In this series of blog posts, RFF researchers take a look at the current state of the nation’s transportation infrastructure and evaluate various policies for financing the Highway Trust Fund. See the first, second, and third posts in the series.
From our previous three blogs we saw that expenditures on roads and bridges from the Federal Highway Trust Fund have increased over time and the need for greater expenditures is expected to continue. Revenues into the Fund have not kept pace and will fall further behind unless Congress acts. We concluded that raising the gasoline tax could be at least part of the solution. In this blog we consider and compare a range of revenue raising approaches, some of which are already in place, and some are relatively new. The idea is to find policies that do well on a variety of criteria, including efficiency, political acceptability, and equity while still raising sufficient revenue to fund expenditures appropriated under the federal highway program.
As we discussed in the third blog, fuel taxes have been the primary funding vehicle since the HTF began. Fuel taxes do well to address the external costs of GHG emissions from vehicles, which depend entirely on gallons of fuel used. Estimates about the right magnitude of fuel taxes to account for the effects of GHG emissions from cars and trucks show that current taxes, which have not been raised since 1993, are too low. Increasing current federal fuel taxes on gasoline and diesel by about 10 to 15 cents a gallon would be efficient in that they would account for the carbon externality, and they would also raise sufficient revenue to make up for projected HTF shortfalls. And, they would be barely noticed amid the rapid and large price fluctuations of crude prices set by OPEC. However, state and federal policies to reduce gasoline consumption undercut the revenue generation of fuel taxes.
The other policy that has been used recently to finance highway expenditures is to draw on general federal revenues. It can be argued that the federal highway system benefits the entire economy and drawing revenues more generally rather than just from users has some merit. On the negative side, general revenues may have a high opportunity cost in foregone government spending in other areas and has no ability to internalize other externalities.
However, the recent approach of using some funding from general revenues may have an additional benefit when used in conjunction with fuel taxes under current funding of the HTF. Recent transportation bills mandate that states get most of their fuel tax payments to the HTF back for their own road improvements. But there may well be projects that have higher regional or national value than those that a given state would decide to implement. This is part of the rationale for a federal system that can examine projects for their value beyond state lines. With recent trust fund expenditures much higher than revenues from fuel taxes, a large share of fuel tax revenues can be returned to states and the additional expenditures can come from general revenues. This approach to funding may enhance efficiency compared to simply raising all revenue from a higher fuel tax and returning most of the money to the states by formula.
Three federal policies make up a small portion of the current funding for the HTF. First, roughly 9% of HTF funds come from sales taxes on heavy-duty trucks and trailers. Another 3% is raised from $100-550 vehicle use fees levied on trucks using public highways, and 1% is raised from taxes on tire sales with a load capacity exceeding 3,500 pounds. Are these taxes as currently levied efficient?
Raising these taxes to fund infrastructure makes great sense because almost all road damage is caused by heavy-duty trucks. However, charges based on distance travelled would provide greater incentives to reduce miles driven—a number of states already levy distance and weight charges on trucks.
Additionally, the current excise taxes on truck, trailer, and tire sales may provide harmful disincentives. For trucks and trailers, these sales taxes may slow the rate at which fleets purchase new trucks. As joint EPA and NHTSA regulations on trucks’ fuel efficiency tighten, replacing old trucks will be crucial for maximizing carbon reductions. Tire taxes may create safety disincentives, as buying new tires would be more expensive. Such taxes may also lead to using trucks with fewer axles, which works against reducing road damage as, other things equal, damages to roads are lower for trucks that distribute weight across more tires.
There are also new options for raising some of the revenues for the HTF that are being discussed. One is President Obama’s suggestion – a one-time only tax on corporate coffers abroad. This policy has the same lack of incentive on reducing externalities as drawing from the general fund, but because it is a new source of revenue, it will not take away from other spending. Nevertheless, such funds still have an opportunity cost.
Another set of policies that have become more flexible and more ubiquitous in recent years are mileage-based fees. The familiar variety is the toll road. Fees are increased the longer one drives on the road, with trucks with more than two axles usually paying more than autos and light trucks. On some roads, it is now possible to increase fees when conditions are congested. Financial and time-related costs of implementing tolling have come way down as on board devices (e.g., EZPass) can substitute for manned tollbooths. Such fees can, in principle, be very efficient in that they can be varied to account for road damage, and for local congestion, and road safety externalities.
Currently such tolling only takes place on a few roads and bridges although the current highway bills floating through the Senate look to expand tolling. To raise a large amount of federal revenue for the HTF to, for example, replace current fuel taxes, fees would need to be charged on most, if not all, miles. Annual odometer readings could be used to levy flat-rate fees on miles driven. And, soon modern on-board systems may allow for location, use and time of day pricing. Such on-board systems could also charge by type of vehicle logging the miles (ICE car vs. electric car vs. heavy-duty truck) and its occupancy (exemptions for HOV use). These variable rates could be tuned to provide appropriate incentives to reduce specific externalities. Because these fees vary by location and time, they are likely to be more efficient as state or local taxes. However, privacy concerns remain a large hurdle for on-board systems.
Another possible source of revenue is an annual federal vehicle registration fee. For avoiding road damage, such registration fees could be varied in size by vehicle type, e.g., charging more for heavier vehicles. Some states give breaks to alternative fuel vehicles (AFVs), yet others are beginning to charge these vehicles more to make up for lost gasoline tax revenues. From a road damage perspective, however, fuel type is irrelevant. Such taxes do nothing to discourage fuel use or miles driven once the vehicle is owned. Levying a federal surcharge could be politically difficult.
It appears that the best solution for raising revenue for the HTF is to use a set of policies that in combination account for the full cost of using and maintaining roads. This has the advantage of improving efficiency by addressing the different externalities from driving with separate tailored policies, and at the same time raises revenue for roads. It is important, however, to account for how policies may conflict with each other in designing the right combination of policies.
In our last blog, we identify the most efficient policies for raising revenues for the Highway Trust Fund, accounting for interactions and conflicts with other policies.