On July 14th, the IRS held a public hearing for the debt-equity rule (section 385 of the IRS code) that the Treasury Department proposed last April. The hearing, which had as many as 16 speakers from various industries,...
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- The VMT tax: A solution to California’s budget woes?
The VMT tax: A solution to California’s budget woes?
California is currently experiencing a two-fold crisis that threatens to create an even deeper hole in the state’s budget. Experts argue that California’s freeways and bridges are due for extensive repairs. At the same time, gasoline tax revenues, the backbone of the transportation infrastructure budget, are on a long-term downward trajectory. The inability of lawmakers to find a long-term solution leaves the state with a sizeable budget shortfall. California must confront this imbalance between expenditures and consider alternatives, such as a Vehicle Miles Traveled (VMT) tax.
The Golden State has some of the worst transportation infrastructure in the nation. The Reason Foundation found that California ranked 45th in road quality and that they had the highest number of deficient bridges in 2014. According to estimates, the crumbling roads cost Californians an extra $44 billion annually in the form of additional vehicle operating costs among other things.
Last year, the California Department of Transportation released its “Ten Year State Highway Operation and Protection Program Plan.” In it, they estimated that the annual cost of road repairs will exceed available revenue by $5.7 billion annually over the next ten years. When combined with the costs to local governments, the total budget shortfall for transportation infrastructure reaches about $137 billion over that period.
While part of the shortfall can be blamed on fiscal mismanagement, the gas tax is no longer able to efficiently fund the necessary maintenance and repairs since it depends solely on gas consumption to raise revenue. This used to be an effective way of ensuring infrastructure projects received adequate funding. However, not only is the gas tax not indexed to inflation, but gasoline consumption is no longer a good indicator of road usage. Indexing the gas tax to inflation would help it respond to changes in the price of fuel, but it would not account for changes in consumption patterns.
Total gas consumption in California has fallen steadily from its peak around 2005. However, total miles driven on California roads have gone up slightly since that time, despite falling around 2008 due to the economic downturn. Due to the increasing popularity of fuel efficient vehicles, hybrids, and electric cars, California drivers are consuming far less gasoline then they were a few years ago, while maintaining about the same amount of driving. Those who drive electric cars do not face the same incentives that others face to limit driving when gas prices rise. This is especially problematic in California, where Governor Jerry Brown aims to have at least 1.5 million electric vehicles on the road by 2025.
Using public infrastructure costs the taxpayers. The increase in hybrids and electric cars is shrinking the tax base and making the relative tax burden more uneven. Hybrid and electric car drivers pay less than they otherwise would, due to limited gas consumption, distorting the price of using public roads and violating the benefit principle. The benefit principle suggests that the amount of taxes paid should relate to the benefits received. This is particularly important in transportation policy, since price helps to regulate the level of consumption.
While other proposals, like increasing vehicle registration fees, might decrease the budget gap, a more direct form of taxation is preferred. One such idea, a VMT tax, upholds the benefit principle and would help provide sustainable funding for infrastructure upkeep. The tax could potentially replace all revenue from the current gas tax. According to a study from the University of Southern California, a 2.1 cents per mile VMT tax would be enough to replace all of the revenue gained from the current state excise and sales taxes on gasoline.
The VMT tax is not without its critics. Opponents note that the gas tax effectively incentivizes better fuel efficiency. Under a standard VMT tax, fuel efficient cars and gas guzzling SUVs will both pay the same rate of taxation per mile, as opposed to the gas tax which places a heavier burden on vehicles with lower fuel economy.
Additionally, VMT tax proposals have incited opposition due to privacy and administrative concerns. For the proposal to work, the government must monitor how many miles each individual drove in the state. This is challenging since ideally, a state would not tax out-of-state travel. Technological advances have made the reality of a VMT tax more practical. A pilot program adopted in Oregon has been able to implement a road usage charge while protecting the privacy of taxpayers and providing them with choices on reporting mechanisms. Similar pilot programs have been adopted in several other states, including California, bringing hope that lawmakers will eventually create a sustainable funding mechanism for transportation infrastructure. The VMT tax should be on state lawmakers’ minds as they consider better ways of funding upcoming transportation projects.
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