You can be audited for any reason

Most of us are aware that certain issues are more likely to give rise to an audit than others — and Laurie Kazenoff has seen them all.

A former senior attorney with Internal Revenue Service Chief Counsel and currently a partner at New York-based Moritt Hock & Hamroff LLP, Kazenoff said that the IRS consistently looks for a number of red flags on individual and business returns.

“You can be audited for any reason, but there are common areas that are on the IRS radar,” she said. “The higher your income, the more likely you are to be audited, but the most commonly audited areas are Schedule Cs because of the opportunity to fudge the numbers by understating income or inflating deductions such as home office or other expenses.”

“If the numbers are outside the norm, the computers will pick it up,” Kazenoff cautioned. “Most fields on a return are compared to averages, and outliers will be targeted. Large losses on both individual and business returns will be flagged. If you’re a going concern and have enormous losses, they want to know how you’re supporting yourself, or how you stay in business. If the numbers fall outside the national average, there’s a good chance of being picked up for an examination.”

Missing information is an area sure to trigger a notice, according to Kazenoff. “Many people don’t realize that the IRS matches every piece of third-party reporting with what taxpayers put on their return,” she said. “This includes interest income, dividend income, independent contractor income as well as W-2 income — the issuer is required to report it both to the taxpayer and the IRS. If the taxpayer fails to report the figures on their return — to the penny — the matching system will flag the return and they will receive a letter from the IRS.”
Not every industry is considered an equal risk, according to Kazenoff. “The service issues a list of industries they target, such as the mining industry," she said. “And there are businesses that have historically underreported income. Businesses where cash changes hands, such as restaurants and laundromats, are examples. But although gas stations deal in cash, they have an independent record-keeping system.”

The IRS also targets independent contractor situations, Kazenoff noted: “Are the workers really employees?”

Worker misclassification is an important issue for the IRS and various state taxing authorities because of the perception that many employers are not properly classifying their workers. By avoiding labeling their workers as employees, employers can avoid paying payroll taxes, minimum wages, overtime, health and retirement benefits, and paid leave.

“A lot of companies try to avoid payroll taxes, workers compensation and unemployment withholding,” she said. “They think they can get off the hook, but it’s an issue the IRS will pursue.” Although there is no bright-line test to judge whether a worker is an employee or an independent contractor, “[The IRS] will look to see if certain factors are present to determine if the worker is really an independent contractor,” she said.

Filing a large claim for a refund on an amended return will almost always cause an audit, according to Kazenoff. “They will wonder what you did wrong on the first return,” she said. “It will almost always be picked up.”

“If the original return failed to include an item of income, of course you will want to correct it on an amended return,” she said. “But filing an amended return that claims credits that you didn’t claim on the first return will open up the whole return to scrutiny, so you end up being audited on other things not originally at issue.”

This is particularly true where the amended return raises new issues, she indicated. “As an example, a return might be amended to claim R&D credits that weren’t on the original return. The IRS is likely to audit for that particular issue, but will open up the entire return for questioning,” she said.

You can be audited for any reason

Most of us are aware that certain issues are more likely to give rise to an audit than others — and Laurie Kazenoff has seen them all.

A former senior attorney with Internal Revenue Service Chief Counsel and currently a partner at New York-based Moritt Hock & Hamroff LLP, Kazenoff said that the IRS consistently looks for a number of red flags on individual and business returns.

“You can be audited for any reason, but there are common areas that are on the IRS radar,” she said. “The higher your income, the more likely you are to be audited, but the most commonly audited areas are Schedule Cs because of the opportunity to fudge the numbers by understating income or inflating deductions such as home office or other expenses.”

“If the numbers are outside the norm, the computers will pick it up,” Kazenoff cautioned. “Most fields on a return are compared to averages, and outliers will be targeted. Large losses on both individual and business returns will be flagged. If you’re a going concern and have enormous losses, they want to know how you’re supporting yourself, or how you stay in business. If the numbers fall outside the national average, there’s a good chance of being picked up for an examination.”

