Restoring Highway Solvency with New Revenue Sources

Jun 26, 2014 | Other Spending| Taxes

As we approach the twin deadlines to reauthorize surface transportation spending and shore up the Highway Trust Fund (HTF), policymakers should note the importance of addressing the structural imbalance between highway spending and dedicated revenue. There are a number of options for both reducing highway spending and increasing revenue from existing sources dedicated to the HTF.

Previously, we discussed options to raise revenue by increasing gas, diesel, and other smaller taxes which currently fund the HTF. Below are other options for new revenue related to surface transportation use. They can be redesigned in a number of ways to raise different amounts of revenue.

Options For New Sources of Highway Revenues
Policy Ten-year savings Percent of Shortfall Closed
4-year 6-year 10-year
Institute 1% motor fuel sales tax $55 billion 39% 37% 34%
Impose $1 per barrel tax on oil $50 billion 30% 30% 30%
Impose $10 per-tire tax on car tires $25 billion 15% 15% 15%
Impose 2% vehicle sales tax $15 billion 11% 10% 9%
Institute $20 fee on containers in U.S. ports $10 billion 5% 5% 5%
Institute 0.05 cent per ton-mile tax on freight $20 billion 12% 12% 12%
Apply 3.5% surcharge to customs duties $10 billion 7% 7% 6%
Impose vehicle registration fee of $10 on light vehicles and $20 on trucks $35 billion 20% 20% 20%
Institute $10 driver's license surcharge $20 billion 12% 12% 12%
Impose 0.5 cent-per-mile VMT fee $150 billion 90% 90% 90%
Replace current taxes w/1.85 cent-per-mile VMT fee $170 billion 100% 100%  100%
Replace current taxes w/ carbon tax (rebate ~50%) $170 billion 100% 100% 100%

Sources: National Surface Transportation Infrastructure Financing Commission, and CRFB calculations.
Numbers are rounded and calculated very roughly by CRFB.
Estimates are intended to include the effect of income and payroll tax offsets under the assumption that revenue losses are compensated with reverse revenue transfers.
Percentages represent average effect over the time period and do not address timing issues. 

Most of these options come from a 2009 report from the National Surface Transportation Infrastructure Financing Commission, who looked at a number of different revenue sources. The table above presents some illustrative options, but the taxes or fees could have a variety of rates or structures. A table of all the options the NSTIFC examined -- including the revenue raised, the Commission's evaluation of the option, and a brief description -- is available here. You can also view the table in the appendix below.

Vehicle Miles Traveled Tax

An oft-discussed new revenue source for the HTF is a vehicle miles traveled (VMT) tax, which would assess a tax based on the miles a vehicle travels rather than the fuel it consumes. The NSTIFC noted the advantages of a VMT tax over the gas and diesel taxes in its report:

Unlike fuel taxes, direct user fees are a way to charge users a price better aligned with the full cost of their travel. Specifically, prices (whether for targeted tolling and pricing or comprehensive pricing) can be varied to incorporate both the costs of providing, maintaining, and operating the infrastructure and some or all of the costs of other considerations such as system damage associated with vehicle weight, congestion impacts, and vehicle emissions. This, in turn, can better inform the individual about the true cost of their travel choices—that is, the price for highway travel can help travelers make more efficient decisions about how and when they use existing transportation infrastructure.

We estimated that a 0.5 cent per mile VMT fee would close 90 percent of the ten-year HTF shortfall, while a 1.85 cent per mile tax could replace all existing fuel sources and fully fund the HTF through 2024. Note that these estimates assume that the VMT fee is applied uniformly, but policymakers could apply different fees based on the weight of the vehicle or the time of day the vehicle is traveling (which would enhance the efficiency of the tax).

Although many academics and policy experts support using a VMT tax instead of fuel taxes, they see it more as a long-term replacement rather than a near-term solution. It would take several years of study, administrative set-up, and much more public buy-in to adopt a VMT.

Vehicle-Related Taxes

Congress could also impose a number of vehicle-related taxes which would be a less direct way of charging for the cost of using surface transportation. Using data from the NSTIFC, we estimate that a vehicle registration fee of $10 for light vehicles and $20 for trucks would raise $35 billion over ten years, enough to close one-fifth of the shortfall. Having a separate 2 percent vehicle sales tax could raise $15 billion, reducing the ten-year imbalance by just under 10 percent. Instituting a $10 surcharge on all new or renewed driver's licenses – arguably the least direct user fee – would raise $20 billion and close about one-eighth of the shortfall.

There could be a sales tax on motor fuels, which would be imposed at the time of sale along with or instead of the excise tax which is built into the price. We estimate a 1 percent sales tax could raise $55 billion over ten years. Of course, policymakers could make the tax higher, lower, or use it to replace the current fuel taxes.

There is currently a tax on truck tires which funds a small part of the HTF, but lawmakers could go further. Imposing a $10 tax on car tires as well would raise $25 billion over ten years, closing 15 percent of the shortfall. The tax could be accompanied by a similar increase in the truck tire tax  to maintain the fact that trucks pay more to account for their increased share of road damage. A tax on bike tires could be considered, although it would raise only a small amount.

