Tag Archives: Gas Tax

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.

Should We Worry About Highway Subsidies?

I touched on this issue way back when I wrote about the gas tax, but I’d like to expand the thought.

One of the most common criticisms of auto infrastructure from transit and smart growth activists is that drivers don’t pay the full cost of roads – the gas tax and other associated fees have not been increased enough to keep pace with spending new construction and backlogged maintenance. Much of the money spent on highways comes from property taxes, which you pay regardless of if or how much you drive. Counter to this, you have folks like Randal O’Toole, who note that no transit agency in the country covers even its operating costs with fare revenues, let alone capital costs. Transit agencies don’t pay property taxes, but they run buses over roads paid for by those taxes. In addition, the federal government and many states have dedicated part of their gas tax revenues to transit, meaning that drivers subsidize transit.

Still Not User Fees

As I said in my post on the gas tax, I don’t see how transit activists can win under the “user fee” framework. Some, like Cap’n Transit, claim that transit would make money if drivers were forced to pay the full cost of driving. However, given typical farebox recovery ratios on US transit systems (about 25%-50%), I don’t see how that could happen. Assuming farebox recovery is currently 50%, an agency would have to either double the number of people on each vehicle, double the amount of money extracted from each rider, cut unit operating costs in half, or some combination of the three. (Note that just doubling ridership doesn’t cut it if you have to run additional vehicles, since that costs money.)

Realistically, it seems to me that a scenario in which a transit agency has 100% farebox recovery is a scenario in which low ridership routes are eliminated, low ridership stops are eliminated, off-peak service is reduced, and peak service fares are higher. Now, maybe you’re fine with that scenario, but you should back up, read your Jarrett Walker, and ask yourself what you’re actually trying to do with your transit service. Are you ok balancing the transit agency’s books by raising fares on people too poor to afford cars? Are you ok with stranding people who live on low volume routes? Are you ok telling your city’s late-night crowd to suck it up and pay for a cab?

Generally, though, the agency is being asked to provide some minimal level of service to all parts of the region, for some minimum span of service, regardless of profitability. In that context, it’s not consistent to expect the agency to be profitable. There are also many benefits that accrue to society as a whole that the agency can’t capture – for example, if someone chooses to ride transit instead of driving, there are benefits to air quality from less congestion. In that sense, we aren’t “subsidizing” transit, we’re making an investment in the public domain that ought to produce future public benefits exceeding the cost.

And here’s the thing: many of the same arguments apply to roads.

For example, implementing tolls or increasing the gas tax is only progressive at the crudest level of analysis. In general, transit riders are poorer than drivers, but there is huge variability within drivers. Within the driving population, these taxes might be regressive, since wealthier drivers can afford to live closer to work. Like low volume transit routes, it is expensive per capita to provide arterial roadways to rural areas, but we’ve decided that in our society everyone deserves some base services. We also expect roads to produce benefits to society that aren’t directly captured by the government agency in charge of roads – for example, when rubber-tire internal-combustion trucks became available, there was a large reduction in the amount of horse poop lying in city streets. (The memories have faded, so we don’t often think of the horse poop benefits of trucks nowadays.)

Public Services Framework

In fact, both roads and transit could be considered public services like police and public schools, and we certainly don’t expect the police department or elementary schools to fund themselves entirely from user fees.

In that case, why charge drivers anything for road use (or why charge patrons anything to ride transit)? There are two reasons to charge for public goods:

  • Negative externalities (in this case, mostly air pollution and GHG emissions)
  • Overuse (in this case, congestion)

With this framework, the gas tax serves both purposes: it imposes a base usage fee that discourages people from driving for no reason, and it taxes people in proportion to the amount of pollution they create. The gas tax should probably be increased nationally because of the high costs of air pollution and GHG emissions. Some states or metro areas might consider a further increase as a base congestion charge. Managed toll lanes, like exist on the 91 and the 110, should be implemented on a larger scale to help deal with congestion during peak periods.