Missing information is an area sure to trigger a notice, according to Kazenoff. “Many people don’t realize that the IRS matches every piece of third-party reporting with what taxpayers put on their return,” she said. “This includes interest income, dividend income, independent contractor income as well as W-2 income — the issuer is required to report it both to the taxpayer and the IRS. If the taxpayer fails to report the figures on their return — to the penny — the matching system will flag the return and they will receive a letter from the IRS.”
Not every industry is considered an equal risk, according to Kazenoff. “The service issues a list of industries they target, such as the mining industry," she said. “And there are businesses that have historically underreported income. Businesses where cash changes hands, such as restaurants and laundromats, are examples. But although gas stations deal in cash, they have an independent record-keeping system.”

The IRS also targets independent contractor situations, Kazenoff noted: “Are the workers really employees?”

Worker misclassification is an important issue for the IRS and various state taxing authorities because of the perception that many employers are not properly classifying their workers. By avoiding labeling their workers as employees, employers can avoid paying payroll taxes, minimum wages, overtime, health and retirement benefits, and paid leave.

“A lot of companies try to avoid payroll taxes, workers compensation and unemployment withholding,” she said. “They think they can get off the hook, but it’s an issue the IRS will pursue.” Although there is no bright-line test to judge whether a worker is an employee or an independent contractor, “[The IRS] will look to see if certain factors are present to determine if the worker is really an independent contractor,” she said.

Filing a large claim for a refund on an amended return will almost always cause an audit, according to Kazenoff. “They will wonder what you did wrong on the first return,” she said. “It will almost always be picked up.”

“If the original return failed to include an item of income, of course you will want to correct it on an amended return,” she said. “But filing an amended return that claims credits that you didn’t claim on the first return will open up the whole return to scrutiny, so you end up being audited on other things not originally at issue.”

This is particularly true where the amended return raises new issues, she indicated. “As an example, a return might be amended to claim R&D credits that weren’t on the original return. The IRS is likely to audit for that particular issue, but will open up the entire return for questioning,” she said.

Hedge funds increase appetite for oil

By John Kemp

LONDON, March 25 (Reuters) - Hedge funds bought another 65 million barrels of petroleum futures and options in the week to March 19, taking total purchases over the last 10 weeks to 384 million barrels, according to reports published on Friday.

The one-week increase in net long positions was the largest since the end of August 2018, a strong bullish signal about the expected direction of prices over the next six months.

Hedge funds and other money managers have boosted their overall bullish position in the six most important derivative contracts linked to crude and fuels prices to 685 million barrels, up from just 302 million on Jan. 8.

Funds were substantial net buyers in the most recent week of NYMEX and ICE WTI (+50 million barrels) as well as Brent (+16 million barrels) and U.S. gasoline (+12 million barrels).

But they were net sellers of U.S. heating oil (-4 million barrels) and European gasoil (-9 million barrels), according to exchange and regulatory data.

Funds now hold almost five bullish long positions for every short bearish one in petroleum, up from a ratio of less than 2:1 at the start of the year, but still far below the recent peak of 12:1 at the end of September.

Until recently, most of the buying was concentrated in Brent and European gasoil, but buying rotated into WTI and U.S. gasoline in the most recent week.

Funds have reduced most, though not all, of the short positions that they started to accumulate from the end of August, indicating that the most recent short-selling cycle is nearing its end.

Portfolio managers have now reduced the number of short positions across the petroleum complex to just 173 million barrels, less than half a recent peak of 357 million on Jan. 8.

In NYMEX WTI, the number of short positions has fallen to just 51 million barrels, down from 133 million on Jan. 8.

Fund managers have become much less bearish about the outlook for oil prices since the start of the year as U.S.-China trade tensions have de-escalated.

Saudi Arabia has cut oil production aggressively and U.S. sanctions have disrupted exports from Venezuela and Iran, which has reduced fears about over-supply.

With so many short positions now squared up, however, short-covering will provide less support to petroleum prices going forward.

There is still plenty of scope to increase long positions, with current longs of 858 million barrels only just over half the recent peak of 1.6 billion barrels early last year.

Positions in U.S. heating oil and European gasoil remain very modest compared with last year, despite the potential consumption boost for both contracts from new shipping regulations at the end of the year.

But many managers may hesitate to add significantly to long positions until the risk of a global recession and slowdown in oil consumption growth is resolved.

Quants Are Grabbing the Calm Stocks That Hedge Funds Don't Want

Quants are flocking to boring stocks as the strategy flips from high-flyer to laggard -- while hedge funds that are snubbing placid securities outperform.

Managers that follow quantitative strategies are loading up on low-volatility shares, a shift from their typical allocation over the past five years, according to Sanford C. Bernstein. Those wagers are underperforming the broader market and potentially hitting returns.