Other Transportation-Related Taxes

There are other taxes which are more broadly transportation-related which could fund the HTF. Currently, an 8 cent (increasing to 9 cents in 2017) tax per barrel of oil funds the Oil Spill Liability Trust Fund. Lawmakers could increase that tax by $1 per barrel and dedicate it to the HTF, raising $50 billion and reducing the shortfall by 30 percent.

They could also charge freight companies for containers moving through U.S. ports; a $20 per container fee could raise $10 billion, reducing the ten-year shortfall by 5 percent. Adding a 3.5% surcharge to customs duties could also raise $10 billion.

Another option would be to charge freight (truck or otherwise) based on distance and weight; a 0.05 cent per ton-mile tax could raise $20 billion over ten years. This would incorporate a VMT element and a "heavy vehicle use" element.

Carbon Tax

Another possibility would be to use a portion of revenue from a carbon tax, which would be a form of fuel tax for transportation. By CBO's estimate, a $25 per metric ton tax on emissions, increasing at 2 percent per year, would raise $1.1 trillion over ten years. Dedicating about half of that revenue to the HTF would allow policymakers to replace all current revenue sources and keep the fund solvent through 2024 at current spending levels. The other half could be used for rebates to consumers, clean energy spending, broad-based tax cuts, and/or deficit reduction.

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If lawmakers do not want to raise revenue from existing sources, a number of new taxes and fees could get the HTF to balance. Later in the week, we will look at ways lawmakers could use to offset general revenue transfers to the HTF in the short-term before addressing the structual problem.

Appendix: Full Table of New Revenue Source Options

Many of the options we mention in this blog come from the 2009 report of the National Surface Transportation Infrastructure Financing Commission. We have compiled a list of all the options the NSTIFC mentions and quantifies, showing how much a certain rate would raise, what rate it would take to raise $1 billion per year, the Commission's evaluation of the quality of the option (based on efficiency, revenue-raising ability, and other criteria), and a brief description of the option. 

Revenue Option Size of Tax/Fee Increase Annual Revenue Raised Required Increase to Raise $1 Billion  Evaluation of Option  Description
Vehicle-Related Taxes and Fees  
Vehicle Registration Fee  $1 for autos / $2 for trucks $366 million $2.75 for light duty vehicles, $5.50 for trucks  Strong Annual national registration fee for cars and trucks
Driver's License Surcharge  $1 $208 million $4.81 Weak Charge per license
Vehicle Sales Tax  1 percent $828 million 1.2 percent Moderate  Tax on new and used light duty vehicle sales
Auto-Related Sales Tax 1 percent $400 million 2.5 percent Weak Sales tax on vehicle-related products and services
Auto-Related Tire Tax $1 $280 million $3.60 Strong Tax on new tires for light duty vehicles
Bicycle Tire Tax $5 $75 million n/a Weak Tax on new bicycle tires
New Motor Fuel-Related Taxes  
Carbon Tax / Cap and Trade n/a n/a n/a Strong  Tax on carbon in motor vehicle fuels
Imported Oil Tariff $1 $4.4 billion $0.23 Strong Per barrel tax on imported oil
Motor Fuel Sales Tax 1 percent $3.6-$7.2 billion 0.14-0.28 percent Strong Tax imposed on full retail cost of motor fuels
Broad-Based Taxes and General Revenues  
National General Sales Tax 0.1 percent $3.3 billion 0.03 percent Weak Tax on net purchase price for all retail items
Personal Income Tax 0.1 percent $1 billion 0.1 percent  Weak Increase in personal income tax rate
Business Income Tax 0.1 percent $350 million 0.3 percent  Weak Increase in business income tax rate
General Fund Revenues n/a n/a n/a n/a Allocate revenues from General Fund
Freight-Related Taxes  
Container Fees  $10 $500 million $20  Strong Fee per container moving through U.S. ports
Freight Waybill (Trucks)  0.1 percent $620 million 0.16 percent Moderate Sales tax on truck freight bills
Freight Waybill (All)  0.1 percent $740 million  0.14 percent Moderate Sales tax on all freight bills
Harbor Maintanence Tax  0.01 percent $110 million 0.089 percent Moderate Tax on value of passenger tickets and commercial cargo at federally maintained harbors
Customs Duties  1 percent $286 million  3.5 percent  Strong Surcharge on all customs duties
Weight Tax (Trucks)  1 cent $107 million  9.45 cents Weak Per ton tax on truck freight movements
Weight Tax (All)  1 cent $155 million 6.35 cents Weak Per ton tax on all freight movements
Weight and Distance Tax (Trucks)  0.1 cent $1.2 billion  0.08 cents Weak Per ton-mile tax on truck freight movements
Weight and Distance Tax (All)  0.1 cent $4.2 billion 0.02 cents Weak Per ton-mile tax on all freight movements
Tolling and Road Pricing Options  
Facility Level Tolling and Pricing  n/a  n/a n/a Strong Application of tolls and/or pricing to fund specific investments
Cordon Pricing n/a  n/a  n/a Weak Access charges for designated urban areas
Mileage-based user fee (VMT) 1 cent $30 billion 0.033 cents Strong Cent per mile charge on all vehicles and roads
Other Options  
Passenger Facility Charges (PFC) n/a  n/a  n/a n/a  Increase the cap on PFCs and/or broaden activities eligible for PFC funding
Development and Impact Fees  n/a n/a   n/a n/a  Targeted taxes on beneficiaries of transport investments