Will the Gas Tax be Replaced by a Mileage Tax?

This article is published with permission from InvestmentU.com.

Americans have a long history of responding poorly to taxes. After all, the country officially began with a bang after the then-British colonies refused to pay some share of the French and Indian War their motherland had waged.

Much more recently, the Tea Party — love ‘em or hate ‘em — formed to protest increased government spending, rising deficit issues and the unavoidable resulting tax hikes. Even their liberal antitheses are usually big fans of reducing their government contributions come April.

So it seems unthinkable for Americans to turn around and actually back a levy. Yet that’s exactly what’s happening in the “little black box” debate, which could ultimately eliminate the gas tax.

If certain powers in Washington have their way, every car will be fitted with a device that logs how many miles it travels, taxing drivers accordingly.

Conservatives are condemning the idea, calling it “nanny state” governance and worrying at the added power politicians will acquire through what they see as the vehicular equivalent of a criminal’s ankle bracelet. And the normally liberal American Civil Liberties Union agrees that the concept raises too many privacy issues.

According to both parties, Americans will lose more than their money if the gas tax is replaced this way. Others say this is the perfect way of solving a problem of falling government revenue.

What nobody seems to dispute, however, is how hybrid-heavy car companies are set to suffer if the little black box plans goes through…

Why we have the gas tax

The U.S. gas tax was implemented in 1932 when President Herbert Hoover tried to solve an expected $2.1 billion federal deficit. Back then, he assured citizens it wouldn’t be permanent.

We now know how worthless that promise was. Government quickly became dependent on the additional income and went on to raise the amount 10 times. In 1932, the federal gas tax was $0.01 per gallon. Today, it’s $0.184 after the most recent hike in October 1997.

For decades, the revenue raised through that tax largely went toward financing the Highway Trust Fund, which pays for federal highway and bridge improvement projects. A sizable chunk of that, perhaps ironically, also supports local public transit projects.

That system worked well enough for a while. And when sports utility vehicles entered the market, tax collectors doubtlessly thought they’d hit pay dirt with the giant gas guzzlers. But in 2007, hybrid electric vehicles, such as the Prius from Toyota Motors (NYSE: TM), started to catch on.

Back in 1999, when Toyota first introduced the model and Honda Motor Co. (NYSE: HMC) came out with its Insight, hybrid sales made up a mere 0.001% of all vehicles sold in the United States. By 2006, that figure had ticked up nicely to 1.77%, but it wasn’t until the following year that fuel-efficient hybrids caught on with a consistent 2% to 4% of new car buyers.

That might not sound like very much, but when we’re talking about the $20 billion or $30 billion the federal government collects from the gas tax every year, 2% to 4% suddenly matters. Finding their formerly reliable cash influx somewhat reduced, politicians began looking for new ways to take it from drivers.

It’s not really about the environment

One reason hybrids have become more popular has very little to do with saving the planet from the ravages of global warming — and very much to do with consumers saving their wallets from destructive gas prices.

While a Ford (NYSE: F) Fusion, for example, starts at $21,900 and a Fusion Hybrid begins at $27,200, car shoppers are regaled with tales of how much they can save long term with the more expensive vehicles. That’s led an increasing number of drivers to throw down the extra cash in hopes of making it up later.

But if gasoline suddenly becomes $0.20 cheaper and mileage simultaneously becomes taxable, you’d better believe people won’t be as willing to fork over another $5,000 or more on a new car. That’s especially true when it’s becoming more widely known that hybrids don’t necessarily save significant money to begin with.

Only last year, The New York Times wrote: “Except for two hybrids, the Prius and Lincoln MKZ … the added cost of the fuel-efficient technologies is so high that it would take the average driver many years — in some cases more than a decade — to save money over comparable new models with conventional internal-combustion engines.”

While the notion of taxing mileage instead of gas is still in its infancy stage, it’s nonetheless being tested out in states from coast to coast. So while there’s still no guarantee it will eventually pass, there’s still more than enough interest among politicians to make the story worth following.

That’s especially true if you own stock in car companies betting heavily on their hybrid offerings, such as Toyota, Honda, Ford and General Motors (NYSE: GM). Those businesses will have a lot of restrategizing to do if the gas tax goes away.

For their sakes and the sake of their shareholders, they need to stay up-to-date on these developments.

Otherwise they could find their factories filled with a whole lot of unwanted inventory.

Jeannette is a member of the Investment U research team. You can read more by her here.

The information contained in this article should not be construed as investment advice or as a solicitation to buy or sell any stock. Nothing published by Physician’s Money Digest should be considered personalized investment advice. Physician’s Money Digest, its writers and editors, and Intellisphere LLC and its employees are not responsible for errors and/or omissions.