The MSCI USA Minimum Volatility Index is trailing the broad market benchmark by more than 2 percentage points since the start of January, among the worst showings for any factor tracked by Bernstein. In a reversal from last year, hedge funds that are avoiding placid securities are outperforming quants.

But for managers who buy and dump stocks systematically based on common attributes, vindication could yet come if the behavioral biases that keep investors away from boring equities hold true. And if the new-year rally sputters out, a heyday for low-vol stocks -- sought by quants and a broader group of investors this year -- could arrive even sooner.

“We could very well be living through another growth spurt in low vol,” said Jayendran Rajamony, Boston-based head of alternatives at Man Numeric, which is considering incorporating the strategy into its core portfolios. “When the market goes up more than what people expect, and when there are first signs of trouble of the bull market ending, investors may seek out a perceived safe harbor.”

Min-vol strategies are part of the DNA for quants like Acadian Asset Management that have popularized the factor. The low-vol anomaly, as it is known, arises because portfolio managers tend to favor racier shares, causing steadier names to be undervalued. But even for quants, increasing exposure to low-vol can be costly. While the strategy can provide a cushion when markets tank, it will typically lag a rally.

Quant funds are down around 1 percent this year, compared with a more than 5 percent gain for hedge funds, according to a recent Bernstein note.

Still, last year was the perfect illustration of how low-vol can bail quants out. The factor bested momentum, growth, quality, value and cap-weighted benchmarks in the fourth quarter. Indeed, since 2000, the factor has beat the S&P 500 by a whopping 215 percentage points.

“Over a full cycle, the downside protection of low-volatility stocks has led to better risk-adjusted returns for low-volatility stocks, and this is exactly what we want to capitalize on,” said Robeco’s Jan Sytze Mosselaar, whose Robeco QI Global Conservative Equities fund is up 10 percent over the past year, beating 87 percent of peers.

A broader pool of investors are embracing low-volatility shares. The $24 billion iShares Edge MSCI Min Vol USA ETF is poised for eleven months of non-stop inflows.

The dovish stance of central banks is a potential tailwind for a strategy that’s reliant on bond proxies like utilities and high-dividend payers, according to Andrzej Pioch, a money manager at Legal & General Investment Management. The firm recently increased its position in low-vol and quality stocks in its multi-factor funds.

Of course, if equities go on a tear -- something banks like JPMorgan Chase & Co. anticipate -- the strategy is likely to continue to underperform. Another reason to be cautious is the risk of over-crowding and the rise in valuations, according to Man Numeric’s Rajamony.

Still, quants remain excited by calm equities despite this year’s lag -- perhaps a bet that the rally is on borrowed time.

The Carlyle Group Bets On Primary Care With $350 Million Investment In One Medical

Primary care provider One Medical announced Wednesday that it had received an investment of up to $350 million from private equity firm The Carlyle Group.

With 72 offices around the country, One Medical, offers concierge-style primary care, charging patients an annual fee of $149 to $199 in exchange for perks like same-day office visits and 24/7 access to a medical professional via their app. One Medical was founded in 2007 by Tom Lee (who is now executive chairman), and former United Healthcare executive Amir Rubin was hired to take over as CEO last year.

Of the $350 million announced, $220 million will be a direct investment in One Medical. Another $130 million is expected to go toward buying shares from existing investors, though the company says that part of the deal has not closed yet.

Prior to this investment the company had raised about $180 million from investors like J.P. Morgan, Fidelity and Alphabet’s venture capital arm, GV, according to Pitchbook. Carlyle’s funding will help with One Medical’s plans to double its office count over the next several years.

In a year where total healthcare sector VC fundraising has already trounced any previous year in at least a decade, Carlyle’s new investment in One Medical is one of the biggest. Moderna Therapeutics, a biotech firm developing drugs using messenger RNA, has raised $625 million this year from two separate funding rounds, and last month DNA testing business 23andMe raised $300 million in a corporate investment from GlaxoSmithKline.  

One Medical also claims that it has measured a 5.5% average decrease in healthcare costs for its 1,000 employer partners.

“The primary care system in the United States is broken and One Medical is the brand poised to help fix it,” said Carlyle managing director Ram Jagannath in a statement. “One Medical pioneered the concept of a more modern primary care experience, and it has an incredibly exciting roadmap over the next several years.”

by JAY L. ZAGORSKY

U.S. roads and bridges are in abysmal shape — and that was before the recent winter storms made things even worse.

