Looking at a New Fee to Replace the Obsolete Gas Tax

Loren Kaye
President of the California Foundation for Commerce and Education

California’s roads and highways are losing their financial base.

The primary tax source to maintain and improve our state’s transportation infrastructure has been eroding for many years. The excise tax paid on each gallon of gasoline does not keep up with inflation, and steadily improving vehicle mileage means fewer taxable gallons of gasoline are purchased for the thousands of miles each car and truck travel on the road.

The challenge to our transportation financing model from improved fuel economy is about to get much worse. Californians are buying thousands of vehicles that use little or no gasoline but still travel the highways as much as gas guzzling taxpayers.

The eroding tax base for road and highway upkeep is nearly unsustainable.

Like it or not, policy makers will need to address this funding mismatch, and face the usual menu of unpalatable options: raising the gasoline tax or vehicle license fee, seeking voter approval of more state bonds, diverting general tax revenues for transportation, or simply hoping that local agencies will meet the need.

Another option to fill the gap is to charge drivers for the actual miles they use the roads and highways. Called a vehicle miles traveled (VMT) fee or mileage-based fee (MBF), this option is only now being contemplated in California. The novelty of this new revenue source and the stakes in solving the transportation finance dilemma mean that every alternative should be carefully considered.

The California Foundation for Commerce and Education was fortunate to be able to join forces with  the Graduate Practicum at the USC Sol Price School of Public Policy to develop a report on this potential new revenue source.

Transitioning from the Gasoline Tax to a Fee on Vehicle Miles Traveled is an informative and thoughtful review of this issue, authored by Jeff Khau, Stephen Michael II, Lili Sun and Peilin Yuan.

Their report synthesizes academic research and survey data collected regarding transportation funding and specifically analyzes how a VMT system would work in California. Though several studies have shown the technical and fiscal feasibility of using a mileage-based fee, few studies have examined the idea of implementing a VMT program in California.

Their key findings include:

  • A 2.1 cents-per-mile VMT fee would raise enough revenue to replace the current gasoline tax.
  • The fleet of California cars is rapidly changing. The authors found that, as old cars phase out of service and new cars become more fuel-efficient, a VMT fee would generate more income compared to the fuel tax. As fuel economy improves, a VMT fee set at the rate equivalent to today’s gasoline tax could raise $3.65 billion to $5.7 billion more than the current gasoline tax.
  • The public response to a VMT fee should be a key consideration. The public prioritizes education and healthcare funding over transportation funding and there is a lack of understanding of what a VMT fee is and how it might be implemented. Individuals who are younger and those with less education are more concerned with the VMT costs. Finally, drivers have a higher preference for less invasive technology that does not track location.
  • The authors highlighted these key implementation factors:
  1. The state must ensure that the public fully understands the problem with the current funding structure.
  2. The process by which the state collects VMT fees must be transparent and easily understood by the public.
  3. Privacy concerns must be addressed, costs of implementation fully estimated, and mileage rates known and explained.

Rebuilding the financing for the state’s transportation system will be contentious, but we really have no choice. Given the evolution of vehicle efficiency and the public policy choices already made by state leaders, we should add mileage-based fees to the policy menu.

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