Replacing the Gas Tax with a Mileage-Based Tax

February 25, 2015

This week, the Mileage-Based User Fee Alliance held their annual conference. I was invited to speak on the tax policy and the taxpayer perspective of mileage-based taxes, or sometimes referred to as vehicle miles traveled (VMT) taxes. This group is interested in how mileage-based taxes could help better fund transportation spending and how it can better “price” roads than the gas tax.

Mileage-taxes are levied on drivers based on the number of miles they drive. For example, a driver could be charged 12 cents a mile for driving on a highway. If they drive 100 miles on this highway a month that mean a $12.00 tax bill. This is similar to tolling, but the technology could potentially allow the tax to be much more flexible in terms of where and when it is levied.

Currently, federal and state governments fund a significant amount of their transportation funding through revenues from the gas tax. The federal government currently levies an 18.4 cent per gallon tax on gas to fund the highway trust fund. This trust fund then distributes these funds to states to help fund highway and transportation projects.

The basis for the gas tax is the user-pays principle of taxation. This principle states that those who benefit from government spending (in this case roads) should pay for the associated government spending. This “prices” the roads in order to prevent overconsumption (congestion) and makes sure there is sufficient revenue to fund repairs.

However, the gas tax at the federal level does not price roads very well. This is due to the economic incentives of the gas tax. The gas tax isn’t directly connected to how much you drive. It only serves as an indirect price on driving through a tax on fuel consumption. One can actually reduce the amount of tax paid, but drive the same amount by driving a fuel efficient car. As more people buy more fuel efficient cars, the price paid for driving on roads will decline overtime. Add this on top of the fact that the gas tax is not adjusted for inflation and we see why the gas tax underprices roads, which leads to an underfunded trust fund and crowded roads.

This is where this group says a mileage-based tax would be an improvement. Since you would be taxing drivers on the number of miles they drive, it wouldn’t matter how fuel efficient their cars were. Fuel efficient cars could consume less gasoline, but as long as they drive the same number of miles, their tax bill won’t decline. In addition, mileage-based taxation’s technology could lead to more flexible tax rates than the gas tax. For example, the tax rate could vary based on where and when you drive and charge you based on your contribution to congestion. This could help cut down on the number of people driving during rush hour.

While a mileage based system could raise sustainable revenue and price roads more effectively than the gas tax, there are some possible drawbacks. It requires more administration than the gas tax, people have privacy concerns about their vehicle being tracked, and since it is much more salient compared to the gas tax, there may be more political opposition.

Time will tell if this type of tax is viable for transportation funding. Oregon has been testing this sort of technology to see if it will work for them. Several countries have mileage based taxes already.

And if mileage based taxes prove to be a more sustainable replacement for the gas tax in the future, it still leaves us with our current transportation funding issues. At the federal level, the highway trust fund is projected to run out of funds by the end of May this year. There is no way an alternative funding source like a mileage based system could be implemented as a replacement to the gas tax that quickly. A more near-term solution needs to be devised that fixes the trust fund, whether it is spending reform, funding reform, or some combination of the two.

Was this page helpful to you?

No

Thank you!

The Tax Foundation works hard to provide insightful tax policy analysis. Our work depends on support from members of the public like you. Would you consider contributing to our work?

Contribute to the Tax Foundation

Related Articles