More on a Vehicle Miles Travelled Tax

Greg Rosston at the Stanford Institute for Economic Policy Research spotted my post a week ago on choosing between the current gasoline tax and a vehicle miles travelled tax as a way of funding highway infrastructure.  He passed along a June 2011 SIEPR Policy Brief by Kumi Harischandra, Justine Isola, Lazeena Rahman, and Anthony Suen on this issue.

They provide a useful table showing different levels of the gas tax, and revenue-equivalent levels of a vehicle-miles traveled tax. For example, the current federal gas tax of 18 cents/gallon is equal to a vehicle-miles traveled tax of about penny per mile. A federal gas tax of $2/gallon would be equal to a vehicle miles travelled tax of about 10 cents per mile.

They make a case: \”Although gas taxes advance environmental stewardship and energy security, VMT fees provide a more sustainable future for funding of transportation infrastructure.\”

My own sense is that there are multiple policy goals here: funding transportation infrastructure, reducing fossil fuel use for a variety of reasons, and addressing traffic congestion. It may take several policy tools–perhaps including a fuel tax and a vehicle-miles traveled tax and congestion pricing–to hit all three goals.

Comparing Oil Price Shocks

James D. Hamilton has short essay in the \”Research Summaries\” section of the NBER Reporter on \”Oil Price Shocks.\”

In one interesting figure, he compares oil price shocks of 1862-1865, 1973-1981, and 2002-2009. He argues that a common factor in each of these episodes (not the only factor!) was \”declining production from the maturing oilfields on which the world had been depending at the time\”: specifically, the decline of the Pennsylvania oil fields in the 1860s, the decline of U.S. oil production starting in the 1970s, and the fall in oil production from mature oil fields in the North Sea and in Mexico in recent years.

Hamilton also argues that \”in fact all but one of the 11 U.S. recessions since World War II were preceded by a sharp increase in the price of crude petroleum,\” and presents an intriguing table showing some patterns for the five recessions before the Great Recession.

Switching from a fuel tax to a vehicle-miles tax to finance highways?

The U.S. government imposes a tax of 18.4 cents/gallon on gasoline as a main source of financing for the Highway Trust Fund. However, the tax rate hasn\’t been raised since 1993, so inflation has eaten away at its real value. In addition, as fuel economy improves, miles travelled are rising faster than fuel consumption. Thus, the Highway Trust fund has been spending roughly $10 billion more per year since 2008 on highway projects than the fuel tax takes in. Thus, there have been proposals to switch from a fuel tax to a vehicle-miles tax as a way of funding highways. Here are a some thoughts about this policy: 
1) Both a fuel tax and a vehicle-miles tax can be viewed as user fees–that is, those who use the roads are paying for their maintenance and upkeep.
2) A vehicle-miles tax would probably raise more money than fuel tax over time, because vehicle-miles are rising more than fuel consumption. In the Winter 2010-2011 issue of the Rand Review, Paul Sorenson, Liisa Ecola, and Martin Wachs illustrate this point with a figure.
 3) The administrative apparatus for collecting the fuel tax is in place, and there are severe issues with how a vehicle-miles tax would be implemented. Sorenson, Ecola, and Wachs write:  “Mileage-based road use fees could be implemented in various ways, but three options appear to offer the greatest promise: (1) estimating mileage based on a vehicle’s fuel economy and fuel consumption, (2) metering mileage based on a device that combines cellular service with a connection to the onboard diagnostics port, and (3) metering mileage based on a device that contains a global positioning system (GPS) receiver.\” The first method seems a little rough-and-ready, and might need to be collected once a year, perhaps when auto registration is renewed. It would be much more visible to the public than the existing fuel tax. The other two methods raise legitimate privacy concerns: should the government really have the power to track where all cars have gone? One way or another, collection costs are likely to be higher for a new vehicle-miles tax.  