In fact, the government rates over one-quarter of all urban interstates as in fair or poor condition and one-third of U.S. bridges need repair.

To fix the potholes and crumbling roads, federal, state and local governments rely on fuel taxes, which raise more than $80 billion a year and pay for around three-quarters of what the U.S. spends on building new roads and maintaining them.

I recently purchased an electric car, the Tesla TSLA, +1.93%   Model 3. While swerving down a particularly rutted highway in New York, the economist in me began to wonder, what will happen to the roads as fewer and fewer cars run on gasoline? Who will pay to fix the streets?

Fuel taxes 101

Every time you go to the pump, each gallon of fuel you purchase puts money into a variety of pockets.

About half goes to the drillers that extract oil from the earth. Just under a quarter pays the refineries to turn crude into gasoline. And around 6% goes to distributors.

The rest, or typically about 20% of every gallon of gas, goes to various governments to maintain and enhance the U.S. transportation’s infrastructure.

Currently, the federal government charges 18.4 cents per gallon of gasoline, which provides 85% to 90% of the Highway Trust Fund that finances most federal spending on highways and mass transit.

State and local government charge their own taxes that vary widely. Combined with the national levy, fuel taxes range from over 70 cents per gallon in high-tax states like California and Pennsylvania to just over 30 cents in states like Alaska and Arizona. The difference is a key reason the price of gasoline changes so dramatically when you cross state lines.

While people often complain when their fuel prices go up, the real burden of gasoline taxes has been falling for decades. The federal government’s 18.4 cent tax, for example, was set way back in 1993. The tax would have to be 73% higher, or 32 cents, to have the same purchasing power.

On top of that, today’s vehicles get better mileage, which means fewer gallons of gas and less money collected in taxes.

And electric vehicles, of course, don’t need gasoline, so their drivers don’t pay a dime in fuel taxes.

A crisis in the making

At the moment, this doesn’t present a crisis because electric vehicles represent only a small proportion of the U.S. fleet.

Slightly more than 1 million plug-in vehicles have been sold since 2012 when the first mass market models hit the roads. While impressive, that figure is just a fraction of the over 250 million vehicles currently registered and legally drivableon U.S. highways.

But sales of electric cars are growing rapidly as how far they can travel before recharging and prices fall. Dealers sold a record 360,000 electric vehicles last year, up 80% from 2017.

Watch this video: Who’s to blame in a self-driving car crash? Auto insurers need to know

If sales continue at this breakneck pace, electric cars will become mainstream in no time. In addition, governments in Europe and China are actively steering consumers away from fossil fuels and toward their electric counterparts.

In other words, the time will come very soon when the U.S. and individual states will no longer be able to rely on fuel taxes to mend American roads.

What states are doing about it

Some states are already anticipating this eventuality and are crafting solutions.

One involves charging owners of electric cars a fixed fee. So far, 17 states have done just that, with annual taxes ranging from $100 to $200 per car.

There are a few of problems with a fixed-fee approach. For example, the proceeds only go to state coffers, even though the driver also uses out-of-state roads and national highways.

Another is that it’s regressive. Since a fixed fee hits all owners equally, regardless of income or how much they drive, it hurts poorer consumers most. During debate in Maine over a proposed $250 annual EV fee, opponents noted that the average person currently pays just a third of that — $82 — in state fuel taxes.

Oregon is testing another solution. Instead of paying fuel taxes, drivers are able to volunteer for a program that lets them pay based on miles driven rather than how many gallons they consume. The state installs tracking devices in their cars — whether electric or conventional — and drivers get a refund for the gas tax they pay at the pump.

The program raises privacy and fairness concerns especially for rural residentswho have few other transportation options.

Another way forward

I believe there’s another solution.

Currently, carmakers and others are deploying large networks of charging stations throughout the country. Examples include Tesla’s Superchargers, Chargepoint, EVgo and Volkswagen’s VOW3, -1.69% VOW3, -2.69%VWAPY, -1.02%   proposed mobile chargers.

They operate just like gas pumps, only they provide kilowatts of electricity instead of gallons of fuel. While electric vehicle owners are free to use their own power outlets, anyone traveling long distances has to use these stations. And because charging at home is a hassle — requiring eight to 20 hours — I believe most drivers will increasingly choose the convenience and speed of the charging stations, which can fill up an EV in as little as 30 minutes.

