COMMENTARY: Replacing Per-Gallon Taxes With Per-Mile Charges Is the Best Path Forward

The transition from per-gallon to per-mile will be a major shift in transportation funding.

By ,

 

Regular readers of this column for Public Works Financing know that I’m a big fan of tolls as a better highway funding source than fuel taxes. But even those who aren’t big fans of tolling should be concerned about the coming demise of fuel taxes as the primary source for funding America’s highways.

Back in 2005, I served on a special committee appointed by the Transportation Research Board (TRB). Our challenge was to examine likely future changes in vehicle propulsion and the demand for highway travel. Even then, it became clear to all 14 members that fuel taxes were not sustainable, long-term. Our report, The Fuel Tax and Alternatives for Transportation Funding, explained why we’d reached this conclusion and suggested steps toward finding a replacement. They included:

  • Retain and strengthen the users-pay principle;
  • Expand the use of tolls;
  • Test what we now call mileage-based user fees; and,
  • Find a stable source of tax funding for transit.

Our findings were reinforced several years later when the congressionally-appointed National Surface Transportation Infrastructure Financing Commission assessed a wide array of replacements and concluded that replacing per-gallon taxes with per-mile charges (mileage-based user fees—MBUFs) was the best way forward.

For the last five years or so, a growing number of state DOTs have operated pilot programs to test various ways of implementing MBUFs to replace per-gallon fuel taxes. They have learned that it’s wise to offer people several alternative ways of having their mileage reported and that it might make sense to have private firms provide the interface with vehicle operators to alleviate concerns over government monitoring people’s travel. They’ve also found that actual experience with a per-mile charging system alleviates most of the concerns people have based only on what they’ve read about the idea.

The transition from per-gallon to per-mile will be a major shift in transportation funding. So it is critically important that we think hard about the scope of this change. As I see it, there are four serious flaws with the 20th century model of paying for highways via per-gallon tax in addition to dependence on one particular mode of vehicle propulsion. The others are:

  1. Most fuel taxes are not indexed for inflation;
  2. The original users-pay/users-benefit principle has been seriously breached;
  3. Fuel taxes are viewed by people as taxes, not payments for highway use; and,
  4. Fuel tax revenues are sent to politicians, not directly to highway providers.

Ideally, we should fix these four flaws as part of the transition from per-gallon to per-mile.

Problem one is the smallest change. A growing number of US toll roads now index their toll rates to the Consumer Price Index (CPI) or some other inflation index; this has been made a lot easier thanks to all-electronic tolling. Eight states have recently indexed their fuel taxes to inflation, too, so inflation-indexing state MBUFs should not be a big deal.

Problems two and three are related, I believe. Highway users readily accepted gas taxes when they began at the state level in 1919, because they were sure that although it was called a tax, it actually operated as a pure user fee: all the revenues were deposited into a dedicated state highway fund, so the users-pay/users-benefit principle was visible and widely understood. But in the second half of the 20th century, that principle was eroded, bit by bit, as state highway departments became state transportation departments. In a large number of states, the dedicated highway fund morphed into a state transportation fund, supporting a whole array of transportation modes. Congress did the same thing with federal fuel taxes, starting in the 1970s. But the large majority (and in some cases all) of the revenue still comes from “highway user taxes.” Thus, while users-pay has been retailed, the users-benefit part of the deal has been seriously undercut.

And that, I believe, has contributed to the public perception of a “gas tax increase” as simply a tax increase, and therefore something to be resisted. House Speaker Paul Ryan (R-WI) objected vociferously to recent calls for a federal gas tax increase, right after Congress had given most Americans a tax cut. A whole array of taxpayer groups seconded that motion, and the odds of Congress enacting a federal fuel tax increase look very small.

That kind of battle does not, for the most part, occur when your cell phone company increases rates in order to add more cell towers to give you better reception. Nor does it occur when your electric company replaces an aging coal-fired power plant with a state-of-the-art gas-fired plant. A well-supported rate increase for such a project is likely to be approved by the state regulatory commission without much fuss. In these and other cases, what you pay is clearly a user fee—one that meets the users-pay/users-benefit principle. And this is true even when the supplier in question is a municipal electric, gas, or water utility. You pay utility bills, not tax bills.

Those utility cases are also different from highways in that you pay the user fees directly to the provider of the service. Here again, the same is true whether the utility is run by the local or state government or is an investor-owned company. You are charged based on how much or what category of service you use, and you pay the provider, not the government. The only case where this is true in the highway sector is toll roads (whether private or public).

My point here is that the emergence of viable methods of charging per mile also makes it feasible to de-politicize highways and re-organize them along the same lines as the other public utilities on which our economy depends. If we are going to go through the great effort it will take to change the method of paying for highways, let’s at least attempt to fix all the flaws that are now evident with today’s fuel tax model.

Robert Poole is director of transportation policy and Searle Freedom Trust Transportation Fellow at Reason Foundation.

