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How Autonomous Vehicles Could Affect State Budgets

Driverless cars and trucks have many benefits, but widespread adoption could shrink vehicle-related revenue streams for states

Cameras, an essential part of a self-driving car, are mounted on a model that was featured last year at CES, the world’s largest annual consumer technology trade show. Autonomous vehicles on the road would affect not only driver safety, mobility, and traffic, but also the fiscal functioning of states that depend on revenue streams from vehicle-related taxes and fees.
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Autonomous vehicles have the potential to do more than change the way we reach a destination or deliver goods. Vehicles that partially or entirely replace human drivers could change state economies as well. New research for The Pew Charitable Trusts shows that even moderate use of AVs could affect the fiscal outlook of states that collect substantial taxes and fees from cars and trucks through a range of revenue streams that would diminish.

Although there is no consensus on how quickly driverless vehicles will be a common sight on the road or on their potential long-term market share, more than 80 companies are testing AVs across 36 states and the District of Columbia. According to the U.S. Department of Transportation, the widespread introduction of AVs could increase the productivity of workers, facilitate long-haul freight movement, and significantly improve road safety by reducing crashes caused by human error. Nevertheless, the prospect of extensive AV adoption raises other safety issues as well as concerns about cybersecurity, data privacy, and the impact on the economy.

States currently collect about 8 percent of their total revenues from vehicle-related taxes and fees on sales, licensing, registration, and fuel—a key source of funding for infrastructure maintenance and improvements. They also collectively receive billions more from a wide range of related economic activity, including car rentals, auto repairs, vehicle financing, parking, ride-sharing, and gas stations.

The research, conducted by William F. Fox, a professor at the University of Tennessee at Knoxville, and published by Pew, examines the effect of the adoption of AVs on tax revenue in California, New Hampshire, New York, Ohio, Tennessee, and Texas. The research focused only on transportation-related taxes and fees, assumed that AVs will be largely electric-powered, and modeled the direct fiscal changes using each state’s current tax structure. (Other considerations for states that were not directly modeled in this analysis include potential changes in employment in motor-vehicle-related industries such as trucking, taxi services, and auto manufacturing.)

The analysis assumes that AVs eventually replace person-driven vehicles entirely and examines five scenarios with different timeframes and the number of cars and trucks needed to meet total demand. The reduction of the number of vehicles would largely result from shared ownership and pooled travel. Assuming moderate rates of full adoption and vehicle reduction—a 30-year AV phase-in and a 40 percent drop in the number of vehicles on the road—implications for states varied widely and depend on a state’s revenue portfolio.

New research for The Pew Charitable Trusts shows that even moderate use of AVs could affect the fiscal outlook of states that collect substantial taxes and fees from cars and trucks through a range of revenue streams that would diminish.

For example, transportation-related revenues in Texas—which, of the six states studied, relies most heavily on vehicle-related revenues—would drop by nearly a third over a 15-year period, from 18.4 percent of total state revenue in 2025 to 12.7 percent in 2040.

Conversely, New York’s vehicle-related revenues are already less than 5 percent of total state revenue. Although vehicle-related revenues would drop by more than half in the Empire State, projected overall revenue would decline by a much smaller amount: from 4.6 percent in 2025 to 2.1 percent in 2040, the smallest fiscal impact among the six states. And because New Hampshire now collects the country’s lowest rate of state taxes as a percentage of personal income, its decline in vehicle-related revenue would be only 3.3 percent between 2025 and 2040.

Not all the effects of AV adoption on states and communities would be negative, of course. AVs can be expected to improve quality of life through greater mobility—for the elderly, people with disabilities, and children too young to drive, for example—and could result in decreased traffic accidents, enhanced productivity, and reduced emissions.

Yet the potential reduction in revenues, job losses in vehicle production and operations, and new investments needed to accommodate widescale adoption of AVs suggest that state policymakers should begin examining adjustments in tax policy. Some experts, for example, advise shifting to new taxes or fees on road use or vehicle miles traveled, rather than relying so heavily on revenue sources such as fuel taxes, to compensate for the potential loss of revenue needed to provide essential public services.

Twenty-nine states already permit AVs to be operated on their roads, and automakers, ride-sharing services, and technology companies are racing to bring self-driving cars to market. State policymakers will have an important role to play in the rollout of this new technology by developing policies that balance the needs of increasing mobility, ensuring safety, reducing traffic congestion, and preserving fiscal health.

Kil Huh leads Pew’s work on fiscal and economic policy. A version of this article first appeared in Governing on February 20, 2020.

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