Another nice feature of this framework is that it’s perfectly logical to charge drivers more than it costs to maintain the road if demand is very high. The surplus can be used to fund other parts of the transportation system. For example, New York charges very high tolls on the Hudson River bridges and dedicates the surplus to transit operations. It’s also reasonable under this system to charge wealthy Acela patrons more than it costs to run those trains, and subsidize other services.

It always seems like a pretty cynical argument to me when I hear transit activists argue that “drivers should pay the full cost of roads”. Under a counterfactual where highway user fees generated more than enough money to cover maintenance of existing roads, would they be arguing that the rest of the fees should be used on roadway expansion capital projects? Of course not. Taking roads and transit to be public services results in a more consistent argument.

What About Overbuilding?

Part of the argument is that if drivers had to pay the full cost of roads, we’d build less roads. True, and valid if your preexisting goal is building less roads. By the same token, if transit riders had to pay the full cost of transit, we’d be building fewer trophy streetcars and suburban LRT lines.

Overinvestment and misallocation of resources is a classic problem of public services. Cities with useless streetcars are no different than rural towns whose police equip themselves with tanks or cities that say they’re going to supply every student with an iPad. In other words, there is no substitute for good governance. While you certainly could curtail some of the abuses by going to a user-fee system, remember the compromises that go with that. Other countries have shown that competent public governance is possible.

However, the more I think about it, the more I’m in favor of getting the federal government out of the capital projects side of things. Our mainline freeway and rail networks are complete, and the federal government seems to make a lot of poor investment choices now that most of the good capital projects are complete. There’s definitely an equity case for some federal involvement in helping out poor states and cities with operating costs and vehicle procurement, and the federal government should help states and cities out by using its low interest rate to borrow, but should the feds be involving themselves in things like Portland’s streetcar extension or the 69 freeway? Probably not.

Are Roads a Public Good?

You could make an internally consistent argument that drivers should pay the full cost of roads if you think that roads are not public goods.

I’m not buying that argument for arterials and neighborhood streets, since having two competing road networks in a city would be a huge waste of land, like having competing gas or electric companies. If arterials and streets were privately owned, they’d have to be regulated like a utility, and you’re right back to the issue of competent governance.

The argument is believable in the case of limited access tollways, where it’s easy to control access at onramps and offramps, and easy to manage demand through variable tolls. If public arterials are available, no one needs to use the freeway. However, I think there are practical limits to that model as well, which I’ll address in a separate post.

The Right Argument for Tolls

Aaron M. Renn, aka The Urbanophile, has an article out today about the need for tolling in Rhode Island. There’s no doubt that things in the Ocean State need some work; I was on the 195 recently and saw some terrifying levels of spalling concrete like that seen in the picture of the Warren Ave overpass. Renn pitches tolls for facilities like the Sakonnet River Bridge, and VMTs, which he calls de facto tolls.

I’ve written before about how VMTs do not make sense and do not actually solve any of the stated problems, so I don’t have anything to add there.

However, the issue of traditional tolling is another good one to discuss, and I think Renn’s article runs into trouble there. First, while tolls solve the problem of inadequate funding, they do not solve the other major issues that Renn identifies: corruption and incompetence. Toll money can be wasted just as easily as gas tax money; it does not force the state to stop deferring maintenance. There is no substitute for building competent governing institutions, and evidence would suggest Rhode Island has a ways to go with that.

Beyond that, though, Renn uses the same faulty user fee logic that I wrote about in the context of VMTs. Renn says that “it’s intuitively fair for those who use something to pay for it”, an argument frequently heard from progressive writers who don’t care for cars. As I said, this is a disastrous line of reasoning for progressive causes, since transit users don’t pay for the entire cost of transit either. We don’t provide roads “for free” any more than we provide bus service or public education for free.

