From Gallons to Miles: Rethinking Road Taxes

Buckle up as we navigate the twists and turns of infrastructure and road funding. As electric vehicles gain traction, traditional gas taxes are running out of fuel to support our infrastructure budget. Today, we're exploring how Vehicle Miles Traveled (VMT) taxes pave a more equitable and sustainable path for funding road maintenance and construction. 

Adam Hoffer, the Director of Excise Tax Policy, joins Kyle Hulehan to unpack the challenges and opportunities of VMT taxes. They will explore the innovative technologies used for mileage tracking and address the significant privacy concerns involved.

Links:
https://taxfoundation.org/research/all/federal/road-funding-vehicle-miles-traveled-tax/
https://taxfoundation.org/taxedu/glossary/gas-tax/

Transcript

Kyle Hulehan: 0:01

Buckle up as we navigate the twists and turns of infrastructure and road funding as electric vehicles gain traction, traditional gas taxes are running out of fuel to support our infrastructure budget. Today we're exploring how vehicle miles traveled taxes pave a more equitable and sustainable path for funding road, maintenance and construction. Hello and welcome to the deduction, a tax foundation podcast. I'm your host Kyle Houlihan. And today we are joined by Adam Hoffer, director of excise tax policy here at TF. Adam. How are you doing today?

Adam Hoffer: 0:35

Um, well Kyle, thanks for having me on again.

Kyle Hulehan: 0:37

Yeah, absolutely. We, we always love it when you're here. We're, we get into fascinating stuff. And today, no different. You know, we, we spend a lot of, time driving on the roads. We spend a lot of time commuting in America. We go from place to place a lot. Um, we use our cars a lot. Um, and there seems to be this issue where, the funding for the roads maybe isn't quite there. It seems like we need to build more roads and fund them. And we're not quite bringing in the same revenue as we were before. Could you maybe share some, some insights on the funding challenges and maybe the gap in this infrastructure need?

Adam Hoffer: 1:15

Yeah, I think most of us don't want to think about transportation budgets on a day to day basis. We want to drive, we want the roads to be there, we want them to work, we want them to be clean and well maintained, no snow, no potholes, that sort of thing. But all of that takes money, and when it comes to funding the roads, For the past several decades, we've used primarily gas tax revenues, and that's worked really well. Gas taxes work as what we call a user fee, meaning that the more you use something, in this case the roads, the more you pay for it. And, for road usage, most of that comes when you pay the gas tax. that money's handed over to the government, and then the government uses those revenues to invest in highways, roads, bridges, and all sorts of other transportation infrastructure. That system worked really well for many years, but recently we've seen a decoupling of the gas tax revenues from road expenses. the basic summary of this is that we continue to drive more. In 2023, Americans drove more than 3 trillion miles. That's a lot.

Kyle Hulehan: 2:27

That's a huge number,

Adam Hoffer: 2:28

It's, it's really big. we use roads for all sorts of things, right? We commute to work, we go to visit family, but then also we have commercial vehicles moving things all across the country. And we need well maintained roads to do that. Highway spending continues to grow. every single year. The problem is that the funding source for that road construction and maintenance has started to fall. Adjusted for inflation gas tax revenues are shrinking year over year and they're projected to fall by a lot. Forecasts suggest that by 2040 gas tax collections will only be half of their current levels. And what that means is that we're, we've already reached a point. at which governments are needing to pull funds from other places in order to fund infrastructure. So instead of just using gas taxes, they're pulling from general funds. This is money that could be used for, well, anything else.

Kyle Hulehan: 3:26

I think what you're, what you're talking about kind of paints a little bit of a dire picture on this funding situation and I mean, I, I kind of came up with some silly puns here, but like, you know, this is a car running on fumes. It really is. Like, this is, that's kind of the situation we're in here. And, I, I'd like for you to maybe get into like, why are, real gas tax revenues declining? People are driving more than ever, why does it go down right now?

Adam Hoffer: 3:52

This is actually, I like to think of this as, this is maybe the favorite problem that I've been able to engage on and maybe that we've talked about on this podcast in that. the, the problem that we're painting here, the fact that, we continue to spend more on roads but have falling gas tax revenue comes from the fact that we have falling gas tax revenue, but that's because of some very good reasons. most notably, two separate innovations have helped make it so that Americans can consume less gasoline now and in the future. Most notably, vehicles on the road today are more fuel efficient than ever. And that's across the board on just about every vehicle type. We just need fewer gasoline to move more miles. That's awesome. That's really good news. And then the second thing is that electric vehicles comprise a growing market share of vehicles on the road. And, well, EVs don't use gasoline at all. Which means that, you know, we have vehicles on the road that are not necessarily paying through that, historical means of funding the roads.

