Solving Externalities, One Mile at a Time
The federal gas tax hasn't changed in over 30 years, but could a new taxation method account for the social costs of driving and improve our infrastructure?
As society grapples with concerns around climate change and sustainability, it is no small irony that significant federal investments are being made to tackle environmental challenges, while Americans' love for driving remains largely unchecked. The country's road system, funded largely through gasoline taxes, contributes to emissions, congestion, accidents, and pavement damage. Despite significant changes in the cars we drive, the federal gas tax hasn’t changed in nearly 30 years.
There may be a simple, economic solution on the horizon. Buried within the 2,700 pages of the Infrastructure Investment and Jobs Act (IJIA) lies a little-known provision that could revolutionize highway travel and address these pressing concerns: the Vehicle Miles Traveled (V.M.T.) fee. The concept itself isn’t new, but the recent infrastructure act provides funding for a national pilot program. This change holds the potential to transform the way we think about transportation and correct the negative externalities associated with driving, regardless of what type of vehicle is on the road.
Oregon and Utah currently operate the most advanced version of the program and collect some of their revenue based on miles driven, but could a nationwide program be part of our driving experience in the near future? The IJIA has allocated $50 million over 5 years for the U.S. Department of Transportation to conduct a nationwide pilot, soliciting volunteer participants from all 50 states, including commercial and passenger vehicles. The IJIA also includes additional grants for state-level pilot programs already in place.
To understand the need for such a fee, we must first understand the concept of negative externalities. When we drive, we contribute to pollution, congestion, accidents, and pavement damage. We don’t all have the same impact since we aren’t all driving the same types of cars. When the federal gas tax was founded, it was used to allocate funds to the Highway Trust Fund to repair roads. One serious problem with this funding approach today is that the cars we drive are much different and, therefore, the social cost of driving is not fully accounted for in the price of gasoline. This market failure leads us to drive more than what would be socially optimal, straining our infrastructure and making environmental issues worse.
That's where the Pigouvian tax comes in, named after economist Arthur Pigou. This tax offers a market-based solution to tackle negative externalities, which in this case is the damage caused by driving. Initially, the gas tax was a Pigouvian tax imposed on each gallon of gasoline, aiming to account for the wear and tear on roads. As we drove more and consumed more gas for those extra miles, we paid higher taxes to reflect the increased damage. Similarly, the Vehicle Miles Traveled (V.M.T.) fee would also function as a Pigouvian tax. Instead of a flat fee per gallon, the V.M.T. fee charges drivers for every mile they travel in their vehicles. This shift recognizes that all vehicles contribute to road damage, and the fee ensures that all drivers contribute their fair share to address it, even if they don’t purchase gasoline for their cars.
The V.M.T. fee could be adjusted for each driver based on driving behavior, fuel efficiency, or energy source. Drivers of electric cars, for example, do not pay the federal gas tax but still contribute to pavement damage. Similarly, drivers of newer cars that produce less pollution pay the same gas tax as someone driving a much older car with worse emissions. By varying the V.M.T. fee, different drivers could face different tax rates to account for the externalities they're producing. This will become an increasingly important consideration as more Americans begin driving electric vehicles.
The effectiveness of the V.M.T. fee hinges on its ability to shape driving behavior and reduce the social costs that driving imposes on society. By discouraging excessive driving, it has the potential to reduce congestion, prevent accidents, and decrease pavement damage. Depending on the sophistication of the fee, it could even be designed similarly to a congestion tax that is set to encourage individuals to avoid peak travel periods, thereby spreading traffic throughout the day and reducing the need for costly road expansions.
New York City’s Road to Congestion Pricing Looks a Little Less Crowded
New York City's long-awaited congestion pricing scheme has overcome a major hurdle as the Federal Highway Administration (FHWA) granted near-final approval for tolling motorists who drive in Manhattan below 60th Street. This development marks a significant step forward in implementing the program, which was
Of course, implementing the V.M.T. fee comes with its own set of challenges. Privacy concerns and administrative complexities have been raised as potential roadblocks. To assign the V.M.T. fee in the most efficient manner possible, mobile devices would need to be installed in vehicles that can track time, location, and mileage, with the collected data sent to administrators for confidential charging. While this may come across as invasive, it's worth noting that similar technologies are already employed for highway toll payments, which helps alleviate some privacy concerns. However, administrative challenges may prove more difficult to overcome.
Policymakers must navigate the political landscape, where large spending programs often take precedence over market-based approaches. Ensuring fairness and equity in the fee's implementation is crucial, as low-income individuals, who heavily rely on personal vehicles, could face disproportionate burdens.
The adoption of electric vehicles is growing, and the revenue generated by gasoline taxes is shrinking. As such, the V.M.T. fee presents a timely solution to replace the outdated gas tax system. Drivers of electric vehicles were able to skirt around this tax while simultaneously contributing to some of the same social costs as cars that require gasoline. By charging electric vehicles for their impact on roads and congestion, the V.M.T. fee aligns with the benefits principle of fairness and ensures all vehicles contribute to the costs they impose on society.
Beyond reducing congestion and improving safety, this fee holds the potential to speed up our transition to a clean energy economy by encouraging the adoption of electric vehicles. Moreover, it can help prepare the road system for the future, where autonomous electric vehicles could communicate with each other and the infrastructure, ensuring efficient and safe travel.
As we confront the urgent need to address the environmental and social costs of driving, the V.M.T. fee emerges as a promising solution. Technological advancements and careful policy design can help overcome some of the challenges to adoption. The V.M.T not only provides a way to internalize the social costs associated with driving but also provides a path towards a more sustainable transportation system that benefits us all.
The federal gasoline tax has been at 18.40¢ per gallon since 1993 [Energy Information Administration]
The Highway Trust Fund received 82% ($36 billion) of its revenue in 2019 from excise taxes on motor fuel [Congressional Budget Office]
Electric car sales in the U.S. rose from just 0.1% of total car sales in 2011 to 4.6% in 2021 [Bureau of Labor Statistics]
The Biden administration has set the ambitious goal of a 50% electric vehicle sales share by 2030 [The White House]
Pennsylvania has the highest state gas taxes in the nation at 57.6 cents per gallon [Forbes]
This is going to be one of the more contentious issues in the coming years with the potential to drive a further wedge between groups in the country. People who live in rural areas, who also tend to be poorer, drive a lot of miles in older vehicles, and have no access to public transportation. Interestingly, they also often live in areas that have less air pollution because there are fewer people. A mileage driven fee shifts the burden of reducing emissions to this group and they will not be happy about it - these tend to be folks who are already skeptical of global warming don't forget. Also, people who are being priced out of urban living will now find themselves with an added bill to pay if they need to drive into town.
While there needs to be a way to collect funds to pay for infrastructure, I worry that the miles driven plan will become a flash point for political discontent, even if the gas tax is phased out, or, if you have an electric vehicle you don't pay it at all. You still have to pay to charge your car, so why not place a tax at the charging stations? Maybe this is already being done, but I doubt it as it would require legislation. It certainly isn't being done at the federal level. You still tax people for using the roads, and those greedy electric car owners don't get away with not paying their fair share ;)