Wednesday, April 25, 2007

Repairing Road Taxes

The President set a goal to reduce gasoline consumption by 20% within 10 years, and the EPA has rolled out a national Renewable Fuel Standard regulation to make it happen. But for those in charge of planning for the construction and maintenance of the country's highway system, that goal needs to be parsed differently: the President's plan is to reduce receipts of the road taxes collected at the gas pump by more than 20% within 10 years. Since Americans continue to drive more miles each year, and our population of drivers continues to grow, this is a recipe for disaster. Today's Wall Street Journal looks at some of the ways that states are exploring to adjust to this situation, but I wonder if the agencies involved have thought this matter through to its logical conclusion. Collecting GPS-based mileage fees at gas stations won't work, either, if future generations of cars fuel up rarely, if at all.

While I retain my doubts that the President's target can be reached within ten years, the momentum is certainly shifting, as stricter Corporate Average Fuel Economy legislation looks highly probable within the current Congressional session, and as sales of alternative fuels that are either exempt from road taxes, or for which foregone tax collections are backfilled from the general fund, grow. As a result of these factors, US gasoline sales are likely to reach an inflection point within the next decade and start to decline. Unless the road-tax collection system is radically overhauled, highway tax receipts will go down in tandem with petroleum-based gasoline.

Anyone looking at successor tax systems must think carefully and clearly about the nature of future cars and their energy sources. If plug-in hybrid cars become practical and affordable, they will get most of their energy from recharging at home, using off-peak electricity, which is free of any road taxes. And plug-hybrids are just another step on the path to a practical all-electric car. Nor do those touting the energy security and environmental benefits of these cars seem apt to welcome taxes on the electricity they would use. Cars running on natural gas, which are already available, enjoy the same natural tax exclusion. I haven't seen anyone suggest that hydrogen for cars be taxed, either. The inescapable conclusion is that any future road tax system must be based on miles traveled, rather than fuel consumed, and that the collection mechanism will have to be divorced from liquid fuel sales.

The trick, of course, is how to get from the current system to something like that. If anything, I think the Journal underestimates the privacy concerns that GPS-based tax collection would raise. The cost of retro-fitting 243 million cars isn't trivial, either. It would be much simpler to shift the tax collection point to the annual vehicle registration process. Many states already require annual vehicle inspections, and the odometer readings from these could easily be translated into a mileage-based tax levy. Anyone preferring to "pay as they go" could volunteer for GPS-based taxation. The alternative to mileage-based taxes is to ratchet up the per-gallon tax on gasoline, to compensate for any future volume loss, but in the long run, that's a dead end.

The politics of all of these alternatives to the current system look challenging, but the cost of starving our highway budgets, in terms of safety and economic impact, would be high. Unless we're willing to assume that gasoline sales will continue to grow forever, someone is going to have to make a tough choice on a new approach to collecting road taxes.

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