Untangling Transportation Funding

As the recent kerfuffle between the Transportation secretary, the White House, and a key congressional leader demonstrate, issues around funding and finance dominate the discussion about surface transportation in the U.S. today.

While that flap was about taxing miles traveled instead of, or in addition to, gasoline consumed, they provide a window into the long simmering quandary over how we move the nation.

Already, we have had not one—but two—national commissions on the topic, and the U.S. Government Accountability Office (GAO) recently added transportation financing to its annual list of high-risk areas suggested for oversight by the current Congress.

Why the high anxiety?

Put simply: the money flowing out of the federal transportation trust fund (often referred to as the "highway" trust fund) is greater than the money flowing into it. This past September Washington was forced to shift $8 billion from the general fund to cover a shortfall in the transportation account. Estimates for how short the fund will be this summer hover around $9 billion.

Despite the sharp, and perhaps simplistic, rhetoric of late, the origins of the shortfall are the result of multiple trends converging.

For one, the federal gas tax—generating nearly 90 percent of the federal transportation revenue—has not been raised in nearly 20 years, not even to keep pace with inflation. So, as the rate effectively declines, so does the purchasing power of the trust fund. The current 18.4 cent per gallon tax in the U.S. is far less than in European competitor nations.

Americans are also driving more fuel-efficient cars. In 2008, the average fuel efficiency of new U.S. passenger cars was 31.2 miles per gallon, the highest figure ever. With more hybrid cars in the marketplace, and eventually electric ones, this efficiency is expected to continue its ascent.

But in addition to more fuel-efficient driving, Americans are also driving less overall. In fact, after decades of steady increases, the total amount of driving in the U.S. has slowed dramatically and fell from December 2007 to December 2008 by 108 billion miles—the largest sustained drop in driving this nation has ever seen.

Without a doubt, some of this drop is due to the fraying economy. However, a recent Brookings report found that driving began to plateau as far back as 2004 and dropped in 2007 for the first time since 1980. These recent declines in driving predated the steady hikes in gas prices during 2007 and 2008.

Yet the gas tax remains a critically important revenue source and will continue to be so for the foreseeable future. Since 2001 only tolls and bond “revenues” grew at a faster rate than fuel taxes in terms of all funds used for highways.

Economists have long criticized the current system of roadway pricing, contending user fees should be structured so that different classes of vehicles would pay their respective costs. One such study found that single-unit trucks weighing more than 50,000 pounds contribute in user fees only 40 percent of the estimated costs of their use. Autos contribute 70 percent of their costs; pickup trucks and vans, 90 percent; and single-unit trucks weighing less than 25,000 pounds contribute 150 percent of their costs through the taxes and fees they pay.

If charges were levied in proportion to the costs imposed by vehicle type, and if roads were constructed to more demanding standards, savings in road maintenance and replacement costs over time would be great enough to permit lower user fees for all classes of vehicles. But getting the prices right also means taking into account the range of impacts, including social costs and environmental impacts on climate change.

So how do we better price the system and still generate needed revenue?

Transportation Secretary Ray LaHood suggested last week that the nation consider using satellite tracking devices to record how far and when motorists drive and would assess a fee based on those travel habits. This is known as a vehicle miles traveled fee, or VMT fee.

Though the White House rebuked him, there are many benefits: better allocation of revenues (based on the roads used), better allocation of costs (vehicles damaging to infrastructure such as heavy trucks could be assessed at a greater fee), and better allocation of resources (higher fees could be charged based on time of day and congestion levels).

Unlike the gas tax, a VMT fee would be unaffected by greater use of more efficient vehicles. In addition, it provides a price signal that encourages drivers to minimize roadway congestion. A VMT fee is also very flexible—it allows pricing to vary depending on the actual cost of capacity, allowing for higher fees during congested periods and lower fees when traffic is free-flowing. VMT fees can also be directed at segments of users, for instance commercial trucks. Germany currently uses a similar system.

The obvious problem is that as driving continues to drop a VMT charge would, almost by definition, generate less revenue or else require regular and frequent increases. Two additional objections, beyond technical feasibility, are privacy concerns and eliminating incentives for more fuel efficient vehicles. However, since the federal gas tax only makes up 9 percent of the cost of a gallon of gasoline, fuel efficiency would still save.

There are many excellent reasons to move aggressively to explore new revenue sources. New ideas such as mileage based fees and a carbon tax would better connect revenue generation to other important domestic priorities. We should also expand market mechanisms such as tolling, variable pricing, high occupancy toll (HOT) lanes, cordon and areawide schemes to better price the system. But they are likely to be less effective as solutions to the funding challenges in the short term.

So what are we to do?

No one solution exists. We need to consider a range of mechanisms, and all options should be on the table. In the immediate term, the federal gas tax should be raised—at least to keep pace with inflation.

Yet the nation should not be tethered long term to the fuel tax for transportation revenues—so the federal government should also provide stronger incentives for the adoption of market mechanisms like congestion pricing to maximize metropolitan road networks, as well as the expansion of user fees. While the VMT tax is still years away from practical implementation here in the U.S. (a 2020 goal was set by one of the national commissions), it is an idea whose time has come. The federal government can continue to study its feasibility through pilot projects.

All of these sources are important and have merit—and all should be discussed, not dismissed, as part of the larger and ongoing conversation about national transportation reform.