About 25 percent of the nation’s highways, which carry about 85 percent of all road traffic, are paid for in part by the federal government. Federal spending on highways comes primarily from taxes on gasoline and diesel fuel, but those and other taxes paid by highway users do not yield enough revenue to support either current federal spending on highways or the higher levels of spending that have been proposed by some observers. Although raising fuel taxes would increase revenue, those taxes alone cannot provide a strong incentive for highway users to take into account all of the costs their road use imposes on others. A CBO study, prepared at the request of the Senate Budget Committee, examines broad alternatives for federal funding of highways, focusing on fuel taxes and on other taxes that could be assessed on the basis of the number of miles that vehicles travel.
Highway users impose costs not only on the highway infrastructure in the form of pavement damage, but also on other users, nearby nonusers, the environment, and the economy in the form of congestion, risk of accidents, noise, pollution, and dependence on foreign oil. Passenger vehicles are responsible for the greater share of the total costs of highway travel, because they account for more than 90 percent of all miles traveled. In particular, urban travel by passenger vehicles represents about two-thirds of total vehicle miles and is the primary source of congestion, the largest category of social costs. Heavy trucks account for less than 10 percent of miles traveled, but their costs per mile are greater and they are responsible for most pavement damage.
Estimates from several sources indicate that most highway users currently pay much less than the full cost of their travel. Given current fuel efficiency, federal and state fuel taxes combined produce revenue of roughly 2 cents per mile for automobiles. The Federal Highway Administration estimates that automobile travel has a national average cost for congestion alone of about 10 cents per mile—much more in large metropolitan areas and much less in rural communities.
Most of the costs of using a highway are tied more closely to the number of miles traveled than to the amount of fuel consumed. Fuel consumption depends not only on the number of miles traveled but also on fuel efficiency, which can differ from one vehicle to another and can change with driving conditions. Therefore, charging highway users for the full costs of their use would require a combination of fuel taxes and per-mile charges, sometimes called vehicle-miles traveled (VMT) taxes.
Fuel Taxes
Viewed according to different conceptions of equity, fuel taxes offer a mix of positive and negative characteristics. They satisfy a “user-pays” criterion, but they also can impose a larger burden, relative to income, on people who live in low-income or rural households.
Fuel taxes have two desirable characteristics for efficiency: They cost relatively little to implement, and they offer users some incentive to curtail fuel use, thus reducing some of the social costs of travel. At best, however, the strength of that incentive can only be right as a rough average, discouraging some travel too much and other travel too little, because it does not reflect the large differences in cost for use of crowded roads compared with uncrowded roads or for travel by trucks that have similar fuel efficiency but cause different amounts of pavement damage. Moreover, for a given tax rate on fuels, the incentive to reduce mileage-related costs diminishes over time as more driving is done in fuel-efficient vehicles.
Potential Taxes on Vehicle-Miles Traveled
VMT taxes are qualitatively similar to fuel taxes in their implications for equity. Like fuel taxes, they satisfy the user-pays principle, but they impose larger burdens relative to income on people in low-income or rural households. However, to the extent that members of such households tend to drive vehicles that are less fuel-efficient, such as pickup trucks or older automobiles, those highway users would pay a smaller share of VMT taxes than of fuel taxes.
VMT taxes that are aligned with the costs imposed by users would provide a better incentive for efficient highway use than fuel taxes do because the majority of those costs are related to miles driven. However, VMT taxes’ effect on overall efficiency also would depend on how much it costs to put the taxes in place and to collect the money. Estimates of what it would cost to establish and operate a nationwide program are rough, with one source of uncertainty being the cost to install metering equipment in all of the nation’s cars and trucks.
A system of VMT taxes need not apply to all vehicles on every road. There are already less comprehensive systems of direct charges for road use: Toll roads, lanes, and bridges are common in the United States, and several states and foreign countries levy weight-and-distance charges on trucks.
This study was prepared by Perry Beider of CBO’s Microeconomic Studies Division.