Getting rid of the gas tax, redux

Written by adam


The post on the mileage tax stirred up a lot of reaction, much of it negative. As it happens, the state of Oregon recently wrapped up a successful trial of a mileage tax system, so for the next few posts I’m going to be relying heavily on an excellent final report on the system (pdf) from the Oregon Department of Transportation (ODOT).

The primary objection to a mileage tax is that we already have one: it’s called the gas tax, and it’s easy to administer, fair, and has the added bonus of rewarding fuel-efficient vehicles and driving behavior. ODOT says, “From the standpoint of tax policy, the gas tax is close to perfection.”

Or at least, it was close to perfection. It has one fatal flaw and a few subsidiary issues. Any discussion of the mileage tax must be grounded in an understanding of the gas tax’s growing problems.

First, keep in mind that the gas tax is meant to raise funds for road infrastructure. Any environmental benefits are incidental. And with regard to its primary function, the gas tax is nearing the end of its useful life, because its tax base is steadily and inevitably dwindling. Cars have become more fuel-efficient — as they must under the nation’s CAFE laws — and these efficiency gains will grow as hybrid electric and fully electric vehicles make up a greater proportion of the national fleet. States across the country today face budgetary shortfalls from this trend. ODOT says, “In about 10 to 15 years the state’s gas tax revenues will enter permanent decline. While this crisis is only a few short years off, the pain of lost revenues has already begun.” (Ten years might sound like a long time, but ODOT’s plan for phasing in a mileage tax stretches all the way to 2040.)

Second, the environmental benefits of the gas tax are largely theoretical. The tax is too low to have much effect on either vehicle choice or driving behavior. According to ODOT, “the average passenger vehicle driving 12,000 miles per year only pays $12 in state gas tax per month,” a tiny fraction of fuel cost, insurance cost, and vehicle cost. While it’s great that a Hummer driver pays more in gas taxes than a Prius driver, a Hummer driver also pays a lot more for gas. In truth, neither driver is sweating the tax very much.

A sharp upward adjustment to the gas tax could address both these issues. Which brings us to the third problem: decades of experience show the near impossibility of raising the gas tax even to the extent necessary to match inflation. Last year, two of the three leading presidential candidates campaigned on a suspension of the gas tax — and they weren’t even from the same party. Politicians usually take the heat for this situation, but much blame lies with gas-obsessed voters.

Would a mileage tax address these issues? Clearly it addresses the first. The only source of revenue erosion under a mileage tax would be a drop in miles driven, which are far more stable over time than gallons purchased. **Note that this issue alone dictates the eventual replacement of the gas tax.**

Regarding the second issue, a mileage tax can easily be designed to reward vehicle fuel efficiency in the same manner that a gas tax does. In fact, more exotic mileage taxes can specifically target drivers who bear a disproportionate share of responsibility for greenhouse gas emissions or are most able to seek transportation alternatives — say, people who drive gas guzzlers in urban centers. Will such a system be any better than a gas tax at encouraging conservation? Probably, and it’s unlikely to be any worse.

Finally, will politicians be able to raise a mileage tax to keep revenue in line with expenditures? Uncertain. On the one hand, the level of emotion surrounding the gas tax springs in part from the high volatility of gas prices. Separating the road fee from the fuel bill might lower the temperature of this issue. On the other hand, Americans pretty much hate to pay for anything. At the very least, the lack of revenue erosion with a mileage tax will reduce the need for constant price hikes. Again, it seems unlikely that the new system could be worse than the old.

So the scorecard thus far is that a mileage tax corrects the huge, gaping flaw in the gas tax and performs at least as well on two secondary issues. Next up: the complexity issue.

*Hat tip to commenter Jason Slason for the link to the ODOT report.*

P.S. Last week, a commenter wrote, “Dear Terrapass, I am surprised to see you jump on the tracking bandwagon…” Hopefully people know this, but the opinions I express here are entirely my own.

