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Finding a New Way to Pay for Roads

June 28, 2012 By Will Nissen, Fellow

Through inflation and efficiency standards, the gas tax—which funds road repairs and highway construction—isn't going as far.

Americans are driving less, fuel efficiency is increasing significantly, and the Environmental Protection Agency and National Highway Traffic Safety Administration have proposed even higher efficiency standards (54.5 miles/gallon by 2025). This all combines to decrease tax-based highway funding. In Minnesota, federal and state motor fuel taxes supplied almost 50% of our total transportation funding in the fiscal year 2011.

Federal policymakers have been struggling over the last couple years to change this drain on the transportation budget structure, and for good reason. The federal fuel tax has stayed at 18.3 ¢/gallon since 1993. According to the Energy Information Administration, the total volume of motor fuel (conventional and blended gasoline) moving through U.S retail outlets (eg, gas stations) hovered around 60 million gallons per day from 1993 to 2008. But in January of this year, this number dipped below 27 million gallons per day, it’s lowest since at least 1983. That’s about a 55% drop in motor fuel volume sold from 2008 to 2012 in the U.S. but no increase in the federal motor fuel tax rate.

In Minnesota, we’re a little better off. The state motor fuel tax rate for all types of motor fuel stayed at 20 ¢/gallon from 1988 to 2008, when policymakers acted to gradually increase the rate to 28.5 ¢/gallon, effective July 1, 2012. This has helped compensate for a 20% drop in motor fuel volume sold in Minnesota from 1.04 million gallons per day in 2006 to 828,500 gallons per day in 2011.

Simply raising the motor fuel tax rate only acts in the short term, and doesn’t deal with the long-term dilemma of funding transportation budgets with a gas tax in the face of changing transportation habits, methods and goals that rely less and less on gasoline.

Minnesotans went through a similar quandary in the years prior to the Next Generation Energy Act of 2007 regarding energy conservation. Profit models for utilities selling electricity to consumers were based on the amount of electricity they generated: more electricity equals more money. This contradicted efforts to implement energy efficiency and conservation. Policymakers “decoupled” the quantity of electricity produced from utilities’ profits.

Similarly, an effective long-term solution for transportation funding would be to find a way to decouple budgets from gas taxes to reflect a more diverse transportation vehicle fleet. But then how do we raise transportation funds for our roads and bridges in a way that is tied to the use of those roads and bridges?

Beyond installing toll roads on Minnesota interstates and highways, one option that is being examined is a mileage-based user fee. In this scenario, drivers are taxed for the number of miles they drive rather than the amount of gas they use. This makes sense in a world where a 15 mpg Hummer H3 shares the road with a 31 mpg Honda Fit.

At Legislature's request, the Minnesota Department of Transportation (MNDOT) has studied the potential and feasibility of a mileage-based user fee system in Minnesota and recently released a report outlining the idea. MNDOT is also currently running a pilot program of 500 volunteers in Hennepin and Wright County using off-the-shelf smart phone apps to track miles traveled. In a potential future system, this information would be used to assess how much of the fee drivers are charged. 

Some benefits of switching to a fee system include being able to directly charge all drivers who use the state’s roads, allow for more funding flexibility, and a more sustainable revenue source as the transportation landscape changes. But there are also some significant concerns with making the switch, including the cost to implement, drivers’ data privacy, and public acceptance of the concept.

Car insurance companies have already implemented this concept through Pay-As-You-Drive programs, and new cars more commonly come with GPS mapping and tracking systems installed. So making the switch from gas tax-based revenue to a mileage-based system may be more feasible moving forward, when it comes to technology.

If we want to be able to adequately fund our transportation needs here in Minnesota and throughout the country, we will at some point need to alter our means of generating revenue away from a gasoline tax. Less travel, more fuel-efficient vehicles, and broader changes in transportation habits and preferences by people will continue to erode the effectiveness of the current gas tax system.

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  • Dean says:

    July 3, 2012 at 9:22 am

    Only a greedy, right-wing conservative would propose such a regressive and unnecessary bureaucratic nightmare.  Taxing by mileage instead of fuel consumed is based on one fundamental, seriously flawed assumption:  it’s unfair for those people who choose to drive inefficient vehicles to carry the majority of the road tax burden. Consider for a moment what’s happening with today’s system.  The government is taxing what it wants people to use the least of - gasoline and diesel fuel.  And the environmentally conscious public responds by buying more efficient vehicles like plugins, hybrids and diesels.  Reducing the nation’s oil consumption is a national imperative and the tax-by-mile system would be contradictory to this goal.  Who can argue against that?  The final strike against a mileage based system is the fact that Americans aren’t paying nearly the real cost of their motor fuel.  It’s heavily subsidized once you include all the externalities.  Raising the road tax on motor fuel is not a new tax at all but rather simply a reduction in the size of the subsidy. The tax on motor fuel is a simple and time-tested way of collecting road tax.  It’s used throughout the western world.  I’ve never read of Europe proposing to build a similar bureaucracy to solve a non-existent problem.  There is a reason MN is one of only two states proposing such an idea - it makes no sense on many levels.