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Research & Commentary: Vehicle Mileage Tax Not Ready to Replace Gas Tax

November 8, 2019

In this Research & Commentary, Matthew Glans examines a new transportation funding plan in Utah that would create a vehicle mileage tax (VMT) for electric vehicles.

In an effort to counteract the decreasing funds from the gas tax, Utah lawmakers are considering a new transportation funding plan that would create a vehicle mileage tax (VMT) for electric vehicles. A VMT is based on road use measured in mileage using an in-car device that captures the distance driven by a vehicle through GPS.

The primary benefit of the VMT is its fairness, as it charges all residents equally based on how many miles they drive. According to a 2017 study in the Journal of Public Economics, “A VMT tax designed to increase highway spending $55 billion per year increases annual welfare by $10.5 billion or nearly 20% more than a gasoline tax does.”

However, VMTs present several problems that could make implementation difficult. The biggest issue is concern over privacy. VMTs could allow the government to track drivers. Although this concern can be mitigated by limiting what is transmitted by the device and data storage rules requiring deletion of personal data, it is still a major paradigm shift in tax collection that may be unacceptable to the public.

Moreover, installing the devices in cars and periodically collecting the data would be a costly endeavor that may offset some of the gains from the tax. There are also concerns the VMT could move consumer choice away from energy efficient vehicles as they are no longer penalized for driving vehicles with poor gas mileage.

In October, the Washington transportation commission considered possible VMT plans. One would phase in a VMT over 10 years while maintaining some form of a gas tax during the transition. The VMT would eventually replace the state’s 49.4 cents per gallon gas tax.

According to the News Tribune, the commission heard three scenarios for a VMT from consultants. Each would phase in the VMT, or “road usage charge” in stages. The first stage would introduce the VMT within five years for plug-in electric vehicles, hybrids, and state government vehicles. Next, within five to 10 years, vehicles with high miles per gallon would be added; the definition of high-mileage has yet to be determined. Last, all new vehicles would be added, starting with model year 2030. The rate for this tax has yet to be decided, but the state has previously considered setting the tax at 2.4 cents per mile.

In 2017, the Washington Policy Center (WPC) released a study that examined VMTs to determine if they are a capable replacement of the gas tax and whether predictions of a future revenue problem are well-founded. The report found several problems with the VMT. WPC found that whenever a mileage tax rate increases automatically every year with inflation, which is common with most VMT proposals, drivers end up paying more on a per mile basis than with gas taxes.

The WPC study also questions whether a VMT passes constitutional muster. The state’s 18th Amendment requires gas taxes paid by drivers to be used for highway purposes only. The report notes that because several lawmakers are calling for the new funds to be used for services and programs drivers do not use, the new tax may violate the amendment.

The following documents provide additional information about VMTs, motor-fuel taxes and their effect on the economy.
 

The Road Usage Charge:  To Impose a Tax on Every Mile you Drive
https://www.washingtonpolicy.org/library/doclib/Frost-The-Road-Usage-Charge-to-impose-a-tax-on-every-mile-you-drive-PB-6.23.17-1.pdf
In this paper from the Washington Policy Center, Mariya Frost examines whether the mileage tax, as proposed, is a true replacement of the gas tax and whether predictions of a future revenue problem are well-founded.

Pros and Cons of a Vehicle Mileage Tax
https://www.glostone.com/2019/04/04/pros-and-cons-of-a-vehicle-mileage-tax/
This article from Glostone Trucking Solutions outlines several pros and cons about the vehicle mileage tax and how states should proceed.

Will Vehicle‐​Mile Fees Be a User Fee or a Tax?
https://www.cato.org/blog/will-vehicle-mile-fees-be-user-fee-or-tax
In this article, Randal O’Toole of the Cato Institute examines the potential of VMT and why they must be structured as a true user fee. “Vehicle-mile fees would be a true user fee if the money went to the roads that users drove on. They would be a tax if the money went to transit or some other program, especially if the fees were set at a punitive level designed to reduce the amount of driving people do. As a user fee, vehicle-mile fees would increase mobility and, in the long run, reduce the cost of travel. As a tax, they would increase the cost of travel and limit mobility to the wealthy,” wrote O’Toole.

State Motor Fuel Taxes
https://www.api.org/oil-and-natural-gas/consumer-information/motor-fuel-taxes/gasoline-tax
The American Petroleum Institute documents each state’s current motor-fuel taxes (both gasoline and diesel). 

Top Five Reasons Not to Raise the Gas Tax
https://www.atr.org/top-five-reasons-not-raise-gas-tax
In this article, Emma Boone of Americans for Tax Reform outlines five reasons not to raise gasoline taxes.

Gas Taxes Not Long-Term Answer For Infrastructure Funding
https://www.forbes.com/sites/adammillsap/2019/04/29/gas-taxes-not-long-term-answer-for-infrastructure-funding/#697cfa692ae8
In this Forbes article, Adam Millsap of Florida State University argues that while pressing infrastructure needs do exist many states, the gas tax is not the long-term funding answer. Millsap examines several alternatives to gas taxes that are not impacted by electric vehicles and that are more connected to road use.

23rd Annual Highway Report on the Performance of State Highway Systems
https://reason.org/wp-content/uploads/2018/01/23rd_annual_highway_report.pdf
In this report, the Reason Foundation ranks the performance of state highway systems in 11 categories, including spending per mile, pavement conditions, deficient bridges, traffic congestion, and fatality rates.

GSI Analysis: State Revenue Report—New Taxes Increase Some Revenues, Others Show Weakness
https://www.gardenstateinitiative.org/updates/2018/8/24/gsi-analysis-state-revenue-report-new-taxes-increase-some-revenues-others-show-weakness
The Garden State Initiative examines several novel New Jersey taxes and their effects on revenue. The author discusses the state’s gasoline tax, New Jersey’s revenue shortfall, and the possible need for additional tax hikes.

Alternatives to the Motor Fuel Tax
https://www.heartland.org/publications-resources/publications/alternatives-to-the-motor-fuel-tax
This report, prepared by the Center for Urban Studies at Portland State University and submitted to the Oregon Department of Transportation, evaluates potential alternatives to motor-fuel taxes. The report also identifies the economic and technological problems that must be addressed when designing alternative revenue sources.

Designing Alternatives to State Motor Fuel Taxes
https://www.heartland.org/publications-resources/publications/designing-alternatives-to-state--motor-fuel-taxes?source=policybot
Writing in Transportation Quarterly, Anthony M. Rufolo and Robert L. Bertini consider the future of motor-fuel taxes as more fuel-efficient vehicles become available. They also report on the economic effects of road pricing as a substitute for fuel taxes.

Paying at the Pump: Gasoline Taxes in America
http://taxfoundation.org/article/paying-pump-gasoline-taxes-america 
In this paper from the Tax Foundation, Jonathan Williams argues gas taxes can be an effective means of funding transportation improvements. In many cases, however, governments exploit the taxes for political reasons, spending them on projects unrelated to roads and other transportation improvements. 

Research & Commentary: Congestion Traffic Pricing
https://www.heartland.org/publications-resources/publications/research--commentary-congestion-traffic-pricing
Congestion pricing, an alternative to gasoline taxes, uses market principles to address traffic congestion. Under congestion pricing, operators of a road charge a variable price based on congestion, allowing the operator to manage demand and limit congestion. Heartland Senior Policy Analyst Matthew Glans examines several proposals for implementing pricing systems to alleviate traffic congestion. 

Raising Gas Taxes Won’t Fix Our Bridges
https://reason.org/wp-content/uploads/2007/10/59f2e045a676b9c69bb9139b2c217bf3.pdf
In the aftermath of the I-35 bridge collapse in Minneapolis, Minnesota, Adrian Moore of the Reason Foundation argues increasing fuel taxes should not be the only response to state transportation funding problems. Moore wrote, “First we must examine how we spend transportation dollars now. Then we maximize the value out of those dollars. Finally, the last step is to address the need for additional revenue.”

 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

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Author
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance. In 2012, Glans was named senior policy analyst.
mglans@heartland.org @HeartlandGR