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  1. BCC

    Here in Massachusetts, the state govt. is looking very seriously at increasing the gas tax to the highest 1-2 in the nation. Meanwhile, there have been more theoretical discussions of implementing a mileage-based tax as well.
    My recent experience is that increasing the gas tax is much, much, much more politically palatable than a distance-based tax, even when the former is a very tangible proposal, and the latter is still in the abstract.
    Mileage-based systems give certain entities all the proof they’ll ever need that environmentalists are out to control people. Even most progressives I know, including those who are fairly informed about mileage-based plans, are horrified by it.
    My reaction to “But close to perfection is different than perfect” is “The perfect is the enemy of the good.” I understand the theoretical advantages of the mileage-based system, but I think most of these advantages fall apart in the real world.
    I certainly am interested in hearing more about mileage-based systems, but I still think it’s the wrong way to go.

  2. Jay

    A mileage tax is certainly fair, and we do have to do something in the long run if we succeed in marginalizing the use of petroleum, BUT, as a policy tool, raising the gasoline tax has a lot going for it. I’d like to see it go up 2 cents per gallon each month for about a decade. That would be a relatively painless way to ramp up the incentive to use less gasoline. The current low gasoline price is subsidizing long commutes and heavy, gas-guzzling vehicles. Persuading people to drive less and to drive more efficient vehicles is a big environmental win and good for the economy. The proposed cash for clunkers program would help to reduce the impact on the poor by making it easier for them to upgrade to more efficient vehicles.

  3. Adam Stein

    I think I’m going to update the original post. That quote about gas taxes being perfect is sort of meant in a theoretical way — they’re easy to collect, hard to evade, etc. But the bigger picture issue is that the tax base is going away, so however awesome it is theoretically, it needs to be replaced.
    I agree that political palatability is a big issue for mileage taxes.

  4. Tom Harrison

    Adam — I read the ODOT report when it came out late last year; I came away feeling ambivalent.
    I pretty much agree with both of your posts on this topic, and I think two items you emphasize here are good ones.
    First, it is true that a gas tax will (hopefully!) be an insufficient tool; the mix of vehicles using alternative fuels necessitates a change … eventually.
    Second, the historical lack of political will to raise gas taxes is important. But I think your own equivocation at the end echoes what I was thinking — you could call it whatever you like, but it’s still a tax. A lot of things we haven’t had the will to do for decades are getting done (or moving in the right direction) including gas taxes.
    To me, the current issue is simply that the DOT’s don’t have enough money. And some governors don’t have enough guts (as another comment writer said, it’s looking good for a higher gas tax here in Massachusetts).
    By all means, we should continue advancing the various technologies, hardware components, and so on needed to make mileage fees come to pass.
    But I don’t see an urgent need, especially when there’s a far more expedient solution at hand, and one that for the time being has a built in progressive tax. Don’t we have bigger issues to address that are directly aimed at advancing the development of renewable resources?
    That’s something that no one has had the will to make happen until very, very recently. And if I have to put my focus somewhere, paying for roads a new way is pretty low on my list.

  5. Jody

    I think some objections to the mileage tax could be overcome if a system could be devised where it didn’t seem as if government was tracking when, where and how far a person travels. We have a big privacy ethic in this country. The gas tax is pretty anonymous–you pay your tax at the pump.

  6. Matt

    I think one additional benefit people miss with the gas tax is that on average heavier vehicles that do more damage to the roads pay more. A millage based tax might be adjusted by gross vehicle weight or something but ultimately it is a more complex system.
    IMO increasing the gas tax is a viable short term solution. Few vehicles (as a percentage of the fleet) will not require gas in the next 10+ years and as we look a decade or two in the future we might want to examine just using income taxes for road projects.

  7. richard schumacher

    A mileage tax is more palatable if it is accompanied by mileage-based insurance.
    In the near term raise the fuel tax, but don’t call it a tax: it internalizes the external costs of fossil carbon use, so call it a fossil carbon mitigation payment or user fee. People will more easily accept paying for the costs they cause to others.

