Imagine if you were living today on the same $1-per-week allowance your parents gave you as a child. It would be tough to pay the mortgage, buy food and find transportation, much less visit the doctor and hairdresser and otherwise keep yourself presentable.
That’s the situation facing the Highway Trust Fund (HTF), created by the federal government back in 1956 to pay for highway construction and maintenance. Feeding the fund is an 18.3-cents-per-gallon federal tax on gasoline and 24.4-cents-per-gallon tax on diesel—the same level set back in 1993.
Meanwhile, the cost of road construction and maintenance has gone up. In fact, due to inflation alone, the gas and diesel taxes have lost more than 40% of their 1993 purchasing power, according to the Institute on Taxation and Economic Policy. And vehicles are requiring fewer gallons of gas while drivers are driving less, which has prevented further growth of the revenue base.
The U.S. Department of Transportation anticipates a $100 million shortfall in the HTF to hit around August 2014, based on the current rate of revenue generation and expenditures, unless the problem is fixed. Fortunately, there are several possible remedies, although none of them is perfect.
They include:
- Tax Increase: Perhaps the most basic step is an increase in the federal fuel tax, either as a fixed cents-per-gallon increase or tying the tax to inflation, so that it can keep pace with road construction and repair costs.
According to the Congressional Budget Office, if the HTF had been indexed to inflation starting in 1993, the gas tax today would be 29 cents per gallon instead of 18.4. Of course, any mention of a tax increase, regardless of its worthiness, is anathema in the current political environment, especially under the weight of the November midterm elections. Indeed, President Obama has already said he opposes raising the fuel tax, and lead transportation chairs Sen. Barbara Boxer (D-Calif.) and Rep. Bill Shuster (R-Pa.) said recently that there are not enough votes in Congress in support of an increase to the federal gas tax in 2014.
- Mileage-Based User Fee: Based on the idea that drivers should help support the upkeep of roads the more they use them, some have proposed a vehicle miles traveled (VMT) tax, which is based on the number of miles driven by a particular vehicle. A mileage recorder would be installed in a vehicle, log the miles and report them back to the state or federal government to levy the tax. Oregon is testing such a scenario. However, there are privacy concerns with a device that tracks an individual’s movement, and this model could unfairly penalize rural drivers who must travel greater distances.
- Tax Swap: This past September, Sen. Boxer proposed eliminating the federal fuel tax and instead waging a percentage-based tax at the wholesale level. The state of Virginia and the District of Columbia have replaced their per-gallon taxes with a wholesale gas tax. However, this disconnects drivers from sharing the cost of using roads.
- Taxing Alternative-Fuel Vehicles: In Virginia, hybrid-vehicle owners were going to face a $64 annual license tax to help pay for transportation funding, although the state’s house of delegates later voted to rescind it. Drivers of all-electric vehicles, however, still must pay the tax. But considering that alternative-fuel vehicles make up only about 13% of the U.S. vehicle fleet, it would have little effect on the HTF in the short term.
The question is: Which fix—or mix of fixes—will win out?
“The easiest thing is to increase the fuel tax,” says John Eichberger, vice president of government relations for NACS, Alexandria, Va. “But it doesn’t address the problem with alternative fuels and high-fuel-efficiency vehicles. The most equitable [approach] is a VMT—but the implementation is so complicated and so anti-consumer, it’s difficult.” Eichberger does not know which fix will bear out, although he suspects it will be a mix of proposals or something not yet discussed.
“In the short run—the next three to four years—you will probably see a substantial gas and diesel tax just because it’s the devil they know, and they desperately need money for roads,” says Dan Gilligan, president of the Petroleum Marketers Association of America (PMAA), Arlington, Va.
“They’ve got to start looking at other alternatives—a VMT tax, or start putting computer chips in cars so when you pull into a gas station, it can tell how big the car is, how many miles were driven,” Gilligan says. He also believes a tax on hybrids and other alternative-fuel vehicles is needed, so that these drivers can pay their fair share toward maintaining the infrastructure.
Then there is the question of whether a higher tax would affect fuel demand and, ultimately, revenue.
“Will it have an impact on prices? Yes, of course it would; it’s raising the cost of fuel, and that cost ultimately gets passed on,” says David Zahn, director of marketing for FuelQuest Inc., a Houston-based fuel-management and tax-automation solutions provider that tracks fuel-tax issues. “Would people notice it from year to year? Maybe. Fuel’s very volatile and tax is only a small part of the price.”
As to whether it would curb demand, Zahn cites other factors—such as increasing fuel-mileage standards—that already have cut consumption.
Greg Cohen is president and CEO of The American Highway Users Alliance, a Washington, D.C.-based coalition of AAA clubs, trucking organizations, bus companies, the RV industry, motorcycle associations and other related groups. For his group’s part, the HTF is a solid program.
“It’s a system that’s served us well. It’s based on the principle that the user pays, the user benefits,” he says. The problem is the sustainability of its funding.
“At minimum, we’ve got to tie it to inflation,” says Cohen. “We also need to look at some sort of way to tie it to the growing fuel efficiency of vehicles. If we really do get to 54 miles per gallon on average—which is the goal for 2025—there should be some sort of automatic adjustment to account for that so the amount of revenue raised per mile is the same.”
Cohen believes a VMT fee would be too unpopular because of the privacy issues, but he suggests tying the tax to a government-generated statistic of on-road fuel economy would work. At some point in the future, he says, purely electric-powered vehicles would need to pay a fee, but with less than one-half-percent of the vehicle fleet running only on battery, it is not an immediate issue.
“And maybe factors beyond that to consider include some look at the actual needs of the system,” says Cohen. “We’re open to different ideas. The key thing is: The revenue needs to be sustainable.”
The folks at FuelQuest propose a series of small steps, including tying federal and state fuel excise taxes to inflation. “That really isn’t a tax increase—it’s saying, ‘Each year, as there is inflation, we want to make sure we have the same buying power we had the year before.’ It’s keeping up with our infrastructure,” says Zahn. Second, the company proposes mandating electronic tax filing, which helps states collect the maximum amount of revenue owed.
In addition, taxation could be simplified either by moving taxation upstream or implementing more toll roads. “Other things that are more innovative, like reducing congestion of traffic with HOV lanes, can lessen the burden on our roads,” and allowing more flex time for work can also help alleviate the wear and tear on roads, Zahn says. “Those initiatives have had more traction than seeing the federal tax rate go up.”
For the short term, Congress may simply permit a transfer of funds from the U.S. Treasury to cover the shortfall in the HTF, which under law cannot have a negative balance. For the long-term, sustainable future, however, the fix is not clear.
“With the highway program, we’re looking at basically a 100% cut in funding next year,” says Cohen. “We have to do something. I’m optimistic there will be at least a serious effort to address the trust fund. Whether it can happen before election day or not, I don’t know. Part of that depends on whether there really is a public bipartisan acknowledgement of the problem.”
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