Mileage-Based User Fees Are a Promising Successor to the Gas Tax
© Maryna Patzen |


Mileage-Based User Fees Are a Promising Successor to the Gas Tax

The United States needs a new funding policy to fund its surface transportation network.

The United States needs a new funding policy to fund its surface transportation network.

The Highway Trust Fund, derived mainly from the federal gas tax, funds nearly 80% of federal transportation projects. At the state level, the largest source of road infrastructure funding is also the gas tax.

However, gas taxes have declined precipitously over the past two decades and are no longer sufficient to fund the nation’s infrastructure.

One reason for this decline is the structure of the gas tax. The federal government designed its gas tax at a fixed cent-per-gallon rate. The federal gas tax has sat at 18.4 cents per gallon since 1993 and is not tied to inflation. During that period, inflation has eroded the purchasing power of the dollar by 76 percent.

States differ in their approaches. While most state gas taxes also use cent-per-gallon structures, 20 states and the District of Columbia have variable rates that automatically adjust to external conditions. Using either inflation, gas prices, population size or some combination of the three, these states’ gas taxes will increase or decrease without regular legislative action.

Nonetheless, states have also felt a decrease in the tax’s ability to fund infrastructure. First, improved vehicle fuel efficiency levels have directly reduced the amount of revenue raised by gas taxes. Second, the rising costs of construction and infrastructure maintenance have diminished the purchasing power of revenues collected.

Consequently, some policymakers argue that gas taxes should simply be raised. Although this action would increase the funds available for infrastructure projects, modern developments have created another issue with the gas tax model.

When gas taxes were instituted, they were considered a relatively fair but indirect form of a user charge. Because fuel efficiencies of vehicles were initially lower, gas purchased was proportional to the distance traveled. Thus, the tax an individual paid on each gallon of fuel could be justly equated to a tax on the number of miles that individual drove on public roads.

Today though, drivers are able to travel longer distances on a tank of gas or even avoid using gas altogether, owing to advancements in fuel efficiency and alternative fuel technology. This development has radically weakened the relationship between gas purchases and vehicle-miles driven. Although Americans are driving more miles than ever, consumption of gas in the United States has plateaued.

As this trend continues, drivers of lower fuel efficiency vehicles will increasingly pay a disproportionate share of infrastructure funding relative to their road usage. An increase in the gas tax would have no effect on this problem of equity.

Many states, having recognized the importance of these two issues, have studied possible replacement policies for the gas tax. One potential policy solution is mileage-based user fees (MBUFs).

Also referred to as road usage charges, MBUFs are fares based on the vehicle miles driven. After reporting changes in the odometer readings, drivers would pay a nominal fee per mile traveled – generally between 1 and 3 cents. This would supplant the state fuel tax.

By taxing the consumption of infrastructure directly, MBUFs can avoid the equity problems of the gas taxes. These will more accurately reflect changes in driver behavior, resulting in increased revenue as the number of vehicle-miles driven rises. Also, MBUFs could be directly indexed to inflation, avoiding future political battles over fee increases.

However, there are two significant concerns about MBUFs replacing the gas tax.

First, MBUFs would be much more expensive to collect than gas taxes. Collecting fees from millions of individual drivers is undoubtedly a complex and expensive task. Generally, acceptable administrative costs are less than 10 percent of revenue, but the gas tax system requires between 2-5 percent. New Zealand’s MBUF system, which collects fees from about 750,000 vehicles, costs less than 5 percent of revenue. Nonetheless, more research needs to be conducted in the United States to determine if the increased revenue yield of MBUFs will offset the increased collection costs.

The second issue is privacy. The type of system used to record mileage could have the potential to invade the privacy of the users. A system that relies on the manual reporting of odometer readings may not compromise individuals’ privacy; but an automated system, one that records driver behavior or vehicle location, could produce legitimate concerns. Some state studies have experimented with hiring a third party for data storage, limiting GPS location data collection and anonymizing individuals’ data to preclude privacy issues.

Oregon has researched the applicability of MBUFs more than any other state. In 2015, after conducting two pilot programs over the previous decade, Oregon created the nation’s first statewide road usage charge program, OreGo. After attaching an automated mileage-counter to their cars, volunteers pay 1.5 cents for each mile they drive in Oregon and receive a rebate on the state gas taxes paid at the pump. Although the program only registered 1300 vehicles as of December 2016, OreGo is a significant step in the development of a replacement for the gas tax.

As long as total vehicle-miles driven continues to increase and gas consumption remains stagnant in the United States, the current federal and state infrastructure funding policy is obsolete. Raising the gas tax and indexing it to inflation will not fix the system’s problems. Mileage-based user fees could be the way to revitalize revenue streams and restore the fairness of a user-pay system.

Connor Kitchings is a transportation policy intern at Reason Foundation.

Baruch Feigenbaum is assistant director of transportation Policy at Reason Foundation a non-profit think tank advancing free minds and free markets.