There is a logical framework with which you can make an internally consistent argument that highway users should pay the entire cost of highways, but transit users shouldn’t pay the entire cost of transit. If you think that highways are not public goods, but transit is a public good, then you’re good to go. But if roads are not public goods, then there’s no reason for the public sector to supply roads at all, and the solution would be to just privatize roadways. That argument seems plausible regarding limited-access highways, but certainly not with respect to local roads and bridges.

If you think that roads are public goods, there are still arguments in favor of tolling. I think there are two, one solid and one marginal. The solid argument for tolling is congestion charging as a way of capacity management. Congestion is a negative externality of driving, and drivers should pay for it. Unlike VMTs, congestion charges account for a negative externality that cannot be properly captured by the gas tax.

The marginal argument for tolling is that users of expensive facilities, like bridges and tunnels, should pay more. This is a marginal argument because it partly relies on the faulty user fee framework. People who have children that require special education use more expensive school facilities, but we do not make them pay additional school tax. The strength of tolls for expensive facilities is that it forces local users to pay for the facility, instead of allowing them to fleece distant taxpayers who may not be paying attention, which provides an incentive to control costs. Note that this is also partly a substitute for competent governing institutions.

So again, like the gas tax, there are good reasons for tolling, but you should always think twice about the user fee approach.

Gas Taxes Are Not User Fees

I wasn’t planning on making the first post on this blog about gas taxes, but transpo funding is in the news a lot lately, and I’m getting sick of writing the same comment over and over again on Streetsblog, The Atlantic Cities, etc.

America’s infrastructure could use some sprucing up. If you live in the Northeast or Midwest, your bridges are rusting away from years of road salt. If you ride one of America’s big legacy transit systems, every day you’re putting your safety in the hands of components so old they can’t even be replaced, because no one makes them anymore.

So, where should we get the money to address this problem? That’s easy. Currently, the federal government can borrow money at negative real interest rates. Considering that any tax increase is going to have a negative effect on aggregate demand, which is the last thing the economy needs right now, it’s an open and shut case.

However, as is usually the case in America, the obvious policy solution is blocked by political intransigence, so lately the debate has been about how to raise more revenue. With a hike in the gas tax off the table, other ideas like a vehicle-miles tax (VMT) have been floated. The basic idea of the VMT is that everyone pays a fixed rate for each mile they travel, with miles traveled being recorded through low-tech means like odometer readings or high-tech means like GPS. For reasons I fail to comprehend, the VMT is getting a lot of traction in the progressive community, capped off by a recent GAO report that declared the VMT more “efficient and equitable”. But in fact, the VMT is a bad idea, and by supporting it, progressives are doing a huge disservice to the cause of better pedestrian, bicycle, and transit facilities.

The supposed benefit of the VMT is that it charges people based on how much they use roads – in effect it’s a user fee. Later, we’ll get to why that’s a bad idea in and of itself, but for now, note that the gas tax can be considered a de facto user fee. The more you drive, the more gas you use, and the more you pay. In addition, the gas tax has the benefit of making people who drive inefficient vehicles pay more. A VMT rewards people who drive Escalades at the expense of people who drive Volts. How is that more “equitable” than the gas tax? Sure, you could make the VMT higher for vehicles that are less efficient, but why go to all that trouble?

Which brings us to the second reason the VMT is a bad idea – it is complicated to implement. Any system, from low-tech odometer readings to high-tech GPS, would be subject to rampant fraud. High-tech systems like GPS would require every vehicle in the country to be outfitted with a VMT unit, at considerable expense. The GAO found that depending on the system, up to 33% of the revenue would be lost to implementation costs. Compared to a gas tax hike, which would lose 0% of revenue to implementation costs, how is that more “efficient”?