So one option could be for governments to tack on their taxes to the bill, charging a few extra cents per kilowatt “pumped into the tank.” Furthermore, I would argue that the tax, whether on fuel or power, shouldn’t be a fixed amount but a percentage, which makes it less likely to be eroded by inflation over time.

It is in everyone’s interest to ensure there are funds to maintain the nation’s road. A small percentage tax on EV charging stations will help maintain U.S. roads without hurting electric vehicles’ chances of becoming a mass-market product.

Jay L. Zagorsky is a senior lecturer at Boston University. This was first published on The Conversation — “How electric cars could make America’s crumbling roads even worse”.

Hedge Funds Snap Back +4.55% after a Hard-Hearted 2018

In the week ending March 15th 2019, a report revealed that the first two months of 2019 offered up the hedge funds industry's best returns to start a year since 2012, when average returns were at +5.78% through February of that year.

Hedge funds returned an average of +1.27% in February, according to the just-released eVestment February 2019 hedge fund return data. The positive month brings year-to-date (YTD) performance to +4.55%.

The big winners for the month were China-focused hedge funds, returning an average of +7.17% in February, bringing YTD 2019 returns to +14.17%.

Meanwhile, the Eurekahedge Hedge Fund Index gained 0.86% in February, supported by the global equity market which continued to rebound over a potential resolution of the US-China trade friction and following a challenging start to the year, and CTA Indices showed signs of improvement with over half of trend constituents in positive territory in February. The gross return of the SS&C GlobeOp Hedge Fund Performance Index for February 2019 measured 1.24% and hedge fund flows as measured by the SS&C GlobeOp Capital Movement Index advanced 0.21% in March.

Further in performance news, Crispin Odey's hedge fund plunged 10% as stock markets rebound, Lansdowne Partners, one of London's longest-established hedge fund managers, suffered a dismal 2018 after a handful of investments failed to perform, while Cadian Capital Management's fund rose 9.8 percent over the first two months of the year after posting a 20 percent gain last year and a 20.8 percent return in 2017.

In new launches, Arcline Investment Management has raised $1.5 billion for its debut fund; OP Investment Management (OPIM), a Hong Kong-based hedge fund platform, is launching Spectron FX Fund which will run fundamental, macro FX strategies through G10 currencies, while Franklin Templeton Investments Canada introduced Franklin K2 Alternatives Fund to provide investors with access to alternatives investments in a mutual fund format.

Further in new launches, AllianzGI has launched a new European infrastructure fund for external investors, the firm has announced; Venture capital firm Accel raised $2.53 billion to fund technology startups, adding to evidence of a surge in demand for risky but high-potential private investments; Osage University Partners, a Pennsylvania-based venture capital firm, closed its third fund, at $273m; Regal Funds Management has resurrected plans to raise up to $500 million via a listed investment company, adding to a rush of fund-manager raisings on the stock exchange and Dubai International Financial Centre (DIFC) has launched a $10 million fintech fund, appointing Wamda Capital and Middle East Venture Partners (MEVP) to manage it.

Meanwhile, San Francisco-based growth stage venture capital firm 137 Ventures, which buys shares in private tech companies from founders and employees, has announced the closing of its fourth fund at $210 million; Aberdeen Standard Investments (ASI) and JPMorgan Mansart have partnered for the launch of a European equity fund, the two firms have announced; Empira Group, investment manager for institutional real estate investments in German-speaking Europe, has launched Empira Real Estate Finance fund IV, the company's fourth debt fund by now and Alpine Investors, a software- and services-focused midmarket firm, is seeking $750 million for its newest fund, according to a filing with the Securities and Exchange Commission.

State Street Quarterly Brexometer index reveals the latest investor sentiment towards Brexit, which showed investor appetite for holdings of UK assets has polarised during Q1 2019.

In investments made by hedge funds, Nelson Peltz's hedge fund has trimmed its position in fast-food chain Wendy's, on whose board Peltz serves as chairman; Hedge funds have been buying U.S. stocks as institutional investors keep up their selling streak, according to Bank of America research; A US hedge fund H/2 Capital Partners has handed the UK's biggest care homes operator a GBP40 million ($52.61m) lifeline as it readies the group for a sale, while hedge funds have doubled their bets against Royal Mail in just over a month as the City worries about the fate of its dividend.

