re an important (though not exclusive) source of funding for roads, bridges, and other infrastructure projects.

The loss of that and other fossil fuel revenue will likely present big challenges for state and local budgets in the coming decades, according to a recent report on public finance implications from the clean energy transition.

Ohio is relatively fortunate compared to other states featured in a recent working paper from Resources for the Future, a nonprofit environmental and economics research group based in Washington, D.C. Wyoming, for example, depends on fossil fuels for 59% of its state and local tax revenue.

Still, most state road budgets will feel the impact as more drivers choose electric or more fuel-efficient vehicles. In Ohio, work is already underway within the state government to develop alternative funding approaches.

“Regardless of what happens with policy, the energy system is changing,” said Daniel Raimi, who heads up the Equity in the Energy Transition Initiative at Resources for the Future. “I think the need to address climate change means that the energy system will change more rapidly than it otherwise would.”

What the study says

Nationwide, revenues from coal, oil, and natural gas generated an average of $138 billion per year for states, local governments, tribes, and the federal government, Raimi and his colleagues reported in their Jan. 13 working paper. As they see it, planning for a just energy transition calls for planning to replace those revenues as they eventually dwindle.

Funding for the work came from the Environmental Defense Fund. Authors of the paper include researchers at Resources for the Future and the Environmental Defense Fund, as well as economics researcher Gilbert Metcalf at Tufts University and Emily Grubert, previously at the Georgia Institute of Technology and now at the Department of Energy’s Office of Carbon Management.

Excise taxes on petroleum provided the largest share — roughly $48 billion per year for states and $40 billion annually for the federal government, the team reported. Other amounts came from the extraction and initial processing of fossil fuels. Additional funds flowed from midstream refining and other consumption, aside from excise taxes.

Within Ohio, state and local governments collect roughly $2.5 billion per year in fossil fuel revenues, the researchers found. Nearly $2 billion of that comes from taxes on gasoline and diesel fuel, Raimi said. Severance taxes from the oil and gas industry provide another chunk of funds for the state. Smaller amounts go to local governments.

The pressure to prolong these tax revenues has largely “driven policymakers to pursue a ‘business as usual’ scenario and try to keep these traditional generation assets open,” said Gilbert Michaud, an assistant professor at Loyola University Chicago’s School of Environmental Sustainability, who did not work on the Resources for the Future report. “This has certainly been the case in Ohio, where regressive energy policies continue to be passed to bail out these polluting — but high tax revenue — assets while stifling the growth of the renewable energy industry.”

Yet “even under a ‘business as usual’ scenario, gasoline and diesel taxes are declining,” Raimi said. “And that’s a major challenge that needs to be addressed regardless of what happens with climate policy.”

ODOT looks ahead

“The current gas tax model is not sustainable for the long term,” said spokesperson Matt Bruning at the Ohio Department of Transportation.

With that in mind, ODOT has begun thinking about new ways to pay for infrastructure. A $2 million grant from the U.S. Federal Highway Administration will let the agency collect data for a large-scale outreach program on an alternative user-based revenue program. 

A road use charge, also known as a vehicle miles traveled fee, is one possibility. The concept involves charging drivers based on how many miles they travel. In theory, it could replace the current pay-at-the-pump taxes for gasoline and diesel car drivers, along with higher registration fees paid by owners of plug-in hybrids and all-electric cars. 

The 18-month study will “assess the public’s appetite for the various options,” with the goal of a fair and equitable funding structure for users of the state transportation system, Bruning said. Educational outreach would show why the existing funding mechanism isn’t sustainable over the long term and how an alternative revenue method would differ. ODOT also hopes to gain feedback on different options for such a method.

ODOT’s consultant, CDM Smith, has been under contract since early January. An external steering committee will be set up to provide feedback on the work’s progress, Bruning said. Some members will come from other state agencies, such as the Ohio Department of Public Safety and Ohio Department of Taxation. Representatives of local governments and various other stakeholders will be on the committee as well.

A vehicle miles traveled fee can be a more equitable way to collect needed infrastructure revenue than flat fees imposed on drivers of hybrid and all-electric vehicles, Raimi said. As of 2020, Ohio increased the annual vehicle registration fees for all-electric vehicles to $200, an amount that’s roughly three times the rate for gasoline-powered cars. The Citizens Utility Board of Ohio and others have criticized the fee as imposing a disproportionate burden on electric vehicle owners, while indirectly discouraging investment in the electric vehicle industry.

Work on the ODOT project began last month and is expected to wrap up by June 2023, Bruning said. “Not enough work has been done on the project to point to any indications of possible outcomes,” he added.

Diversification at the local level

Local revenues from fossil fuels are much smaller. Yet money from the oil and gas industry is significant for some areas in eastern and southeastern Ohio.

“The prudent thing to do for any government that’s looking at declining revenues is to think about how they can diversify their tax base,” Raimi said. 

One potential model is emerging in Ohio’s Mahoning Valley, home to a once thriving steel industry whose decline has left local communities searching for alternatives.

“Our community was once Steel Valley, and now we’ve got to focus on being the Voltage Valley,” Mayor Jamael Tito Brown of Youngstown said during Reimagine Appalachia’s 2022 strategy summit on Jan. 12. 

Voltage Valley refers to efforts to develop manufacturing for electric vehicles and batteries. Those efforts could get a boost from a forthcoming bill to stimulate Ohio’s electric vehicle industry, announced by state Sen. Michael Rulli, R-Salem, on Feb. 16. Brown said he also hopes Youngstown will attract advanced manufacturing, 3D printing and renewable energy. 

Farther south, in Appalachia, Athens Mayor Steve Patterson hopes his region will attract advanced energy manufacturing, particularly for wind turbines and solar energy generation. With a new Intel plant bringing an estimated 3,000 jobs to the state, he also wants Ohio to develop more manufacturing for the computer industry’s supply chain. Innovation and pollution cleanup also can help diversify local economies, he noted.

“People who live in Southeast Ohio are pretty resourceful in how we go about doing things, given the hand we’ve been dealt and given the boom and bust of the extractive industries,” Patterson said. The area suffered as the state’s coal mining industry declined over the last few decades.

To the extent any areas of the state aren’t yet working to diversify their economies, they should start doing so to ensure jobs and tax revenues, Michaud said. “The energy transition is continuing to unfold, and accelerates more rapidly every year.”

Kathi is the author of 25 books and more than 600 articles, and writes often on science and policy issues. In addition to her journalism career, Kathi is an alumna of Harvard Law School and has spent 15 years practicing law. She is a member of the Society of Environmental Journalists and the National Association of Science Writers. Kathi covers the state of Ohio.