But wait, didn’t we say that a gas tax hike was off the table? Ah, now we’re getting somewhere. Why is a gas tax hike off the table? Because politicians decided it was off the table. So my question to progressives is this: do you really think that GOP pols will reflexively block any increase in the gas tax, but are perfectly willing to go tell the Agenda 21 crowd that they all have to install government-monitored GPS units in their cars? It’s just ridiculous. No Republican politician takes the VMT seriously. It’s a red herring, an issue that can be used to distract from the need to raise the gas tax. They’ll call for studies of the VMT, and then cite privacy concerns and implementation difficulties as reasons it won’t work.

Beyond all of this, though, if progressives engage in the debate using the “user fee” framework, we’ve already lost, no matter what the outcome. A lot of people have jumped on the “drivers should pay the full cost of roads” bandwagon just because they don’t like cars. But the obvious next step in the argument is that transit riders should pay the full cost of transit, bicyclists should pay the full cost of bike improvements, and so on. The likes of Cato and Reason, who love highway user fee concepts, already make that argument. If you look at the gas tax or VMT as a user fee, you’ve set yourself up for Randall O’Toole to make a convincing argument that gas taxes and VMTs should only fund highways.

Okay, so if the gas tax isn’t a user fee, then why do we have it? Simple. It’s a tax on the negative externalities, which include pollution, climate change, noise, and so on.

Here’s the right way to think about it. On one side, we have public goods that cost money – things like schools, roads, transit, etc. Some projects are better than others and more deserving of funding. On the other side, we need to raise revenue, and there are better and worse ways of raising revenue. The gas tax is a great way to raise revenue because it imposes a cost for generating negative externalities in direct proportion to the rate at which a vehicle produces those externalities, and because it already exists. A tax on bicycling would be a bad idea, because bikes generate positive externalities that we would like to increase. Similarly, a VMT punishes nascent alternative technologies that we ought to be encouraging. Note that by this logic, it is perfectly reasonable to have property or land taxes contribute to funding transportation – land is worthless without access to transportation, just like it is worthless without police to stop crime. We don’t demand that user fees pay for police service either.

Note that this framework also allows you to build a coherent argument for why the gas tax should be increased but transit fares should not. It obviates the “I pay for my roads so you pay for your bikes and trains” talking point – cycling and riding transit have positive externalities, so they should be promoted. It’s also the right way to argue in favor of HOT lanes and congestion pricing, which are taxes on the negative externalities of traffic congestion. The user free framework, on the other hand, is an argument you can’t win. It’s a trap.

Its_a_trap

As for the supposed fatal flaws of the gas tax, they are all weak arguments that fail to hold up to scrutiny:

  • Inflation: the easiest to dispense with. The argument goes that inflation has eroded the purchasing power of the gas tax. The obvious solution is to index the gas tax to inflation or construction costs or what have you, or periodically raise the gas tax. You know, like we did for 60 years.
  • Fuel efficiency: the argument here is that increasing fuel efficiency has made it impossible to raise enough money from the gas tax. Note that this is logically inconsistent with the idea that enough money can be raised from a VMT – as long as we are driving gasoline powered vehicles, a gas tax and a VMT can be seen as functionally equivalent, with the difference being that a gas tax is a tax on inputs and a VMT is a tax on outputs. Electric and natural gas vehicles may be an issue someday, but right now they are an inconsequential portion of the vehicle fleet. And at any rate, the data shows that in historical context, current increases in fuel efficiency are not out of scale with what happened in the 1970s.

fuelecon

  • Not popular with drivers: and the VMT won’t be either. Shockingly, people prefer not paying to paying.
  • Politically impossible: the same kind of thinking that leads people to argue for spending billions of dollars on trans-Hudson rail tunnels before maximizing existing capacity by through-routing.

At the end of the day, there is simply no compelling technical or economic reason to switch from gas taxes to VMTs. On top of that, a VMT would be a major victory for the kind of people who want to user-fee everything in the public realm. The VMT is counterproductive for progressive causes and we need to treat it as such. The answer is simple. Raise the gas tax because it is a charge on negative externalities.