A version of this testimony was given to the Maryland House Environment & Transportation Committee.
Chairman Korman, Vice Chair Boyce, and fellow Members:
My name is Baruch Feigenbaum. I am the Senior Managing Director for Transportation Policy at Reason Foundation, a non-profit think tank. For more than four decades Reason’s transportation experts have been advising federal, state and local policymakers on transportation funding and financing.
Overview of Testimony
While the federal government continues to delay action on meaningful transportation funding reform, states are leading the way. Understandably, raising taxes is unpopular. And while the motor fuel tax has been a reliable funding mechanism for the past 100 years, due to the combination of an increased number of electric vehicles, an increased number of hybrid vehicles, and particularly the increased fuel efficiency of vehicles powered by internal combustion engines, the fuel tax will not be a reliable mechanism in the future. The fuel tax is like a rockstar on his farewell tour. The time to replace it with something more durable has arrived.
While states have studied multiple options, ranging from statewide sales taxes to kilowatt-hour fees for electric charging, two national surface transportation commissions, the National Conference of State Legislatures, and several transportation research organizations across the political divide have all recommended that states transition from a fuel tax to a mileage-based user fee (MBUF). Reason Foundation echoes that recommendation.
There are two basic types of transportation funding sources: those that follow the users-pay principle and general revenue sources.
A road-use fee, similar to the current fuel tax, follows the users-pay/users-benefit principle. Using this principle to fund and finance transportation projects has at least five benefits:
- Fairness: Those who pay the user fees are the ones who receive most of the benefits, and those who benefit are the ones who pay. This is the same general principle used with other utilities, such as electricity and telecommunications.
- Proportionality: Those who use more highway services pay more, while those who use less pay less (and those who use none pay nothing).
- Self-limiting: The imposition of a user tax whose proceeds may only be used for the specified purpose imposes a de facto limit on how high the tax can be: only enough to fund an agreed-upon need for investment.
- Predictability: A user fee produces a revenue stream that can and should be independent of the vagaries of government budgets.
- Investment signal: The user-pays mechanism provides a way to answer the question of how much infrastructure to build, assuming that the customers have some degree of say.
To understand why a consensus has emerged around the users-pay principle and mileage-based user fees, it helps to examine the other options. Other than the fuel tax and MBUFs, there are few other good users-pay options. Increasing registration fees would be one revenue source, but Maryland’s $221 registration fee is already higher than the U.S. average. Tolling is a promising option especially on new capacity and in bridges and tunnels. But surface streets cannot be easily tolled, and Maryland’s eight tolled facilities already generate $1.8 billion in toll revenue. Other user-pay options, such as tire fees for light-duty vehicles, are challenging to implement and don’t raise significant revenue.
Many of the other funding options, including a statewide sales tax, statewide property tax, use of general fund revenue, or forcing Delaware to pay for the infrastructure, lack that users-pay principle. But the bigger practical concern is the money raised from general taxes is not dedicated to transportation. As a result, it is more challenging for state DOTs to bond against it, reducing the number and speed of projects that they can deliver. And the money can be easily diverted to other purposes. Typically, when transportation competes for funds directly with other state priorities such as education or health care it loses.
Maryland House Bill 1457 takes the first step in replacing the fuel tax with a mileage-based user fee. By allowing drivers of fuel-efficient vehicles the choice of paying a sliding fee for road usage based on vehicle fuel efficiency or participating in a formal mileage-based user fee program, the bill begins the needed process of transitioning Maryland to a more sustainable road funding mechanism.
By requiring owners of electric vehicles using the highway system to pay their fair share, the legislation will have a small but real impact on Maryland’s Transportation Trust Fund. While the exact amount depends on whether participants choose the annual surcharge or the mileage-based option, charging the state’s approximately 127,000 electric vehicles the $125 surcharge nets the state $16.5 million while charging the state’s 158,000 hybrid vehicles the $100 surcharge raises $15.8 million.
However, the bill is not primarily about raising revenue. In fact, MBUF program participants receive a discount for participating in the program. Drivers of vehicles powered by internal combustion engines would pay only 85% of the amount that they would pay in fuel taxes. This approach has been successful in encouraging MBUF adoption in other states that have tried it, such as Virginia. While this may lead to a slight revenue decrease in the short term, it could speed up the adoption of MBUFs, providing a more reliable revenue source over the long term.
Maryland is not starting from scratch on MBUFs. Other states across the country, including Oregon and Utah, already have permanent MBUF options. Further, Maryland has already conducted a pilot to determine how MBUFs would work. The average driver would pay $23 a month to use roads with a MBUF, the same amount as they pay in fuel taxes. Perhaps more surprisingly, in Maryland’s pilot, rural drivers paid about 9% less with MBUFs than they paid with fuel taxes. This result echoes findings from other states, including Vermont and Virginia. The reason is that rural drivers are more likely to have older, less fuel-efficient vehicles. Under the current policy, rural, poorer drivers of Ford F-150’s are effectively subsidizing suburban and urban wealthier drivers of Toyota Prius’, an odd public policy choice.
Unfortunately, there are several bills in the Legislature that would ban an MBUF system. While the authors of these bills raise understandable concerns about an MBUF program including the concern that an MBUF might be layered on top of fuel taxes, the reality that wealthy transit users do not contribute enough funding, or worries about privacy, each of those concerns can be mitigated.
I strongly agree that wealthy transit users in suburban Baltimore and Washington D.C. should be paying more to ride transit. But dedicating portions of the Transportation Trust Fund that are supporting transit to highways instead will by itself not fix the fundamental underlying problems with the fuel tax.
High-tech MBUF options use GPS signals, which are sent one-way from the satellite. However, given location is calculated using multiple satellites, GPS alone cannot be used to track the vehicle. However, for those uncomfortable with high-tech options, low-tech odometer readings are another option. Participants could use a camera app to monitor mileage data. Another option would be for mechanics, who already collect this data and report it to private entities such as insurance companies and to the Department of Motor Vehicles, to collect data for this program. The odometer readings would not provide any entity access to data for which it does not already have access.
Thank you for the opportunity to testify on HB 1457. I’m happy to answer any question here in person or in writing.