Components of Highway Funding Shortfalls

I forget where, but I recently heard another story about highway funding that specifically mentioned declining vehicle miles traveled (VMT) and increasing fuel efficiency as causing reductions in gas tax revenues. The impact of inflation on the purchasing power of gas tax revenues was mentioned only in passing (to note that the federal gas tax has not been increased since 1993).

The VMT and fuel efficiency trends are real, but are they the main show? Well, we have data! So here’s a look at trying to tease out the impacts of decreasing VMT, increasing fuel efficiency, and inflation on transportation funding at the federal level.

Warning: all of the calculations here are very rough. There are many variables involved that are beyond the scope of this post. A detailed study would probably be a good project for a grad student somewhere. As it is, take the results here as indicative of the order of magnitude of impacts.

Detailed methodology is explained at the bottom of the post.

The federal gas tax was last raised in 1993, to 18.4 cents per gallon. Since that time, inflation has eroded the purchasing power of the gas tax (i.e. the same amount of money now buys less roads). In addition, in recent years there has been a notable increase in fuel efficiency, and a stagnation of VMT. Because people are driving more fuel efficient vehicles, and driving them fewer miles, the amount of gas used is going down, and so are fuel revenues.

To figure out the impact of each factor, we need to look at data trends over the last 20 years and pose some reasonable counterfactuals. For data, I pulled VMT from the St Louis Fed’s FRED service, inflation from the BLS Inflation Calculator, and fuel efficiency from the EPA’s Fuel Economy Trends Report. For counterfactuals, I looked at the following scenarios:

  • VMT growing at a constant 2.33%/year, the approximate rate at which it grew from 1993 to 2005.
  • Gas tax being adjusted annually to account for inflation.
  • Vehicle fuel efficiency held constant at 1993 level.
  • Combination of all three factors.

Trends since 1993 are shown in the following graph:

yearly revenue loss

Logically, the loss of purchasing power due to inflation has an immediate and increasing effect, tempered by slower inflation in recent years. The emergence of VMT and fuel efficiency as significant factors in revenue losses is relatively recent, within the last 5 years.

The next graph shows cumulative losses to transportation funding since 1993:

cumulative revenue loss

The reason to look at cumulative losses is that transportation funding is usually authorized as multi-year bills, and surpluses (or deficits) to the highway trust fund roll over from year to year. The loss of purchasing power due to inflation dominates; change in VMT trends only recently emerges as a relatively minor factor. Changes in fuel efficiency have had basically zero effect on the long-term solvency of the fund, as recent gains in fuel efficiency have just barely offset losses in fuel efficiency in the late 1990s and early 2000s.

While these are only order of magnitude results, they show pretty clearly that inflation has been the most important factor. It is beyond the scope of this post to argue if additional federal transportation funding is needed, but if it is, raising the gas tax is the easiest and most effective way to do it. (Note that theoretically, declining revenues due to declining VMT isn’t even a problem in the first place, since less driving means less roads are needed. And due to climate change, trends that result in higher fuel efficiency and lower VMT are net positives for society.)

So why so much talk about declining VMT and fuel efficiency? Wild guesses: first, it’s a convenient narrative if you want to replace the gas tax with a VMT tax and/or tolls. Second, it makes the problem seem more complicated, which creates the opportunity for Serious People™ to opine. And lastly, it provides a scrap of cover to incompetent politicians who would look like dunces if everyone realized that the problem could be solved by a 25-word piece of legislation raising the tax and indexing it to inflation.

Methodology

A detailed assessment of the impact of inflation, VMT, and fuel efficiency trends on gas tax revenues is beyond the scope of this post, which is intended to determine orders of magnitude. Data was processed as follows.

VMT data was pulled from the St Louis Federal Reserve Bank’s FRED service. I used the January data point for the moving 12-month average for each year from 1993 to 2014. VMT trends started changing in 2005, so I calculated the annual rate of change from 1993 to 2005 as about 2.33%, then projected a VMT trend from 1993 to 2014 at that rate. The impact of VMT trends was calculated as a function of the difference between actual VMT and “implied VMT” calculated at 2.33% growth per year.

Inflation data was pulled from the BLS’s CPI calculator. I calculated the tax rate for each year from 1994 to 2014 that would yield the same purchasing power as 18.4 cents in 1993. The impact of inflation was calculated as the difference between revenue that would have been collected if the tax had been adjusted for inflation every year and revenue that was collected at 18.4 cents per gallon. This methodology probably systematically underestimates the impact of inflation, since costs of construction materials increased more quickly than general CPI between 2000 and 2007.

Fuel efficiency data was pulled from the EPA’s Fuel Economy Trends Report. This data provides fuel efficiency for vehicles by model year, not for the actual composition of the US vehicle fleet. Therefore, it can’t be used directly because that would overestimate the impact – model year 2014 cars are more efficient, but most cars on the road are older. I generated a crude fleet MPG by summing the product of model year fuel efficiencies and an approximation of vehicle fleet composition by age.

I then calculated assumed revenue amounts for each year as follows (where T = tax rate):

  • Actual revenue for each year: R = T(VMT/MPG).
  • Implied revenue assuming VMT continued to grow at 2.33%, and the gas tax was adjusted yearly for inflation, and no gains in fuel efficiency: S =T’ (VMT’/MPG’).
  • Implied revenue assuming actual VMT trends, but gas tax adjusted yearly for inflation and no gains in fuel efficiency: W = T’(VMT/MPG’)
  • Implied revenue assuming the actual gas tax (i.e. unchanged), but VMT continued to grow at 2.33% and no gains in fuel efficiency: X = T(VMT’/MPG’)
  • Implied revenue assuming actual gains in fuel efficiency, but VMT continued to grow at 2.33% and gas tax adjusted yearly for inflation: Y = T’(VMT’/MPG)

As a point of reference, the world’s finest information source says that the federal gas tax raised $25b in 2006. The methodology here generates an estimate of $27.4b. Good enough.

The revenue losses due to each factor were then calculated as the difference between the theoretical revenue with all historic trends (S) and the theoretical revenue with actual trends for each factor (W, X, Y):

  • Total revenue loss = S – R
  • Revenue loss from VMT trends = S – W
  • Revenue loss from inflation = S – X
  • Revenue loss from fuel efficiency = S – Y

Note that the total revenue loss does not equal the sum of the components, i.e. (S-R) ≠(S-W) + (S-X) + (S-Y). This is because the factors are not independent. For example, if fuel efficiency goes up, the revenue lost from a decline in VMT will go down, because the missing VMT represents a smaller amount of gas. This is why the three factor lines on the graphs do not sum to the total.

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One thought on “Components of Highway Funding Shortfalls

  1. Alex

    Follow-up question for you. You show the components of the implied loss, and make them cumulative since 1993. What is the actual cumulative shortfall in HTF balance sheet over that time, and how what % of that number is attributable to your estimates here? ie These talking points are brought up all the time. If we had accounted for them via policy in real-time, how much lower would the cumulative deficit have been? Could we call the remainder what we’ve ‘overbuilt’ relative to actual user demand? (this, of course, ignores demand elasticities to price increases via gas taxes that correct for these factors).

    Reply

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