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House Transportation Chairman Proposes Examining Shift to User Fees for Highway Funding

Rep. Bill Shuster (R-PA), the outgoing chairman of the House Transportation and Infrastructure Committee, this week released a legislative discussion draft of a new infrastructure bill, attempting to build consensus on modernizing federal programs related to surface transportation, water resources, and project permitting and environmental review. In this post, I’ll focus on the surface transportation components.

The main element of this draft, Section 121, is a proposal to increase federal gasoline and diesel taxes by 82 percent over three years—from 18.3 to 33.3 cents per gallon of gasoline and 24.3 to 44.3 cents per gallon of diesel—and then index those rates to inflation using the Internal Revenue Code’s section 1(f)(3) cost-of-living-adjustment computation. At baseline spending, this would end the general fund bailouts of the Highway Trust Fund, which began in fiscal year 2008 and will amount to more than $200 billion in bailouts when current law expires at the end of fiscal year 2020.

Fiscal conservatives understandably are likely to balk at such a large tax increase—and built-in future tax increases subject to the inflation adjustment. The typical request from fiscal hawks, and one that I agree with, moves in the opposite direction. Rather than increasing tax rates to match the current unsustainable level of Highway Trust Fund spending, Congress should decrease spending to align with the estimated revenues collected at current tax rates while eliminating federal barriers to states raising their own user-based revenue. This would not only save taxpayers billions of dollars a year, it would reduce the distortionary effect of federal infrastructure policy by returning more decision-making authority to state and local governments while making those government officials more accountable to the public. I term this attrition strategy “de facto devolution.”

However, the likelihood of a total devolution of federal surface transportation programs and elimination of the Highway Trust Fund is slim. Rural states with small tax bases are accustomed to their large, federally subsidized highway networks. And “projects of national significance” enjoy wide bipartisan support. So, it is likely that some federal surface transportation program will remain to subsidize projects unable to cover their capital and operating costs with user fees. This brings us to the most interesting aspect of the discussion draft: the per-mile user fee surface transportation system funding pilot.

Section 102 would establish a national mileage-based user fee (MBUF) pilot program aimed to restore long-run solvency of the Highway Trust Fund and reduce the “state of good report” project backlog. This is important as reconstructing the Interstate Highway System alone—which accounts for around 48,000 of the 222,000 miles of National Highway System—over the next 20 years is expected to cost more than $1 trillion. This money must come from somewhere and charging users—the direct beneficiaries of the highway system—is the fairest and most efficient way to do so.

The discussion draft lays out three objectives of the MBUF pilot:

  1. Test the viability of an MBUF as a fuel tax replacement for the Highway Trust Fund’s primary revenue source;
  2. Increase public awareness over the lack of surface transportation revenue and the MBUF concept; and
  3. Provide recommendations as to how to implement an MBUF replacement of the fuel tax.

MBUFs have seen several state pilots since Oregon launched theirs in 2013 and the 2015 highway bill provided around $20 million in annual federal support for similar initiatives. This testing is ongoing, but the discussion draft MBUF pilot proposal seems to adopt a few elements from state MBUF pilot best practices, including:

  • Provide different methods to track use, ranging from “third-party on-board diagnostic” dongles to smart phone apps to manual odometer readings from state departments of motor vehicles;
  • Protect participant privacy and secure their data; and
  • An option to allow trusted third-party collection and transmission to the Treasury.

The MBUF rate would be set by dividing average annual fuel tax receipts by annual vehicle miles traveled. Participants would then receive refunds for the fuel taxes paid.

It is great that a senior member of Congress is finally taking interest in the recommendations of the 2009 final report of the National Surface Transportation Infrastructure Financing Commission. Fuel taxes are already regressive and will continue to become more regressive as tax rates rise and/or wealthier drivers buy new fuel efficient or electric vehicles. In recent years, local governments have implemented even more regressive local sales taxes to fund transportation. Adopting direct usage-based road pricing, which would include congestion charges and deliver congestion benefits, could offer low-income drivers more opportunities. For instance, more predictable travel times mean they are less likely to be late to jobs or appointments, thereby avoiding that unseen portion of the congestion penalty that “Lexus lane” opponents never mention.

The discussion draft is unfortunately silent on congestion pricing. Nor does it spell out how state MBUF programs might interface with a national MBUF program. It more or less looks to do a one-to-one replacement of fuel taxes with MBUFs, allowing the business-as-usual Highway Trust Fund revenue collection and spending to continue. But since Chairman Shuster indicated he is hoping to start discussion over these matters, we hope Congress is able to get a bit more creative in their thinking over MBUFs. That being said, Chairman Shuster and other transportation-minded members of Congress deserve praise for starting this important conversation.