Mileage Based User Fees are the Most Realistic Long-Term Funding Mechanism

Commentary

Mileage Based User Fees are the Most Realistic Long-Term Funding Mechanism

Despite a growing consensus that mileage based user fees are the best long-term solution for funding transportation infrastructure, most panellists at a recent DC event recommended some other solution.

As part of Infrastructure Week 2015 in Washington DC, the Eno Center for Transportation­­­, American Action Forum and the Center for American Progress hosted a panel event titled “Transportation Funding and the Future of the Highway Trust Fund,” The goal of the five panelists was to address “long term” solutions to the Highway Trust Fund’s (HTF) shortfall. Recent funding proposals have included: general fund transfers, repatriation, a gas tax increase, a federal role reduction, and a shift to mileage-based-user-fees. Yet except for MBUFs, each of these funding sources is problematic.

Most federal surface transportation funding comes from the Highway Trust Fund that was created in 1956 to pay for the Interstate Highway System. The HTF receives its money from the federal gas tax of 18.3 cents per gallon of gasoline and 24.4 cents per gallon of diesel fuel. Although the fund was supposed to sunset when the Interstate system was completed, the fund remained. While supporting some legitimate federal highway needs, the program increased in size to fund transit, active transportation and non-federal roadway needs. As a result, since 2008 the HTF has experienced massive shortfalls which have been addressed with temporary patches and bailouts from the general fund. As pointed out by Kevin DeGood, the director of the Infrastructure policy at the Center for American Progress, $65 billion were transferred from the general treasury to the highway trust fund between 2006 and 2014. Currently, the fund is running a $13 billion dollar cash deficit and is expected to exhaust all of its money by the end of the summer.

One reason for the deficits is the HTF’s diversion from the user-pay-user-benefit principle that originally built the system. The user-pay-user-benefit approach requires that those who benefit from government spending are the ones who should pay for the associated government spending. In the HTF’s case, highway projects should be funded by highway users and highway user fees should not be used to fund non-highway projects. Although the gas tax structure ensures the former, the latter is often violated today as the HTF is being used to fund a litany of non-roadway projects that are not national priorities. As of 2014, roughly 25% of the HTF was diverted to spending on non-roadway projects. In particular, approximately $8 billion was spent on buses, rail, streetcars, recreational trails and other projects of local nature.

Increasing vehicle fuel standards and inflation are another reason for the deficits. The gas tax has lost its purchasing power in recent years due to the rise of fuel-efficient cars and the failure to index the tax to inflation.

As such, any solution to the HTF shortfall needs to address these root problems. Yet most of the panel’s suggestions did not focus on re-incorporating the user-pay-user-benefit approach. Further, most of their solutions were one-time-only measures.

For example, several years ago the Eno Center for Transportation suggested eliminating the HTF in favor of using the general fund to support transportation projects. Jeff Davis, a Senior Fellow at the Eno Center, appeared to moderate Eno’s position by stressing that highway projects should continue to be funded by the highway trust fund and non-highway projects should be paid for with general funds. This is a realistic short-term solution, but not a good long-term solution. First, gas tax revenue adjusted for inflation is going to continue to decline. So at some point some general funds will have to support highways. General funds clearly lacks the user-pay-user-benefit approach as the general funds are not paid by the highway users’. Further, transportation has historically not competed well with more politically popular programs such as defense, social security or healthcare. Relying on general funds assumes transportation will become a higher national priority, which is a leap to say the least. Finally, transit and active transportation projects are inherently local, and should be funded by state and local governments not Washington D.C.

Repatriation, another option, has its own problems. Repatriation involves taxing multinational companies’ overseas earnings to generate funds for infrastructure projects. At least three types of repatriation proposals have been offered: the Administration’s GROW AMERICA Act, a new version of Rep. John Delaney’s Partnership to Build America Act, and a bipartisan proposal from Sen. Barbara Boxer and Sen. Rand Paul. However, the President’s 14% tax, which would provide funding for 6 years, will never pass. A more politically feasible 6% tax would but it only raises 2-3 years of funding. When funding runs out we would be in a worse position than we are today. Hence, such a solution is inherently short term and not a way to ameliorate the HTF’s long term fiscal situation. Repatriation also destroys the users-pay principle.

The next “solution” brought up by Rep. Jim Renacci is raising the gas tax. The gas tax has not been increased since 1993. With the President and leaders from both political parties officially against raising the gas tax, passing any increase will not be easy. But even if the political will exists, the gas tax is another short-term solution. Increasing vehicle fuel efficiency and the growing number of hybrid and electric vehicles are leading to a reduction in the revenue power of gas tax. Increasing the gas tax by 15 cent and indexing it to inflation only buys us 10 years at the most.

Part of the solution is reducing the program’s scope. Gone are the days of ever increasing revenue when we could fund environmental goals and economic development dreams. A national transportation program should fund just that-projects that are national and related to transportation. Everything else: transit, active transportation, and even local roadway projects need to go. However, with expected annual reconstruction and maintenance costs of rebuilding the system more than today’s annual gas tax collections, we need more than just cuts to excess programs.

Therefore, Mileage Based User Fees (MBUFs) are the best and to date only realistic long-term solution. Most funding experts and one member of the panel, Rob Atkinson, president of the Information Technology and Innovation Foundation, believe that a mileage-based-user-fee would be easy to administer and a better users-pay/users-benefit payment mechanism than the gas tax. Mileage-fees are levied on drivers based on the number of miles they drive. Different technologies could allow the fee to be much more flexible in terms of where and when it is levied. More importantly, while gas taxes are based on a vehicle’s fuel efficiency, MBUFs are based on the actual amount of road travel consumed. This would address the recent loss in purchasing power of the gas tax. Furthermore, increasing vehicle fuel efficiency will no longer come at the expense of maintaining roadways.

While the federal government dithers, states are experimenting and implementing MBUFs. So far, Oregon, Nevada, and Minnesota have tested MBUF systems, with Oregon taking the furthest steps to permanently replace gas taxes with road user charges for some drivers. On July 1, 2015 the Oregon Dept. of Transportation will begin assessing a charge of 1.5 cents per mile for 5,000 drivers of cars and light commercial vehicles who have volunteered for the state’s road usage charge program; gas taxes will be refunded for all MBUF program participants. Finally, California is starting a pilot project later this year.

Mileage based user fees are the best current long-range funding solution. If we actually want to solve our long-term transportation funding situation, MBUFs have to be part of the solution.

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