In the meantime, D1 Capital Partners is betting against German athletic brand Adidas, placing a "rare" bet worth about €216 million ($243 million) that its shares will go down; Fund managers appear to be betting that the long economic recovery and bull market will continue to age well; Many managers sold out last year, but the Chinese e-commerce giant was a top gainer for those who stayed the course; U.S. technology stocks this week took back their title as the stock market's most profitable bet of the year, and the so-called FANG stocks have regained their shine after investors dumped the high-flying group in December over fears that the decade-old bull market was dying, while investors who have shunned risky assets since Christmas better start embracing them, according to JPMorgan Chase strategists led by Marko Kolanovic.

In miscellaneous hedge fund news, New Jersey-based alternative investment firm Spring Valley Asset Management (SVAM) announced the launch of the SVAM Diversified Alpha Portfolio, a multi-dimensional, systematic trading system; Bad Homburg, Germany-based Feri Alternative Assets GmbH reported especially strong demand in the alternative investments sector in its financial report for 2018 and the alpha generated by hedge funds, and more generally by active managers, is influenced by multiple factors, pointed out Lyxor in its Weekly Brief.

Meanwhile, EnTrustPermal - one of the world's largest hedge fund investors and a leading alternative asset manager headquartered in New York and London - announced that it has rebranded the firm as EnTrust Global; Singapore-based AI open-platform fund manager Noviscient has been selected as one of eight winners and the first Asian startup to join the Copenhagen Fintech Accelerator; Argentiere Capital is returning capital to investors from its flagship $940 million hedge fund after years of unsuccessful wagers on rising market turmoil; A once-lucrative business within Deutsche Bank AG catering to hedge funds is on its way to becoming yet another casualty of the German lender's chronic turmoil; Bfinance Australia's Vishal Sharma says underlying conditions are improving for the macro strategies, but with performance varying greatly from one fund to the next, selecting the right manager is key to successful investing in the sector and Man Group's 2018 results reflected a "more difficult" year for asset management, but Luke Ellis, chief executive, said investment performance for Man was still better than its peers. Funds under management fell from $109.1 billion in 2017, to $108.5 billion.

In institutional investor news, Los Angeles Fire & Police Pension System committed a total of $42.5 million to two alternative investment funds, according to a report on the $21.3 billion pension fund's website; The $44 billion Texas Permanent School Fund is the largest education endowment in the country, but the state's public schools are seeing less money than they did decades ago; State of Michigan Investment Board disclosed a total of $1.5 billion in fourth-quarter commitments for the $69.5 billion Michigan Retirement Systems, East Lansing, in materials, while, Pennsylvania Public School Employees' Retirement System, Harrisburg, agreed to commit up to $516 million to five alternatives investment funds and retained its investment consultant for its defined benefit and defined contribution plans.

In the meantime, Nashville (Tenn.) & Davidson County Metropolitan Government Employee Benefit Trust Fund made three new commitments totaling $130 million; Danish pension fund PensionDanmark has merged its alternatives and private debt departments in a move aimed at bringing efficiency benefits as well as added flexibility in investments; Finland's largest pension fund suffered a 3% investment loss last year, with the market value of its assets contracting by EUR1.8bn ($2.04bn) during 2018. Keva's assets fell to €50.1bn by the end of December 2018, compared with €51.9bn a year earlier, and the $193.7 billion New York City Retirement System (NYCRS) has expanded its in-house emerging managers program in private equity by $600 million, raising the total assets dedicated to the program to more than $1.5 billion.

By

JAYL. ZAGORSKY

U.S. roads and bridges are in abysmal shape — and that was before the recent winter storms made things even worse.

In fact, the government rates over one-quarter of all urban interstates as in fair or poor condition and one-third of U.S. bridges need repair.

To fix the potholes and crumbling roads, federal, state and local governments rely on fuel taxes, which raise more than $80 billion a year and pay for around three-quarters of what the U.S. spends on building new roads and maintaining them.

I recently purchased an electric car, the Tesla TSLA, +1.93%   Model 3. While swerving down a particularly rutted highway in New York, the economist in me began to wonder, what will happen to the roads as fewer and fewer cars run on gasoline? Who will pay to fix the streets?

