What’s the future of the fuel tax?

Some experts say a vehicle mileage tax is a better long-term funding source

Nearly everyone can agree that many of the country’s roads and infrastructure are in dismal shape. What they can’t agree on is how to pay for the fix.

The current model relies mostly on taxes collected on gas and diesel fuel for transportation funding at the state and federal levels. But these revenues have fallen woefully behind over the years as vehicles have become more fuel efficient and fuel tax rates haven’t kept pace with inflation. In some states, and certainly at the federal level, the real fuel tax rates’ purchase power decreases because they are fixed at a cents-per-gallon amount rather than indexed to inflation.

If nothing changes, the shortfall will worsen in the coming years, says Jerome Dumortier, an economist and associate professor in the Paul H. O’Neill School of Public and Environmental Affairs at Indiana University-Purdue University, Indianapolis.


Declining tax revenues

His study, “State and federal fuel taxes: The road ahead for U.S. infrastructure funding,” co-authored with Fengxiu Zhang, Ph.D., a student at Arizona State, and John Marron, director of strategic planning at IndyGo, was published in the January 2017 issue of the journal Transport Policy. Their research shows fuel tax revenue is on track to decline by as much as 50 percent by 2040 in states that do not adjust rates for inflation. And even in states that do, it will also decline, though at a smaller rate—between three and 16 percent.

Switching to a vehicle mileage fee would increase tax revenue for transportation by 54 to 101 percent, with a median change of 62 percent by 2040.

“Our results indicate that, although a mileage fee is politically and technologically difficult to achieve, it is the only measure that avoids a declining tax revenue in the long run,” Dumortier said.

Those concerns range from drivers opposing the government tracking their miles to the need to install equipment on vehicles to gather the information.


Charging by the mile

Along with inflation, both state and federal governments are seeing tax revenues continue to decline while highway miles traveled increases as a result of continued improvement in mandated vehicle fuel mileage and electric vehicles. There are now more than a million electric vehicles on the road, and none of them pay a fuel tax.

The concept of a road charge is being tested out in several states, with Oregon at the forefront.

Since launching in 2015, there have been 648 volunteers with 1,578 vehicles who have signed up to take part in the state’s pilot program.

“We estimate upwards of a million vehicles would need to be in the program to start seeing the benefit of what road charging can do for Oregon’s roads and bridges,” said Education & Outreach Coordinator for the Oregon Department of Transportation Michelle D. Godfrey.

Still, even though it is limited and voluntary, the program is convenient and effortless for drivers. They are charged 1.7 cents per mile, which aligns with Oregon’s recently increased 34 cents per gallon gas tax. The system uses a dongle that plugs into a vehicle’s data port and wirelessly communicates mileage data with the private-sector account manager that bills the road charge. It also transmits fuel consumption, so those taxes are deducted from the total amount that is then invoiced monthly to drivers.

“We have demonstrated that it can be done and that it can collect revenue because our volunteers are actually paying into the state treasury via the system,” Godfrey said.


‘Sense of urgency’

Shifting to a road usage fee or vehicle miles tax, referred to as VMT, nationwide is likely several years off, some experts say.

“Right now, many anticipate the VMT would likely be phased in over time beginning with commercial motor vehicles,” said Ken Presley, United Motorcoach Association’s vice president of industry relations and chief operating officer. “With the International Fuel Tax and International Registration Plan, most carriers are already accounting for their miles and fuel consumption.”

Desperate for transportation dollars, 27 states have hiked their gas tax rates since 2013. In March, Alabama approved its first hike in 27 years, raising the tax to 28 cents per gallon. Michigan’s new governor is asking state lawmakers to approve a 45-cent hike to 71.3 cents per gallon, which would make it the highest gas tax in the country.

Pennsylvania’s gas tax rate is currently the nation’s highest at 58.7 cents per gallon while Mississippi has the lowest at 18.79 cents. The average state fuel tax is 33.78 cents, according to the American Petroleum Institute.


Stagnant federal tax

Federal investment in highways has historically come from the U.S. Department of Transportation’s Highway Trust Fund, bankrolled with a national gas tax that has been stagnant for 25 years. As a result, the fund isn’t raising the dollars needed for infrastructure maintenance, much less expansion, said Carl Davis, research director for the Institute on Taxation and Economic Policy in Washington, D.C.

“We’ve never gone this long without updating the federal gas tax rate before. It used to be something that would happen every few years, maybe every decade or so, just like a business would raise its prices over time,” Davis said.

While voters often don’t like the idea of increasing gas taxes, businesses say they can’t afford bad roads that damage their vehicles. The U.S. Chamber of Commerce is advocating for raising the current national gas tax rate of 18 cents per gallon to 43 cents over the next five years to generate enough funds to repair and expand the nation’s transportation network.

“U.S. exports and consumer purchases are rising, and as consumers enjoy additional disposable income, travel and tourism are rising,” Presley said. “All these economic opportunities require an expanding infrastructure that includes well-maintained and expanding roads, highways and bridges.”


Fuel tax exemption

Since the late 1970s, over-the-road buses have either a full or partial fuel-tax exemption in an effort to encourage people to ride buses when possible. Buses take dozens of cars off the road and reduce carbon emissions as well as wear and tear on the highways.

The retiring Chairman of the House Transportation and Infrastructure Committee, Bill Shuster, suggested it may be time for the bus exemptions to go away.

“We completely disagree,” said Presley. “If anything, we believe the rationale for implementing the exemption is even more prevalent today. Our modern motorcoaches can eclipse $600,000, all paid with private capital and sales. We make a serious contribution to society and the exemption is well justified.”

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