Impose an Excise Tax on Overland Freight Transport

Background

Existing federal taxes related to overland freight transport consist of a tax on diesel fuel; excise taxes on new freight trucks, tires, and trailers; and an annual heavy-vehicle use tax. Revenues from those taxes are largely credited to the Highway Trust Fund, which finances road construction and maintenance and mass transit. Rail carriers, which generally operate on infrastructure they own and maintain, are currently exempt from the diesel fuel tax, other than an assessment of 0.1 cent per gallon for the Leaking Underground Storage Tank Trust Fund.

The Fixing America's Surface Transportation Act of 2015 established national policies to improve the movement of freight and provided funds from the Highway Trust Fund for two programs that focus on freight. It did not, however, establish any new revenue sources for the fund. Under current law, the Highway Trust Fund cannot incur negative balances. As a result, with its existing revenue sources, the trust fund will not be able to support spending at current levels (with adjustments for inflation) beyond 2020, the Congressional Budget Office estimates.

Overland freight transport is largely carried out by heavy-duty trucks—Class 7 and above in the Federal Highway Administration's (FHWA) classification system—or by rail. In 2015, FHWA estimated that tractor-trailer trucks (above Class 7) were driven about 175 billion miles, whereas single-unit trucks (including Class 7 and many smaller trucks that are not considered heavy-duty trucks) were driven about 110 billion miles. (Both totals include miles traveled without freight payloads.) Freight railcars traveled a total of about 36 billion miles in 2015, including unladen miles. Total freight transport by both truck and rail is projected to increase over time as the economy expands.

Option

This option would impose a new tax on freight transport by truck and rail. The tax would be 30 cents per mile on freight transport by heavy-duty trucks. Under the option, freight transport by rail would be subject to a tax of 12 cents per mile (per railcar). The tax would not apply to miles traveled by trucks or railcars without cargo.

Effects on the Budget

According to the staff of the Joint Committee on Taxation, the option would increase federal revenues by $358 billion from 2019 through 2028. The excise tax would reduce taxable business and individual income. The resulting reduction in income and payroll tax receipts would partially offset the increase in excise taxes. The estimates for the option reflect that income and payroll tax offset.

Carriers would respond to the new taxes in two ways that lower the estimated change in revenues by relatively small amounts. First, both taxes would increase shipping costs, which would slightly reduce the total amount of freight shipped because some shipments would no longer be profitable. Second, the relatively higher tax rate on truck transport would induce some shippers to shift a small portion of their freight business from truck to rail. The option could also induce shippers to shift a small amount of freight from either mode of transport to barge.

The amount of revenues raised through the tax would depend on the number of miles over which freight is transported by truck and rail in the future, which is uncertain for several reasons. The amount of freight shipped, the distances traveled, and shippers' choices of modes of transport are uncertain because they depend on developments in technology and economic conditions over the next decade, which are themselves uncertain. In addition, there is uncertainty surrounding how carriers would respond to the tax. The timing and amount of revenues raised by the tax would also depend on decisions about how to implement and administer it.

Other Effects

One argument for imposing an excise tax on freight transport is that it would promote economic efficiency. Freight transport imposes costs on society (known as external costs), including pavement damage, congestion, accidents, and emissions of air pollutants. The higher tax rate on truck transport is based on estimates of those external costs, which are higher for trucks than for railcars. An alternative approach to reducing those external costs would be increasing the fuel tax, which would better target emissions of air pollutants. However, imposing a tax on freight miles would more directly reduce the external costs of pavement damage, congestion, and accidents.

An argument against this option is that it would be more costly to administer than is the federal tax on diesel fuel—a primary source of funding for highway construction and maintenance. The option would require that carriers report their miles traveled and that systems be developed to collect the taxes and audit the reported distances.

An additional argument against this option is that the tax would probably be passed on to consumers through increases in the price of final goods. For many types of goods, the price increase would be relatively small because freight transport accounts for less than 5 percent of the cost of the merchandise. Even so, because lower-income consumers spend a larger fraction of their income on goods, the tax would be regressive—that is, it would be more burdensome for consumers with fewer economic resources than it would be for those with more economic resources.