Taxes and auto registration fees as an alternative to the California emission standard

Abstract: Congress has eliminated more stringent California (CA) emission standards covering CA and the thirteen states adopting the CA emission standard. The most rational response by states following the CA emission standard involves higher sales taxes and annual registration fees on higher emission vehicles.

Taxes and auto registration fees as an alternative to the California emission standard

The federal government has long allowed California to adopt more stringent emission standards. Federal law also allows states, which are not compliant with federal ambient air standards to adopt the CA emissions standards, and 13 states have adopted the CA standard.

Congress has rescinded three CA emission rules.

· The first rule mandate increases in the share of EVs for cars, pickup trucks and SUVS sold in state leading to a 100 percent EV share in 2035,

· The second rule mandates the phase out of the sale of the medium and heavy duty diesel trucks in the state of California

· The third rule rescission prevents California and states using the CA emission standards from adopting a more stringent procedure for testing for automobile emissions

Most of the discussion of the recently enacted legislation involves the decision in the Senate as to whether the vote to rescind the CA emission waivers should have been subject to the filibuster rule in the Senate. There have also been threats to litigate this change in court. These “inside-baseball” issues are useless from an economic perspective. They do not add insight into the economic merits of the CA rules, whether there are more effective policy levers to achieve the environmental objectives and what to do next now that the authority for CA to create its own environmental rules has been restricted.

At least one of the waived emission standards, the rule requiring 100 percent EV sales by 2035 is totally impractical. One state, deep blue Maryland, has already rescinded this mandate.

I don’t see any chance of California prevailing in Federal court on a lawsuit claiming Congress does not have the authority to regulate this inter-state issue. However, Congress has absolutely no authority to restrict state automobile taxes or annual automobile registration fees.

California and any state can reduce or even eliminate the sale and use of high-emission vehicles in the state by imposing sales taxes and annual fees on certain types of vehicles.

California and the 13 states could tax all gasoline powered vehicles, all diesel vehicles or base an emission tax on whatever emission test the legislature deemed appropriate. Congress does not control the ability of states to set sales taxes or annual fees on its residents.

The impact of the new taxes and new annual fees on the environment, the economy, and the auto industry depend on the details of the proposal.

A draconian tax or a draconian annual registration fee could eliminate all sales or use of certain vehicles. This was vividly demonstrated by the 145 percent tariff on exports from China.

A smaller tax or annual fee imposed on certain high-emission vehicles would discourage the purchase and continued use of the high emission vehicles. A regulation that set sales taxes or annual fees on gasoline cars twice as high as the tax or annual fee on an EV would lead to substantial growth of the sales of new EVs. A higher tax or annual fees on diesel vehicles than gasoline vehicles would deter the purchase and use of diesel vehicles.

Annual fees are more closely related to vehicle use than taxes imposed at the time of the vehicle sale. Sales taxes on new vehicles will discourage vehicle replacement and reduce improvements in emission improvements since most new vehicles are cleaner than older vehicles. A postive differential between the annual fee on high emission versus low emission vehicles would result in more rapid replacement of higher emission vehicles.

A third consideration involves the class of vehicle subject to higher taxes or annual fees. Higher taxes or annual fees on all gasoline powered vehicles would lead to rapid EV growth, which could strain the electric grid and lead to other forms of pollution. The imposition of a lower tax on hybrid ultra-low-emission vehicles, which use some gasoline facilitates the growth of a lower-cost environmentally friendly option.

There is another advantage of higher taxes and fees on vehicles which create pollution. The higher fees and taxes will increase tax revenue reducing state deficits and/or allowing state governments to reduce other state taxes.

Lawmakers in California and the thirteen states, which adopted the CA emission standards have choices. They could whine and complain and litigate the Congressional decision and ultimately lose their case in court. Alternatively, they could impose new taxes and annual fees, which would benefit both environment and economy of the state. My guess is the lawmakers will choose to whine and litigate, but I hope to be favorably surprised.