In a presentation titled "Alternatives for Making Federal Highway Spending More Productive," a Congressional Budget economist proposes three approaches to improving methods for spending on highway infrastructure:
To make federal highway spending more productive for the economy, policymakers could adopt different approaches to managing highways and determining how to allocate funds, including:
- Charging drivers,
- Using benefit-cost analysis, or
- Linking spending to performance.
Charging drivers seems like a no brainer. If you want to use the roads, you should pay for the roads. The more you use the roads, the more you should pay. A few years back, the Obama administration advocated for a Vehicle Miles Traveled charge (VMT) that stalled for a number of reasons, one of which is the system required complicated and possibly costly equipment installed on cars and monitored at gas stations:
There are obvious downsides to taxing motorists based on the number of miles they drive, however. There are concerns about privacy rights and the cost of administrating a new program that would rely on GPS technology and on-board monitoring devices.
But as we have noted a number of times, there is a simpler way to charge for vehicle miles traveled: Raise the gas tax.
Let's take a simple example: Suppose we impose a gas tax of $1 per gallon. The total tax someone pays is then equal to $1 times the number of gallons of gas consumed. So if you consume 40 gallons of gas per month, your tax would be $40. But, the number of gallons consumed depends on two things: 1) The number of miles driven, and 2) The fuel efficiency (miles per gallon).
To see this, another way to calculate the total gallons consumed is to divide the total number of miles you drive by the fuel efficiency (MPG): Gallons Consumed=Miles Driven/MPG. So if you drive 1000 miles per month and you car gets 25 MPG you will consume 40 gallons of gas.
Why is this important? Because raising the gas tax effectively creates two different incentives:
- The incentive to drive fewer miles
- The incentive to increase fuel efficiency
Driving fewer miles and/or increasing fuel efficiency will decrease your total tax bill.
Taking this a step further, if rich people care less about fuel efficiency than poor people, then the gas tax becomes a progressive tax with the rich paying higher taxes than the poor. So to summarize so far, raising the gas tax accomplished 4 things:
- It places a higher burden on those driving less fuel efficient vehicles.
- It places a higher burden on those driving more. By increasing the marginal cost per mile driven, total miles driven should decrease.
- Assuming fuel efficiency and income are negatively correlated--that is, the rich tend to drive larger, more expensive, less fuel efficient cars--the Fuel Efficiency Payment places a higher burden on higher incomes.
- It provides an incentive for drivers to switch to more fuel efficient vehicles.
But wait, you say, isn't one of the goals to raise government revenue to pay for highway infrastructure repairs? And if people drive fewer miles and/or drive more fuel efficient vehicles, won't gas consumption decrease causing tax revenues to actually decrease?
The answer is, it depends. The revenue collected from an increase in the gas tax is equal to the number of gallons consumed multiplied by the tax per gallon. As the tax increases, two things happen, 1) the revenue collected per gallon increases, and 2) the number of gallons consumed decreases. It turns out that if the demand for gasoline is somewhat insensitive to price changes (we call this inelastic demand), the revenue collected will increase if the tax increases.
Now we just need to figure out if the demand for gasoline is inelastic. And the answer is yes.
So there you have it. An increase in the gas tax will raise revenues for highway infrastructure, decrease vehicles miles traveled, decrease gas consumption (decreasing emissions, which I haven't mentioned), increase fuel efficiency, and make everyone happy.