  8. Kerstin

    I believe a toll on the roads you drive is not bad – it taxes only the people who drive the roads, and helps create the funds for those specific roads to begin with. I have traveled in several countries, and also in various states where there are tolls on the roads – and if a way can be found to make it easy to pay with minimal impact on traffic flow, I believe that, in addition to the gas tax, would solve much of the problem. The other advantage is that to start with, it is the bigger roads – so people who never leave their town may not need to pay it for a long time.
    Just an idea.

  9. jorge

    Here is an idea: The DOT of each state keeps track of how many vehicles, class, size, etc. are circulating out there. They also have a pretty good idea of how much it costs to keep roads, bridges and tunnels in decent shape. So, how about, charging a fixed fee at the time of registration that takes into account all this parameters and covers for part of the expenditures needed. Thus, a hummer pays more than a prius, etc. (I wonder how much that would be relative to the cost of a car).
    Clearly, this does not take into account that a hummer driven 1,000 miles wares the roads much less than a prius driven 10,000 while using up comparable amounts of gas. So, in addition to the above, keep (and increase) the gas tax (so that the hummer pays its share) and introduce an electricity tax that covers the difference. Here the hummer owner pays less and the prius owner pays its share.
    Surely, we can estimate the electricity bill’s increases when an electric car is added to a household. Electricity companies already keep track of all these numbers (and nobody complains about privacy issues). Perhaps a separate meter can be installed with the outlet used to charge the cars or something like that.

  10. praful

    good luck. try collecting these taxes plus what is there for stopping someone tampering with whatever system they use and avoid paying taxes. at least now you pay up front at the gas station.

  11. Dave

    I agree that charging by the mile would be okay if we could have other costs of car usage tied to the miles. Pay As You Drive auto insurance needs to be implemented in all states immediately. As far as I’m concerned, the mileage tax could be tacked onto that rate if it makes people feel better.
    I’m tired of paying full insurance on a car that I consciously avoid driving for ecological reasons. I am subsidizing all the high-mileage drivers out there. Why is auto insurance regulated differently in each of the 50 states? What a backwards system we have.

  12. Adam Stein

    I’m going to discuss this issue in my next post. The system ODOT implemented continues to collect the tax at the gas station, and they also address the evasion question.

  13. RR Gilbert

    Taxing Vehicle Miles Traveled
    As we wean ourselves off gasoline with alternative energy means ( electric, hydrogen or whatever), there will be a need for supplanting the current gasoline tax. A program is currently underway that proposes to install GPS computers in each and every road vehicle to measure vehicle miles traveled for the purpose of taxing such mileage ( You would be billed periodically for your use of the roads. This elaborate system would run well into the billions of dollars and present invasion of privacy issues.
    This proposed GPS system is totally unnecessary. All vehicles (cars, trucks, busses, motorcycles) on the roads today have recorders of vehicle miles traveled. These recorders are rugged, reliable and tamper-proof. They are called tires. You want to tax vehicle miles traveled? Tax tires.
    Proponents of the GPS computer scheme claim that high usage roads could be charged at higher rates. A system for doing that is already in place; it uses toll booths.
    Now some people might tend to drive conservatively, within the speed limit, slowing down for curves, etc so as to get more mileage out of their tires, but think of this as a reward, like a charitable deduction on your income tax. Others may get less mileage by driving aggressively, speeding, cornering fast, etc. Think of this as sin tax. Tires on a Lincoln may not wear as well as those on a Ford Focus; think luxury tax. It all sort of makes sense, doesn

  14. Anonymous

    Say what?
    “In fact, more exotic mileage taxes can specifically target drivers who …are most able to seek transportation alternatives

  15. Steve

    Those of us who drive fuel efficient cars (e.g. hybrids) must pay our share to maintain the roads. I don’t see how this can happen without a mileage tax. If one were to have an electric only vehicle, they would never be paying to use and maintain the public roads.

  16. tsukemen

    Aha! Tire tax. Though, kind of non-intuitive to punish you for buying more durable tires.
    The GPS route is extremely invasive, not to mention expensive and a variety of ways to circumvent (electronic == foolable).
    While hybrids and plug-ins are ‘better’, I only see more coal plants in our future as we are charging our cars.

