01 Jul 2009

In Defense of Mileage-Based Road Taxes

There’s been a bit of discussion recently over the idea of mileage-based road taxes replacing the Federal gasoline and diesel taxes that currently pay for the Interstate system, among other things. Most articles seem to have been prompted by a report from the “National Surface Transportation Infrastructure Financing Commission” (which somewhat strangely has a photo of the DC Metro in an underground station on its homepage) suggesting that the gas tax be phased out by 2020 and replaced by a mileage-based tax.

The proposal by the NSTIFC called for a GPS-based system to track road usage and upload it on a monthly basis for taxation purposes. This is stupid. It’s overly complex, it would be ridiculously expensive, it has major privacy concerns, its operation would be opaque to users, and it would almost certainly be open to abuse due to its complexity. It’s a terrible idea and the people suggesting it should be forced to read the RFPs of every overly-complex public sector IT project that has fallen flat on its face for similar reasons, until they repent for coming up with such a terrible idea.

However, the stupidity of that particular implementation plan doesn’t mean that all mileage-based taxes are a bad idea. The underlying concept is a sound one, and if it’s done right it might cause people to think harder about the services they’re using and how much it costs to maintain them. That’s a Good Thing in my book.

The kind of mileage-based tax I’d support would be a low-tech one. Calculate taxable mileage using annual odometer readings, conducted while vehicles are undergoing normal safety or emissions inspections. (There are states which currently don’t do emissions or safety inspections that would have to start doing them, but this change is far less than what would be required for alternative schemes, e.g. the GPS-based one.) Certainly it’s possible to roll back an odometer or bribe an inspector, but those things are already illegal, as are other kinds of tax fraud. Increase the penalties proportional to the increased incentive to commit fraud, and we shouldn’t have much more trouble with odometer tampering than we currently do.

Basing the taxable mileage from the odometer reading doesn’t require invasive GPS tracking devices, which would doubtless be used for purposes well beyond tracking taxable mileage once installed. It doesn’t require any new technology, and in many places it makes use of the already-extant inspection infrastructure. It’s cheap – both from the user’s and the government’s perspective – and it would work.

Two of the most frequently-cited concerns regarding mileage-based taxes concern drivers who frequently travel outside the US, and drivers who spend most of their time on private roads (e.g. farm vehicles). The second issue – vehicles on private roads – is easy to address: if your vehicle doesn’t have a license plate and doesn’t normally operate on public roads (vehicles which today use untaxed off-road fuel), it doesn’t get taxed. If your vehicle does have a plate, it does. In the very worst case, this might force a very small number of edge-case users to get a second vehicle, if they currently have one that sometimes operates on-road using taxed fuel and sometimes off-road using untaxed gas, but this is such a small percentage of vehicles that I’m not sure it bears building policy around.

Addressing international driving is a more interesting question. The simplest, lowest-tech solution is probably to simply record mileage as part of the border-crossing process. If drivers who are crossing the border want a tax exemption on their non-US mileage, they could carry a logbook similar to a passport, specific to their vehicle, and have the mileage noted and certified by a Border Patrol agent as they crossed out of and back into the US. It would be up to drivers to determine whether, based on the amount of mileage they actually drive outside of the US, the paperwork was worth it.

What gets lost in the discussion of mileage based taxes, and which I think bears attention, is that in any reasonably fair scenario, the taxes on passenger cars and light trucks should be vanishingly low. The bulk of mileage taxes should be placed on commercial vehicles weighing more than 6000 lbs., because they actually cause wear and tear to the roads. Passenger cars essentially don’t. Whenever you see an Interstate being repaved, it’s generally either due to weather deterioration, or wear and tear by trucks. The weather-repair costs should be borne by all drivers essentially in proportion to the amount they drive, but the wear and tear expenses should be squarely on heavy vehicles. In fact, the easiest way to ensure vehicles pay for the damage they do is to base the tax on the milage driven multiplied by the maximum axial weight of the vehicle. (Road wear is essentially proportional to the load on each axle, although I suspect the relationship is strongly nonlinear and some research might be required to determine the actual rate tables.)

And that brings me around to my only real objection to a mileage-based tax, which is also my objection to virtually all taxes except those placed on real property: the public needs an assurance from the government that the mileage tax would only be used for maintenance and construction of the transportation infrastructure, and not for whatever purpose Congress decides is politically expedient this season. This is because, when you start taxing a particular activity, you start to change the underlying incentive structure that drives people’s choices and lives. It is important to make the ‘retail’ cost (that is, the out-of-pocket cost paid by the consumer) of goods reflect the true cost to society of that good, but it shouldn’t be made any higher.

Federal road taxes should be used for the maintenance of the Federal road and highway system only – not for regional light rail projects (better funded by property taxes on those areas that will benefit) or for environmental remediation of fossil fuels (better funded by taxes on the fossil fuels themselves). And certainly not for schools, hospitals, police stations, or anything else, except insofar as the need for those things can be directly attributed to the existence of the Federally-maintained road network.

Some have objected to the idea of a mileage-based tax because under most proposals, it would not immediately replace the gas tax – that is, the gas tax would not drop to zero cents per gallon on the day a mileage-based tax went into effect. If both the mileage-based road usage tax and the gas tax were set properly, this would not be a problem. The mileage based tax would go towards infrastructure maintenance, and the gas tax would go towards remediating the environmental consequences and other negative externalities of petroleum use. Since there are a lot of negatives associated with burning oil, it should have a fairly high tax regardless of what we decide to levy for road use. Furthermore, the remaining gas tax should apply across the board to all petroleum products intended for combustion, not just road fuels: this means oil used in power generation, on farms, or by railroads shouldn’t be exempt. If you burn it and vent the byproducts into the atmosphere, it should be taxed: it’s not a “road usage” tax anymore, it’s a “petroleum combustion” one. (Here’s where you build your CO2 or climate-change taxes, incidentally.)

Retaining – even increasing, if valid reasons exist – the tax on gasoline to cover its negative externalities also eliminates one other problem with a mileage-based tax: that it creates a perverse incentive to continue using petroleum vehicles and not switch to alternative fuels, which are cleaner and have fewer negative externalities associated with their use. Plus, as a bonus, if we institute a mileage-based tax with a weight component, we can stop punitively taxing diesel fuel as a backdoor way of taxing trucks for the damage they do to the roads. Diesels are more efficient and are favored in other parts of the world (where the tax regimes are less punitive) due to their inherent economy.

There are lots of reasons to hate the mileage-based taxation proposals that have been put forward, and would require GPS receivers and constant monitoring of every car on the road. However, there’s no reason to dismiss the idea of mileage-based taxes out of hand. Taxing based on services actually consumed is always a good idea in my book, and if it were done right, a mileage-based tax could help shape our actions in ways that avoid externalizing costs on others. However, I remain as cynical as ever about Washington’s ability to get this, or just about anything else, right.

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