Impact of electrics cars on fuel tax in Kenya. What’s the way forward

Kenya just like many countries both developed and developing has seen arise in uptake of electric vehicles with the most recent and notable being the launch of a 25-seater electric bus by start-up BasiGo, designed by BYD automotive with a 250 km range and recharging in less than 4 hours.

The increased adoption of electric vehicles poses a challenge to most governments that currently tax fuel to fund highways and transport infrastructure on one side and an opportunity ingrain equity where drivers pay based on degree of road use.

In the United States for example federal fuel tax is 18 percent per gallon goes to the U.S. Highway Trust Fund and is used to pay for interstate highways, large infrastructure projects, and public transportation with a total collection of 52 billion USD .

Similarly in Kenya, roads are maintained through the Kenya roads board fund which is financed through roads maintenance levy fund currently charged at 18 Ksh per litre of petrol and diesel. The Kenya roads board fund disburses the funds to agencies tasked with road maintenance such as Kenya national highway authority, Kenya urban roads authority, Kenya rural roads authority, Kenya wildlife services as well as county governments collecting 84 billion Kes as end of June 2022.

The rationale for the fuel tax originates from the benefit school of thought in which case publicly provided goods and services should be paid for by the beneficiaries.

Applying the same school of thought to electric vehicles that benefit from the transport infrastructure, it therefore means such vehicles must contribute their fair share to public good meaning exempting them from for example a mileage tax that is proxied by fuel tax is akin to allowing electric vehicles to skip the tollbooth on a toll road.

Electric vehicle drivers do not pay fuel tax hence as the number of electric vehicles on Kenyan road increases it raises the  questions about the effectiveness and equity of this financing mechanism.

Several countries are considering implementing a mileage tax on electric vehicle drivers to make up for the lost revenue which is significant (tax revenues from fuel duty account for a significant 2% of GDP )  . However, there has been little economic analysis, either evaluating the economic efficiency of potential policy responses, or quantifying the revenue shortfall. Other considerations have been taxing EVs charging at home and public with Kenya power indicating capacity to charge 50,000 buses and 2 million motorcycles.

Similar to the system adopted by the Nairobi expressway, modern cars have capacity to provide a technological platform for mileage taxation of EV via dynamic monthly or annual payment similar through for example paying and estimated instalment tax based on average monthly mileage coverage and paying balance or receiving  rebate after declaring true figure