Collecting Road Taxes After Peak Gasoline

On Monday I was interviewed on Chicago's WGN Radio on the subject of switching the collection of federal highway taxes from the current assessment on motor fuel sales to a fee on vehicle miles traveled (VMT). The gas tax is always a hot-button subject, and when it's combined with potential concerns about privacy it becomes even more controversial. However, the path we're on is a slow-motion train wreck, for multiple reasons, and I'm relieved to see that with so much attention focused on other, larger aspects of the budget deficit and taxation, this relatively small yet important corner of the tax system hasn't been forgotten. It's high time to plan for how we will pay for the upkeep of our highways as sales of gasoline begin to decline.

The interview was prompted by some comments I made on this subject to Tom Curry of MSNBC. Since my conversation with him and then with Mr. McConnell of WGN I've been doing some more thinking about the problem, which I've discussed here since 2005. For some time it's been apparent that we have a disconnect between federal energy policies explicitly aimed at reducing our consumption of petroleum products and a road tax system that depends on the stability and growth of those sales. With gas prices again near their 2008 maximum and the auto industry required to sell consumers a more efficient mix of cars each year, it appears that US gasoline demand might have peaked in July 2007 and won't reach that level again. Lower gasoline sales mean lower gas tax collections, unless the tax rate is steadily increased, encroaching on one of the third-rail issues of US politics.

This is the long-term part of the gas tax problem. It's true that it takes decades to turn over the US passenger car fleet. Nevertheless, the more highly efficient cars are sold, including this year's crop of 40 mpg non-hybrids, plus hybrids, clean diesels, and a tiny but growing number of EVs and other cars using no liquid fuels at all, the harder it will become to fund the cost of road maintenance from its traditional source at the gas pump.

The problem has a more immediate dimension, too, because gas tax collections haven't been sufficient to balance the Federal Highway Trust Fund (HTF) for some time. According to a recent study by the Congressional Budget Office the taxes on gasoline and diesel fuel brought in about $32 billion last year, but between 2008 and 2010 an additional $30 billion had to be transferred from the general fund to the HTF to keep it in the black and avoid canceling or delaying projects. Given the deficit, such transfers add directly to the national debt. Nor is the current level of expenditures adequate to address the decay of many of our roads, as assessed by the American Society of Civil Engineers. This issue received a lot of attention in the aftermath of the 2007 collapse of the I-35W bridge in Minneapolis-St.Paul, but it faded after a few news cycles.

So we need to come up with more money to keep federally-funded highways in good repair, despite the principal funding mechanism being on a gradual but inexorable downward slope. States face a similar dilemma. Solving this problem requires creativity and most likely a new funding mechanism for all or part of a gap that is expected to grow in the years ahead. Simply extending the status quo will require steadily larger transfers from the general fund, exacerbating the deficit. It would also create growing inequities by weakening the long-established link between usage and financial responsibility, compounded by EVs and other vehicles that pay no road taxes at all under the current system. Unless you think EVs will never expand beyond a tiny niche of early adopters, that's unsustainable. (Some might argue that EVs should escape this tax as a further stimulus to sales, but in my view $7,500 per car ought to be inducement enough for anyone interested in buying one.)

There are several possible remedies for shrinking gas tax revenue, with partial or total conversion to a mileage-based system topping the list. It retains the fairness of "user pays" and encompasses all cars, whatever their energy source. It might also trade off a lower tax burden for the drivers of older, less-efficient cars for a slightly steeper bill for newer, more frugal cars. However, considering that the annual federal gas tax bill for someone driving an average car 12,000 miles per year is currently only about $100, any differences between the gas tax and a replacement VMT tax--not to be confused with a VAT tax--would be unlikely to influence car choice one way or the other.

If a VMT tax is the answer, the question of how to assess and collect it looms large. As I noted in the interview I worry about a tendency to rush to a technology solution, even though other options might do the job without requiring GPS-based tracking that a significant number of Americans would consider unacceptably intrusive. If you doubt that, consider the controversy over alleged smartphone tracking by Apple and Google. I would not dismiss low-tech methods such as odometer readings at vehicle inspections, or even self-reported odometer readings where such inspections aren't required. This might introduce new opportunities for fraud, but I'm willing to be that a GPS tracker could be spoofed, and all of these potential loopholes pale compared to the current problem of fuel tax evasion by organized crime and unscrupulous distributors and dealers.

I like the idea of testing this concept in a few locations, particularly if the tests include a wide variety of approaches. The slow uptake of EVs and the gradual shift of total fleet fuel economy give us enough time to find the best solution, if we start now. But lawmakers should ensure that such tests are finite and designed for quick evaluation, so that the window of opportunity presented by the broader tax reform discussions between now and the next presidential inauguration isn't missed.

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.