This column first appeared in Public Works Financing.

ICYMI: This new Florida city will produce its own power and run self-driving buses

BY DANIEL SHOER ROTH

 

Posted January 09, 2018 07:29 AM, Updated January 10, 2018 08:25 PM

The Long Game on Infrastructure

by Debra Knopman and Martin Wachs

 

With the release (PDF) of its Legislative Outline for Rebuilding Infrastructure in America, the Trump administration announced its intent to rely on state, local and private investment to provide the lion’s share of new infrastructure funding. Local projects with the highest non-federal share of funding would have priority and a project’s economic benefits to the public would take a back seat to revenue potential in the plan’s ranking system. But with its lack of new federal funding, the plan may not be the best path to economically beneficial or creative solutions to America’s most serious regional, national and long-term problems.

The plan would diminish the federal role in funding and regulation and reduce requirements for environmental permit reviews that the administration blames for slowing project approvals. Private developers would be incentivized to play much larger roles in financing public infrastructure.

State and local governments today bear 62 percent of the cost of building new transportation and water infrastructure and 92 percent of their annual operations and maintenance costs. Annual public spending on transportation and water across all levels of government currently exceeds $400 billion (PDF). The federal share is under $100 billion. Freight railways are almost all privately owned, but private ownership accounts for less than 1 percent of America’s surface transportation and water infrastructure assets.

The president’s plan asserts that federal spending of $200 billion over the next 10 years will unleash some $1.3 trillion in new spending by states, local governments and private developers for a total of $1.5 trillion. But most of the $200 billion would likely come from cuts in existing infrastructure and other domestic programs—it would not be “new” money on top of current federal infrastructure programs unless Congress acts to raise the gas tax or generate other new revenues.

How the six- or seven-fold increase in state, local and private investment would happen is a mystery. The plan includes $20 billion for federal spending on “transformative projects,” defined as projects with positive impacts unlikely to attract private investment.

Block grants to rural states for spending on infrastructure are another element of the plan, with a total set-aside of $50 billion. Rural economies need a boost, but the vast majority of aging infrastructure and most economic growth are in highly urbanized states.

Even more important than imprecision about national spending priorities is the absence of clarity about the future federal role and the need to raise new revenues and increase direct spending on infrastructure. With the interstate highway system complete, many believe federal leadership in transportation funding is no longer necessary and that the federal share of transportation spending, now less than 25 percent of the annual $220 billion (PDF) total, can continue to decline. They maintain that local projects should be supported by local resources, public and private. This is already the case for water and wastewater utilities where the federal share is only 4 percent, although most local governments depend on federal subsidies through tax-exempt municipal bonds for financing and low-interest loans through federal and state programs.

Federal retreat is appropriate for projects that largely benefit local populations. But an entirely different class of projects could bring widespread benefits to larger regions and the nation as a whole. Such projects would transcend state boundaries and promote clearly national goals. Harbor improvements, major flood control works on the nation’s great rivers,and the interstate highway system were the reasons the federal government years ago began funding “internal improvements.” The Clean Water Act of 1972 cleaned up the nation’s rivers and streams. It initiated a massive public works program to help cities of all sizes build secondary sewage treatment plants to comply with new water quality standards.

The nation has different needs now, but there still are national needs. More than 60 percent of the interstate highway system was built before 1970, and a renewed national road network is needed no less in the current era of fast-changing new road and vehicle technologies than it was in the 1950s. Freight hubs connecting rail, roads and ports around the country are congested and reaching their limits. The plan would allow states to toll interstates to raise needed money for improvement, but it does not mention how the bankrupt federal highway trust fund could be put on sound footing.

Urban mass transit—considered a national asset in other countries—provides economic and environmental benefits that cannot be fully financed by fares. The plan requires local governments to capture land value increases near transit stations to fund transit, but does not commit sufficient federal money to match local revenue. Coastal and riverine cities are struggling to keep up with increasing threats from stormwater flooding, with federal spending on recovery from natural disasters—mostly flood-related—exceeding $300 billion in 2017 alone. Federal spending on protection could save federal money on recovery.

The conversation about national infrastructure policy should be not only about which level of government or which private investors will put up the money. It should be a call for imagination and vision of what U.S. infrastructure needs to be for a prosperous 21st century. The conversation could and should transcend party politics. Achieving that could be the biggest transformative project of all.


Debra Knopman is a principal researcher at the nonprofit, nonpartisan RAND Corporation and a professor at the Pardee RAND Graduate School. Martin Wachs is an adjunct principal researcher at RAND. They are the principal co-authors of a RAND Corporation report entitled Not Everything is Broken: the Future of Transportation and Water Infrastructure Funding and Finance in the U.S.

This commentary originally appeared on U.S. News & World Report on February 16, 2018. Commentary gives RAND researchers a platform to convey insights based on their professional expertise and often on their peer-reviewed research and analysis.