  17. Tom A

    I like the out-of-the-box thinking of the tire-tax solution. I think the single biggest issue with this idea is that many consumers would avoid buying new tires until the old ones were completely bald. I suspect many people would ignore wear sensors until it was too late.

  18. Rob Morris

    My opinion…
    I feel that I am one of a relatively small group of people, who strongly believes in the benefits of a high tax on private or commercial transport, with a good system of subsidies for public transport, efficient transport, the poor, and for enterprises operating in crucial sectors such as farming.
    A mileage-based system is fair, easy to measure, well targeted and could be mostly self assessed at tax time (making tax subsidies and management far simpler).
    Reducing usage of oil is vital. Not only are we currently reliant upon oil for our very survival, but oil is the most efficient and viable source of mobile fuel we have available to us. The longer we preserve it the better.
    Our current biggest problem re: oil is increasing demand. Anything that can gracefully and viably help reverse the trend of increasing consumption is vital to our future. The more expensive petrol is, the more incentive there is for efficiency and alternative technologies – which can only benefit us.

  19. Rob Morris

    I vehemently agree that a GPS based solution is a Bad Idea.
    A tire tax is a good idea, and certainly a part of the solution, but I can see many ways it could be exploited and it would artificially decrease demand for tyres – not great for tire manufacturers/retailers. I don’t see that a tire tax could effectively serve as the primary mechanism.
    However, all cars are also fitted with another mileage measuring device – a speedometer. Modern speedometers are difficult enough to tamper with that it’s a viable measurement solution.
    Compliance would be simple to administer and non-invasive. Vehicles already require on-road checks. Simply require a speedometer check once per year, and this is submitted with the income tax return and taxed accordingly.

  20. Rob Morris

    One more note re: fraud. Taking a philosophy of “near enough is good enough”, I don’t see fraud as a show stopping problem. A speedometer approach is not tamper proof, but neither are income taxes. While -some- people may illegally avoid some tax, there are an increasing number of ways to cross reference data and catch them, and MOST of the tax due will be collected.

  21. Jason

    So if we have a mileage tax is the Government going to have some kind of machine to monitor our driving at the gas pump? …or are they going to expect me to put it on my car like fastrack so they can track all my movements? I don’t like the idea of a Mileage Tax. We should just have more responsible state spending.

  22. Rob Morris

    You are definitely right about such invasive or high-overhead forms of monitoring. I’m for a mileage tax, but strongly against any invasive forms of measurement such as GPS, pump monitoring & traffic-cam monitoring.
    It can be done oh so simply with a odometer, which gives absolutely no indication of WHERE you’ve been, just how far you’ve travelled.

  23. RR Gilbert

    As I discussed in my blog, the unsafe tire is a problem. Nevertheless, I think the solution to it would be much more feasible than the GPS scheme.

  24. disdaniel

    Sheesh you guys are way out there! Makes me think I shouldn’t renew my terrapass…you obviously have too much time on your hands.
    Your mileage tax is trying to solve a problem that doesn’t exit. Besides it sounds creepy and intrusive.
    Wait until hybrids/electric cars make up more than a few percent of our vehicle fleet.
    In the mean-time vehicle registration fees can be hiked to cover any state-by-state DOT shortfalls.

  25. RR Gilbert

    The odometer approach is feasible, but it does require setting up a new federal bureaucracy for gathering the data. The feds would probably rely on the states. The potential for corruption is very real; just slip the man a C-note and he will misread (or overlook!)the first digit.
    In any case, either the tire method or odometer method is far superior to the GPS scheme. The immediate goal is to stop spending time and money on the GPS approach.

  26. Anonymous

    You would be rewarded, not punished, for buying more durable tires.

  27. J-M Toriel

    Here in BC, Canada, we have North America’s first carbon tax implemented July 1, 2008 at the hight of the gas price surge. If you think gas prices were high south of the 49th, add about $.40/Gallon. We have about 95% hydro or micro-hydro. All fossil fuels at the pump, natural gas and home heating oil are taxed. I commend the BC gov’t for taking a lead position on this and hope it spreads to reduce consumption of fossil fuels. Story here: