Image by Gage Skidmore CC 2.0 via Flickr https://goo.gl/9XZDVh

President Trump is working to rebuild America’s infrastructure. At least, he is talking about it. A February 28, 2017, White House press release reiterated the President’s campaign promise to spend $1 trillion on infrastructure. The press release acknowledges the challenges: the American Society of Civil Engineers gave America’s infrastructure a “D +” grade; the American Road & Transportation Builders Association found that over 55,000 American bridges are “structurally deficient.

During its first 100 days in office, Trump’s Administration has made little progress on this goal. While the President did sign a memorandum clearing the way for the Keystone XL pipeline, as well as a memorandum facilitating the completion of the Dakota Access pipeline construction, there has been no action on roads and bridges.

One Trump action might have long ranging consequences for roads and bridges: his directive to the Environmental Protection Agency (EPA) to re-evaluate the corporate average fuel economy standards (CAFE). I explored the link between fuel economy and infrastructure deterioration in a 2016 article.

Infrastructure funding

America funds its highways, roads and transit with a dedicated tax on motor fuels, which goes into the Highway Trust Fund (HTF). The $0.184 per gallon tax on gasoline and the $0.243 per gallon tax on diesel have not been increased since 1993. The national government transfers almost all the funds in the HTF to states and localities, which construct and maintain the roads and operate the transit systems.

The HTF has fallen short on infrastructure needs since 2008. From 2008 through 2015, Congress transferred $70 billion from general revenues to the HTF. Legislation enacted at the end of 2015 continues to transfer $70 billion from general revenues each year, through to 2020.

Clearly, fuel taxes no longer provide adequate revenue to maintain transportation infrastructure. Approximately 65% of major roads are rated in less than good condition; one in nine bridges are structurally deficient; and 45% of Americans lack access to transit. A fuel tax rate that does not change can only work if more and more Americans drive more and more, using more and more fuel. America’s driving habits have changed, and a new government policy to roll back fuel economy standards will probably not solve the problem.

Changes in fuel use

Fuel use is declining because of increased fuel economy of the vehicle fleet and demographic shifts. American’s vehicle miles traveled (VMT) are increasing at a much slower rate than predicted. In 2005, the EPA predicted that the average VMT from light duty passenger vehicles in 2015 would be four times the average VMT in 1970. Instead, average VMT in 2014 was only about 1.5 times the VMT in 1970.

Fuel economy has also increased, with average model year 2012 fuel economy value reported at a record 23.6 miles per gallon (MPG). Demographic changes may also reduce VMT, as the millennial generation drives significantly less than previous generations. In 2009, people aged 16 to 34 drove 23% fewer miles on average than they did in 2001. The growth of telecommunications services and social networking platforms in addition to the increased availability of data has changed the way people live, work, and commute on a daily basis.

But isn’t fuel efficiency good for the environment and the economy?

Yes, of course! Inefficient vehicles emit more greenhouse gases (GHG), which lead to climate change. Inefficient transportation adds costs to consumers and businesses, reducing profits and disposable income. Moreover, a number of government policies encourage fuel efficiency. The CAFE standards encourage automobile manufacturers to produce fuel-efficient vehicles. Tax credits encourage consumers to purchase electric vehicles. Tax-free, employer-provided fringe benefits for transit and bicycle commuting encourage workers to take fuel-efficient commuting options. Public transportation use in America saves 4.2 billion gallons of fuel a year, as well as reducing the cost of maintaining roads. As noted above, only 45 percent of Americans have access to public transportation, so there is room to increase that percentage.

Potential solutions

A sustainable approach to funding transportation infrastructure could be accomplished in a number of different ways. Congress could eliminate the HTF and force surface transportation to compete with other federal programs for annual funding. Most other developed countries, including Australia, fund surface infrastructure from general revenues. Switching from fuel taxes to a vehicle miles traveled tax (VMTT) could arguably strengthen the user-pays principle, but would potentially penalise drivers of fuel-efficient vehicles, contrary to government policy of encouraging efficiency. The user-pays principle would also be respected by increased use of tolling. Increasing gas tax rates would be consistent with user-pays principles and potentially could modify behavior consistent with environmental concerns of pollution and climate change. America has the lowest fuel taxes of any developed nation. Finally, the solution might encompass more than one of these options in combination.

What about President Trump’s plan?

Mr. Trump did have an infrastructure plan during the campaign. It relied entirely on private projects through which investors would own the projects, receive federal tax credits equal to 82 percent of their equity investment, and make profits from the tolls or fees they would charge to consumers. In effect, the plan would greatly expand tolling. Expanding the use of tolling to raise transportation infrastructure financing faces a number of obstacles, including hostility of the trucking industry, concerns about diversion of traffic to adjacent free roads, uncertainty about revenue projections, and the high cost of collection (estimated at between 8 and 12% of amount collected).

To date, private investment in US highways and transit has been modest in comparison to spending by all levels of government. From 1989 through early 2011, there were 96 transportation public-private partnerships worth a total of $54.3 billion in the United States; 11 of these projects, totaling $12.4 billion, included a private financing component. According to the Center for Budget and Policy Priorities, the Trump plan would provide lucrative tax breaks for many investments that would occur anyway, with no mechanism for focusing its subsidies on projects that would yield high returns for the economy at large.

Recommendation

At a minimum, America should index motor fuels taxes for inflation. Better still, increase motor fuels taxes to the level they would be if they had been indexed for inflation in 1993. VMT taxes should not supplant motor fuel taxes. VMT taxes may be appropriate at the state level, as a baseline user fee for efficient vehicles, but those vehicles should still cost less to use than those with lower mileage. Finally, federal fuel taxes should go into the general budget, so that transportation projects compete with other governmental priorities. Putting fuel tax revenues in the general budget allows for a green tax shift and is consistent with government policies for increasing fuel efficiency.

This blog article is drawn from Roberta F. Mann, “Sustainably funding transportation infrastructure: tax fuel or miles?” Australian Tax Forum [Vol.31-4_2016], published [01 February 2017].

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This article has 1 comment

  1. And as if in response, President Trump yesterday (May 1) said he was considering asking Congress to raise the gas tax. See https://www.washingtonpost.com/news/wonk/wp/2017/05/01/trump-floats-raising-increasing-the-gas-tax/?utm_term=.611ecd613332.

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