4) A vehicle-miles tax does not reward driving a fuel-efficient automobile–which may help the poor.             The Congressional Budget Office published in March 2011 a comparison of a vehicle-miles tax vs. the existing fuel tax in “Alternative Approaches to Funding Highways.”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.” 
5) Trying to sort out the relevant externalities is tricky. The CBO suggests that costs imposed by highway users can be divided up into costs more related to miles travelled and costs more related to fuel use. \”Mileage-related costs, which include the costs associated with pavement damage, congestion,
accidents, noise, and emissions of local air pollutants by passenger vehicles, in fact account for the majority
of total costs. (The costs associated with local air pollution from passenger vehicles are considered mileage
related because those emissions, unlike emissions from trucks, are regulated on a per-mile basis.) Fuel-related costs include the costs of local air pollution from trucks, climate change, and dependence on foreign oil.\” I\’m not sure that a single policy can sensibly address costs of road maintenance and construction, environmental costs of fossil fuels, and costs of congestion. Trucks are much harder on pavement than cars. Contributions to congestion depend on when and where you drive. Pollution is affected by the type of car you drive, not just by miles traveled.
Here\’s a useful CBP table summarizing arguments about taxes on fuel versus taxes on vehicle miles traveled. 

Green Energy is not Growth Energy

Last week Germany announced that it would phase out its nuclear power plants over the next decade or so, and instead substitute green energy sources like wind and solar. I blogged that government support for green energy may be justifiable on environmental grounds, or perhaps on ground of making the a country less dependent on imported energy. However, green energy is likely to cost more as fossil fuel–or at best, cost the same–and that isn\’t going to boost the economy as a whole. Here is some other commentary I\’ve seen in the last week or so related to these issues.

1) At the Technology Review website, Peter Fairley discusses how the policy, if implemented, can lead to higher energy costs and even blackouts in the short term. In the longer term, a Germany that relies less on nuclear power may well end up burning more coal.

2) The Washington Post editorialized on \”Germany\’s nuclear energy blunder,\” pointing out that if implemented, Germany will probably end importing more electricity–much of it produced by burning fossil fuels.

3) Via Clive Crook\’s blog at The Atlantic, I found a couple of sets of quick estimates of how unlikely it is that Germany can find enough wind and solar power to substitute for its electricity generation, and thus how phasing out nuclear energy will lead to higher carbon emissions: one set of number is the Breakthrough Institute, the other from Roger Pielke.

4) Finally, for a misguided argument along the German lines, the June 19 issue New Republic carries a leader called \”Waste of Energy\” (available by subscription only) lamenting that President Obama had deserted the agenda he laid out in February 2009 to wean the U.S. off of fossil fuels. They write: \”From the day he took office, Barack Obama had a unified theory of how the United States could recover and prosper. At the center of his plan–which he voiced in an address to a joint session of Congress in February 2009–was the need to reduce the use of carbon-based fuels …\” The editors at TNR argue that this is a recipe both for environmental gains, which is plausible enough, and also for economic gains, which is not plausible. Indeed,
the TNR editors argue, quite remarkably, that moving away from carbon-based energy is \”the most convincing framework for ensuring America\’s future prosperity.\”

The Miles-per-Gallon Fallacy

 Here\’s a gentle brain-twister: 
Person A upgrades their car from one that gets 11 MPG to one that gets 13 MPG. 
Person B upgrades their car from one that gets 29 MPG to one that gets 49 MPG. 

Who saves more on gas?
A and B would actually save the same amount. Here\’s the explanation from Hunt Allcott in the May 2011 issue of the American Economic Review (p. 98). 
As an example, consider two pairs of vehicles. The first pair is two vans, one rated at 11 MPG and the other at 13 MPG, and the second pair is two cars rated at 29 and 49 MPG. Many people intuitively believe that conditional on gas price and miles driven, the difference in fuel costs between the second pair is much larger, because the difference in MPG is much larger. In fact, the fuel cost differences are almost exactly the same: the difference between each pair of vehicles in gallons of gasoline consumed per mile driven is 0.014. Interestingly, if this misperception has any magnitude outside of the laboratory, it would make us more likely to buy a Hummer and more likely to buy a Prius, while making us less likely to buy a medium-MPG car. This is because it causes us to underestimate the relative costs of the lowest-MPG vehicles and overestimate the relative savings of the highest-MPG vehicles.

In short, when it comes to making cars more fuel-efficient, what might look like modest MPG gains for the lowest-MPG vehicles actually matter quite a bit more than whether someone who is already in a high-MPG vehicle makes additional gains.

And maybe some smart marketing person or heads-up government regulator should be figuring out a way for car buyers to learn about how many gallons it takes to travel a mile–or 100 miles?–not how many miles to a gallon.