Fuel taxes 101

Every time you go to the pump, each gallon of fuel you purchase puts money into a variety of pockets.

About half goes to the drillers that extract oil from the earth. Just under a quarter pays the refineries to turn crude into gasoline. And around 6% goes to distributors.

The rest, or typically about 20% of every gallon of gas, goes to various governments to maintain and enhance the U.S. transportation’s infrastructure.

Currently, the federal government charges 18.4 cents per gallon of gasoline, which provides 85% to 90% of the Highway Trust Fund that finances most federal spending on highways and mass transit.

State and local government charge their own taxes that vary widely. Combined with the national levy, fuel taxes range from over 70 cents per gallon in high-tax states like California and Pennsylvania to just over 30 cents in states like Alaska and Arizona. The difference is a key reason the price of gasoline changes so dramatically when you cross state lines.

While people often complain when their fuel prices go up, the real burden of gasoline taxes has been falling for decades. The federal government’s 18.4 cent tax, for example, was set way back in 1993. The tax would have to be 73% higher, or 32 cents, to have the same purchasing power.

On top of that, today’s vehicles get better mileage, which means fewer gallons of gas and less money collected in taxes.

And electric vehicles, of course, don’t need gasoline, so their drivers don’t pay a dime in fuel taxes.

A crisis in the making

At the moment, this doesn’t present a crisis because electric vehicles represent only a small proportion of the U.S. fleet.

Slightly more than 1 million plug-in vehicles have been sold since 2012 when the first mass market models hit the roads. While impressive, that figure is just a fraction of the over 250 million vehicles currently registered and legally drivableon U.S. highways.

But sales of electric cars are growing rapidly as how far they can travel before recharging and prices fall. Dealers sold a record 360,000 electric vehicles last year, up 80% from 2017.

Watch this video: Who’s to blame in a self-driving car crash? Auto insurers need to know

If sales continue at this breakneck pace, electric cars will become mainstream in no time. In addition, governments in Europe and China are actively steering consumers away from fossil fuels and toward their electric counterparts.

In other words, the time will come very soon when the U.S. and individual states will no longer be able to rely on fuel taxes to mend American roads.

What states are doing about it

Some states are already anticipating this eventuality and are crafting solutions.

One involves charging owners of electric cars a fixed fee. So far, 17 states have done just that, with annual taxes ranging from $100 to $200 per car.

There are a few of problems with a fixed-fee approach. For example, the proceeds only go to state coffers, even though the driver also uses out-of-state roads and national highways.

Another is that it’s regressive. Since a fixed fee hits all owners equally, regardless of income or how much they drive, it hurts poorer consumers most. During debate in Maine over a proposed $250 annual EV fee, opponents noted that the average person currently pays just a third of that — $82 — in state fuel taxes.

Oregon is testing another solution. Instead of paying fuel taxes, drivers are able to volunteer for a program that lets them pay based on miles driven rather than how many gallons they consume. The state installs tracking devices in their cars — whether electric or conventional — and drivers get a refund for the gas tax they pay at the pump.

The program raises privacy and fairness concerns especially for rural residentswho have few other transportation options.

Another way forward

I believe there’s another solution.

Currently, carmakers and others are deploying large networks of charging stations throughout the country. Examples include Tesla’s Superchargers, Chargepoint, EVgo and Volkswagen’s VOW3, -1.69% VOW3, -2.69%VWAPY, -1.02%   proposed mobile chargers.

They operate just like gas pumps, only they provide kilowatts of electricity instead of gallons of fuel. While electric vehicle owners are free to use their own power outlets, anyone traveling long distances has to use these stations. And because charging at home is a hassle — requiring eight to 20 hours — I believe most drivers will increasingly choose the convenience and speed of the charging stations, which can fill up an EV in as little as 30 minutes.

So one option could be for governments to tack on their taxes to the bill, charging a few extra cents per kilowatt “pumped into the tank.” Furthermore, I would argue that the tax, whether on fuel or power, shouldn’t be a fixed amount but a percentage, which makes it less likely to be eroded by inflation over time.

It is in everyone’s interest to ensure there are funds to maintain the nation’s road. A small percentage tax on EV charging stations will help maintain U.S. roads without hurting electric vehicles’ chances of becoming a mass-market product.

Jay L. Zagorsky is a senior lecturer at Boston University. This was first published on The Conversation — “How electric cars could make America’s crumbling roads even worse”.