The Impact Of Decreasing Gas Tax Revenues On BEV Pure Plays Like Tesla

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Includes: TSLA
by: FundSpec.IO
Summary

More and more US states are looking to reduce their EV incentives.

California is even looking to impose a special tax on BEVs as it tries to make up for the revenue lost from its gasoline taxes.

What impact does this have on BEV pure plays like Tesla?

CNBC recently ran a story talking about how how some states are starting to reduce EV incentives and instead imposing special taxes on electric vehicles. We all knew something like this was coming, it is just a bit of a surprise that it is happening so soon. According to a recent report from Greentech Media, there are now 13 states that charge fees for electric vehicles. What a lot of readers may find surprising is that this list of states now includes California which arguably has some of the highest incentives for alternative fuel vehicles and is even looking to expand its program to support electric vehicle adoption. In this article, I will go over some of the driving forces behind this issue and how it can impact BEV pure plays like Tesla.

The Problem
The problem is this - while the states would like to provide incentives to promote adoption of clean energy solutions, they also need to face the reality of managing their budget. The State of California is probably one of the leading examples of this problem since it typically has the highest adoption of fuel efficient/alternative fuel vehicles. According to the LA Times, the state currently faces a $130 Billion backlog of repairs to state highways, bridges and local streets.


"California has not approved an increase in the base excise tax on gas for 23 years, according to Brian Kelly, secretary of the California State Transportation Agency. As a result, the state faces a $130-billion backlog of repairs to state highways and bridges and local streets." - LA Times

California Vehicle Fees Source: LA Times

CA Gasoline Taxes Source: http://www.sandiegouniontribune.com/business/energy-green/sd-fi-california-gastax-20170413-story.html

What is the State doing to make up for this shortfall? Apart from increasing the gasoline tax, the state is also looking to enforce an annual vehicle "fee" as well as special fees for electric vehicles that avoid paying the gasoline taxes. There are a few reasons why we have ended up in this situation

  • The decrease in gasoline prices over the past few years has meant the state is collecting less in sales taxes on every gallon sold.

California Fuel Revenue Source: Gasoline Excise Tax Media Resource

  • The average fuel economy of vehicles sold in the US has seen a significant improvement over most of the past decade as the below graph from research at University of Michigan tracking monthly numbers shows.

Average MPG Source: U-M Weblogin

  • Despite the record number of new car sales over the past few years, the average age of light cars and trucks in the US was 11.6 years as of 2016 according to IHS Markit. Even if this metric remains constant over the next half decade, the overall efficiency of the US fleet will be meaningfully higher. Add to this the jump in efficiency expected as Hybrids and PHEVs become more popular. The new Toyota Camry apparently gets 53 miles to the gallon. Imagine how this picture will look like when these cars start getting handed over to their second/third owners.

Clearly this is not a problem that is going away nor is it unique to the state of California. If anything this is only set to get worse over the next decade.

The incentives

Last year, I was looking for a new car to buy for a coast to coast road trip I was planning with my wife across the US and Canada. I would have normally chosen a "fun" car like the Golf GTI but I always wanted to try one with an electric drive train and started looking at BEVs. I quickly ruled out pure BEVs like Tesla because it would put too much of a restriction on how I wanted to plan the trip. I finally settled on the Chevy Volt where not only did I get the $7500 Federal tax credit, but I was also able to claim the maximum $3000 rebate on BEVs offered by the Connecticut CHEAPR program. That is quite a discount on a car where I did not have to make any compromises. To top it off, with the 53 miles of all electric range, I almost never use the gas motor in my day to day driving. In the end, not only did the state give me a massive rebate on the cost of the car, but the revenue it collects from gasoline taxes from me dropped like a rock as well.

Clearly this is not sustainable, nor is it fair. If the states continue to rely on gasoline taxes to support the road infrastructure, as more and more people upgrade their cars and start getting better gas mileage, the poorer among us still driving older cars and trucks will be stuck bearing the burden. Every state will soon start to try to find alternate sources of revenue, whether it be based on miles driven or some form of a special tax for electric vehicles.

The impact on purchase decisions

So why is this important? If you are buying shares of Tesla (TSLA) at anywhere close to today's price, you expect them to sell millions of cars over the next few years (For now, let's forget about the profitability question and the reality that their margins don't really give the true impact of what will happen when they scale up). Clearly this is not possible with their premium priced Model S and Model X which are targeted at a much smaller market. What you are relying on is their "affordable" Model 3 and other future vehicles costing similar/lesser to drive the demand.

There are a couple of things to consider here. The Model 3 can be considered affordable only when you factor in the significant government incentives for BEVs along with the fuel savings and reduced maintenance costs buyers expect to realize from a BEV. Once the Federal incentives expire and the states start to not only wind down their own incentive programs but start charging additional taxes on BEVs to make up for the revenue lost from gasoline taxes, the Model 3 falls into more of a Midsize Luxury segment. Now as of last year, the entire Small/Midsize Luxury segment sold a little over 800,000 vehicles across all manufactures and models in the US. This is way too small a market to try to make up on volume sales. Sure, Tesla will be able to pull some demand from more price conscious customers who want to own a BEV. In can be argued they have done something similar with the low end Model S sedans where it looks like they have convinced a lot of people who would normally not pay much more than $35-40K on a new car to take the leap. However to be able to sell vehicles in the hundreds of thousands to a few millions, they have to be able to make an argument on value to the price conscious consumer.

Luxury Car Sales 2016 Source: Small And Midsize Luxury Car Sales In America - December 2016 & 2016 Year End

If you think things will fare better outside the US, think again. According to Tax Foundation the average gas tax rate among the 34 advanced economies is $2.62 per gallon. If anything, this will be an even more dire situation in other countries and may play out earlier outside the US.

Conclusion

States will soon need to find an alternate source of revenue to the gasoline tax to maintain the country's road infrastructure. As this plays out, the current climate of incentives for BEVs will soon morph to special taxes targeting the very same BEVs. This will be particularly negative to BEV pure play companies like Tesla who will have a harder time convincing the value conscious segment to buy into their product. Will battery and manufacturing costs for BEVs eventually come down low enough to make them competitive with a low end ICE vehicle? Yes, very likely. But that will take some time. While manufactures of hybrids and PHEVs have a strategy for the interim, a pure play like Tesla is running out of options.

Disclosure: I am/we are short TSLA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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