Updated Tax Policies Could Secure Road Infrastructure Funding While Supporting the Energy Transition
Using the organization’s modeling capabilities, a team of researchers from Resources for the Future (RFF) analyzed several policy options that would maintain America’s roadways while supporting the transition to a cleaner transportation network.
💡 What’s the story?
The United States’ highway system relies heavily on revenue generated by gasoline taxes–but rising fuel economy and electric vehicle sales means current tax policies are no longer sustainable. The Biden administration’s new policies to spur electric vehicles will also add to the funding challenge. Using the organization’s modeling capabilities, a team of researchers from Resources for the Future (RFF) analyzed several policy options that would maintain America’s roadways while supporting the transition to a cleaner transportation network.
The team analyzed three policy options and reached the following conclusions.
- Adjust tax rates for gasoline-powered vehicles and add a new per-mile fee for electric vehicles. A gas tax of approximately $1 per gallon for gas-powered vehicles and a tax of $0.03 per mile on electric vehicles would raise the needed revenue without slowing down electric vehicle sales.
- Levy a per-mile fee on all light-duty vehicles. A tax of $0.03 per mile would be sufficient to maintain roadway funding and performance.
- Charge all motorists for the external costs of driving (including greenhouse gas emissions, local air pollution, congestion, and traffic accidents). This method would introduce a tax of $3.85 per gallon (or $0.16 per mile) on average for gas-powered vehicles and a tax of $0.06 per mile for electric vehicles. This would create significantly more revenue than the other options and rapidly accelerates electric vehicle sales.
Author Perspective
“US and state governments need a consistent stream of funding to fill potholes, build new roads, and repair bridges. A ‘vehicle miles traveled’ tax, set to the right level, could be an especially good option to maintain transportation funding. However, policymakers will likely face substantial technical and political challenges in implementing this, which points to the importance of understanding the need for–and effects of–such a policy.”
—Senior Fellow Joshua Linn
The chart below notes the taxes and associated revenue collected under the three policy scenarios. Either higher taxes on gasoline or a per-mile fee of $0.03 levied on all passenger vehicles could achieve target revenues.
🔎 How do we know?
The new paper uses RFF’s transportation model to analyze how different policy scenarios would affect roadway funding, electric vehicle adoption, vehicle miles traveled, and gasoline consumption between 2025 and 2035. The model set up a business-as-usual baseline to determine current trajectories and compared these against the three policy options. In addition, the modeling creates alternative scenarios in which fuel economy standards are extended beyond their current levels.
The modeling only includes household vehicles and is unable to estimate how changes in gas taxes affect commercial and fleet vehicles such as large trucks or rental cars.
🚗 How would these policies affect communities?
The modeled policies would raise electric vehicle sales compared to the baseline. Under the hypothetical scenario in which all externalities are incorporated into the price of gasoline or vehicle miles traveled, the number of electric vehicles on the road skyrockets.
Total vehicle miles traveled is not expected to change substantially under any of the policy scenarios.
Gasoline consumption is expected to fall substantially for light-duty vehicles under all modeled scenarios. With a vehicle miles traveled tax and gasoline excise tax, light-duty gasoline consumption is expected to fall from roughly 95 billion gallons in 2019 to 47–60 billion gallons by 2035. Under a scenario in which externalities are priced into taxes, consumption is expected to fall to roughly 19 billion gallons by 2035.
Regardless of the policy type, however, new transportation taxes may raise political and practical challenges. Start-up costs of implementing a large-scale vehicle miles traveled tax are substantial. There are also concerns over equity, as a tax on vehicle miles traveled may disproportionately burden rural and low-income households depending on its design. Tracking vehicle miles traveled, too, introduces concerns about privacy and data collection.
Author Perspective
“It’s undeniable that our revenue policies around road transportation are in dire need of reform, and recent efforts to reduce vehicles’ emissions will make this problem worse. But as we develop solutions to this problem, it will be especially important to pay attention to equity. For example, rural households will be concerned that a tax on vehicle miles traveled will burden them disproportionately, as they tend to drive longer distances. As policymakers consider implementing something like a tax of vehicle miles traveled, they will want to ensure that new policies don’t introduce new inequities or exacerbate old ones.”
—Fellow Daniel Raimi, director of RFF’s Equity in the Energy Transition Initiative
📚 Where can I learn more?
For more information, read the working paper, “Transportation Taxes and Energy Transitions: Alternative Policy Designs for Funding US Road Infrastructure and Pricing Externalities,” by RFF Senior Fellow Joshua Linn, Senior Fellow Virginia McConnell, Senior Research Analyst Sophie Pesek, and Fellow Daniel Raimi.
For more commentary, read Raimi’s blog post, “The Climate Challenge Demands a Shift to Electric Vehicles—But How Will We Fund Road Infrastructure?,” on the Resources website.
Resources for the Future (RFF) is an independent, nonprofit research institution in Washington, DC. Its mission is to improve environmental, energy, and natural resource decisions through impartial economic research and policy engagement. RFF is committed to being the most widely trusted source of research insights and policy solutions leading to a healthy environment and a thriving economy.
Unless otherwise stated, the views expressed here are those of the individual authors and may differ from those of other RFF experts, its officers, or its directors. RFF does not take positions on specific legislative proposals.
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