The unintended consequences of the Inflation Reduction Act
On Tuesday, President Biden signed into law the Inflation Reduction Act, marking one of his signature legislative victories and an important step in addressing climate change and American competitiveness in green-tech manufacturing. The day before his signing ceremony, I was in New Hampshire briefing elected officials about the possible implications of this and other rapidly enacted climate polices by both government and industry.
While I am a strong advocate for developing a new generation of sustainable technologies, organizational strategies and policies to achieve a net-zero carbon economy, I am concerned that the pace at which we are advancing policies to address climate change is not being matched by an effort to provide policy makers a better understanding of the hidden and unintended economic, social and environmental implications.
One such example is the transition taking place to rapidly move away from internal combustion gasoline and diesel vehicles to electric vehicles. This is being driven in part by states, led by California, adopting zero-emission vehicle standards for new car sales, as well as global automotive manufacturers such as GM transitioning toward electric vehicles exclusively by 2035.
While this transition will provide strong benefits, including domestic manufacturing and job creation, we must also understand the other side of the ledger: As the adoption rate of electric vehicles increases, so too do the potential losses in local and state revenues.
The most obvious impact will arise from a precipitous drop over time in gasoline purchased at our local gas stations. The national average of the combined federal and state gas tax is roughly 57 cents per gallon, the bulk of which is imposed by states and supports the maintenance of our roads and highways. The revenue also funds environmental protection programs relating to the storage of fuel in underground storage tanks which number over half a million.
Beyond the direct loss in fuel tax, states and local communities rely on the sales tax that comes with customers running inside gas stations’ convenience stores for drinks, food and, of increasing importance, lottery tickets. In some states, a portion of the lottery revenue goes into the general fund of the state. In the president’s home state of Delaware, for instance, the lottery was the state’s fifth largest revenue generator in 2021. The vast network of gas and convenience stations around our nation also provide property tax revenues, which will be impacted as many of these facilities may go away in the future.
Further, electric vehicles require less maintenance than their conventional gas-powered vehicles, further reducing state sales tax revenues from auto repair and service shops. Training programs will be needed for a changing work force, as the skills required to maintain electronic cars with advanced software is far different than existing gas-powered cars. States and local communities will face revenue complexities as dealerships are increasingly challenged by online direct sales of vehicles.
And even as revenues decline, our states and local communities will have to rapidly develop the required charging infrastructure to ensure dependability and access to all parts of communities, including those that are economically depressed. Some of the charging stations will be deployed by the private sector or through public-private partnerships, but much of the necessary supporting infrastructure will fall on local and state governments. And what happens to all of the underground storage tanks that require on-going monitoring if retail gas stations go out of business and the funds generated from fuel taxes to protect the environment erode?
There are also no well-developed technologies or plans to manage the large volume of lithium batteries that will eventually have an end-of-life without some form of innovation to recycle the batteries. Further, the heavier weight of electronic vehicles may require more expensive maintenance of our roads. The Bipartisan Infrastructure Law is a good first step to address some of these near-term financial needs, but more thought and action is required to quantify and mitigate the more expansive economic and job impacts from the transition to electric vehicles. States will need to not only develop alternative tax structures based on annual mileage to replace the fuel tax, they will also need to get a handle on the additional revenue losses and increased costs from the broader impacts of the transition.
The electric vehicle transition is one example — so too will there be implications to our states and local communities for other fast-moving programs to address climate change, such as the rapid expansion to 30 gigawatt of off-shore wind. Special focus needs to be given to American farmers, as they will need income alternatives with the reduced demand of ethanol and biodiesel. Sustainable aviation fuel will not be enough.
We need Congress to support rural America and further advance efforts in the development and production of biobased chemicals, bioenergy and biobased products, as well as programs to financially incentivize precision agriculture and on-farm carbon credits that can be sold by farmers to companies and financial institutions focused on meeting their public carbon reduction commitments. We only add to the growing rural-urban divide by providing tax incentives for electric vehicles primarily used in short-distance driving in cities while adversely impacting our rural corn and soy farmers who will lose out with reduced demand of gasoline additives or replacements such as ethanol and biodiesel.
The recent policies and legislation are necessary and needed. But what also is needed is for the White House to invest in bringing together leaders from industry, agriculture, federal, state and local government as well as subject matter experts to immediately identify and tackle these unintended issues, and to direct the appropriate government agencies to fund the research necessary to support public and private decision-makers as we move forward with our net-zero carbon transition.
Jay Golden, P.h.D., is the Pontarelli professor of environmental sustainability and finance in the Maxwell School at Syracuse University and directs its Dynamic Sustainability Lab. He advises and consults for corporations, NGOs and governments around the world on the nexus of sustainability, innovation and policy, and is the author of the forthcoming book “Dynamic Sustainability,” published by Cambridge University Press. He can be reached at JGolde04@syr.edu.