Oregon to Experiment with Mileage-Based Tax

June 1, 2015

Oregon will become the first state to implement a per-mile tax on driving. The tax is voluntary – an alternative to the state’s fuel tax. Drivers will get the choice of paying one or another. Should they choose the mileage-based tax, they will be charged 1.5 cents per mile, but get a credit to offset the taxes they pay on gas. (The current statutory rate on gasoline is about 30 cents per gallon.) The program will start on July 1st, open to 5,000 drivers as a sort of pilot program.

The tradeoff between the gas tax and the mileage tax is even at about 20 miles per gallon – similar to the average car – but a big truck or SUV would be better off with the mileage tax, and a hybrid would be better off with the gas tax.

Readers might wonder why Oregon is experimenting with a system that makes hybrids worse off. If one views gas taxes as an environmentalist initiative, this seems backwards. But gas taxes – at least historically – have not actually been about the environment. They have been about funding roads.

Regular readers of this blog know that this is an application of the benefit principle: the idea that the users of a government service should provide the tax funding for that government service. For example, taxes on hunting equipment pay for game conservation efforts. People who don’t drive in New York don’t pay any gas taxes, but they do pay for the subway through fares and local taxes.

There’s an obvious fairness in these kinds of arrangements. In addition, they also make for better public policy. By making sure the taxpayers benefit from the services they pay for (and conversely, making sure that those who benefit pay the taxes) we make it easier for citizens to make an appropriate cost-benefit analysis and decide whether using the service is worth it.

When it comes to roads, this is not a minor point of sound public policy. Rather, it is the single most important issue facing them. The greatest inefficiency in our whole infrastructure system – by far – is traffic. It’s stressful and it wastes everyone’s time, and it exists in part because roads are “priced” so cheaply. At one and a half cents per mile, roads are a great deal. And the problem with great deals is that too many people want to use them.

Policy experiments at the state level are worth keeping in mind as we debate the Highway Trust Fund at the federal level. The Oregon experiment is a good reminder that roads need to be paid for, and they probably should be paid for by drivers. When drivers are underpaying for the roads they use (getting a good deal) roads become overused, and traffic jams happen.

While it’s understandable that drivers don’t want to give up a good deal, it is worth considering raising more revenue from drivers. That money could be spent on more roads to drive on, making the experience better, or on cutting other taxes, such that the overall policy change reduces traffic but comes at no net cost to taxpayers.


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