Kyle Hulehan: 4:58

Yeah, I mean, again, obviously, like you're saying, this is a great problem to have in a way, but it makes it more complicated. It brings up this challenge, you know, do we need to change what this user fee or how this user fee, the gas tax, what it looks like because of, electric vehicles are changing how we think about road funding. And they, it has to change it because, because it's different, you know, they can charge at home and that, is bypassing the, the traditional, user fee, the traditional gas tax. So should there be a specific tax on EV charging stations to help fund infrastructure? Would, would that make a difference?

Adam Hoffer: 5:37

So it, it could. The, the EV policy landscape is messy, but I think what we're observing right now is this really interesting, really timely, series of policy experimentation across all 50 states. and I think that, the good news here is that we will have a policy solution for funding the roads in the future, that this isn't a problem that we can't solve. exactly what that solution will be, I'm not quite sure yet, but I, I'm pretty optimistic and I have some ideas. So, when it comes to the EV landscape, these electric vehicles on the road, we're seeing lots of different things being tried. most notably, we see that in a lot of states, the states charge an extra vehicle registration fee to electric vehicles, right? So this might be, these range from, you know, 50 to 200 per year. If you have an electric vehicle, when you register that vehicle with the state, you pay an extra fee each year. This isn't ideal. It's trying to capture this idea that, again, EVs aren't paying gas taxes, but they're still using the roads. so we try to the states try to charge them a little bit of extra money that extra fee doesn't change based on how much you use the road You could use a lot or not at all The car could sit in your garage for a whole year and you still have the same annual fee So it's not ideal But it's it's again a step in the direction of trying to to charge ev owners for some road use separately a handful of states have tried You to capture this, you know, road use from EVs by placing a tax on public EV charging stations. These states charge vehicles as you plug in and pay for recharging the cars themselves as I charge. The biggest problem with this solution is that, well, a lot of EV owners simply prefer to charge their vehicles at home. And so, they're not going to pay into the public EV charging station. This is a step in the right direction, but, we're still seeing a lot of problems. And I want to say that all of these, these potential solutions for EVs, pile on top of the fact that, people when they purchase an electric vehicle are generally eligible for a 7, 500 federal tax credit at the federal level for buying EV. And then 19 states also offer some kind of incentive for buying an EV, usually a tax credit or some kind of a subsidy. So in the electric vehicle landscape, We're seeing this really interesting phenomenon where we're actually subsidizing and invent, it's incentivizing people through the tax code to purchase something like an electric vehicle and then once they purchase it we're charging them extra for using it. It, it's messy, um, but it's what we have right now. The, the reason I'm so optimistic is that, there's a solution on the horizon, that is probably the cleanest solution to our road funding challenges and it's using what's known as a vehicle miles traveled or VMT tax and we're starting to see states move in the direction of using VMT taxes.

Kyle Hulehan: 8:53

Yeah. And, and we'll get to VMT taxes for sure. I kind of want to follow up on one thing is, is that. people may charge at home. Something we hit on this podcast a lot is that taxes can affect people's behavior and their behavior may change You know, they'll just charge at home like people go to I I live in new jersey I have lots of people who go to Delaware where there's no sales tax to go buy something And if you're going to pay taxes at a station You're going to figure out how to charge at home to maybe avoid those taxes. Not everyone Is But people will do that, so it isn't a perfect situation, it's not, it's not ideal, and then you bring up something very interesting, the VMT tax, and, there's a push maybe towards moving towards VMT taxes Can you explain maybe how, how they might better align, you know, funding with road use, and can you compare them with, with the methods based on, on gas consumption?

Adam Hoffer: 9:50

I'm excited for VMTs if you can't tell because I do think they are the the policy solution of the future for road use and road taxes. So, a vehicle mile travel tax or I'll just call them VMTs. what they are is it's a, it can be a simple solution that charges a driver for each mile they drive on public roads. in Oregon, so Oregon has the, the nation's longest running VMT program. It's, it really is a simple program and for people who opt into this program, drivers pay two cents per mile driven on Oregon roads. to the Oregon Department of Transportation. That money goes to the state highway fund and they use the revenue for Oregon roads. So it's two cents per mile. The beauty of a VMT is that it can act as a more accurate user fee for road use. I mentioned that we've used gas taxes for decades, but one of the things you just mentioned, Kyle, the fact that Um, people know that they could perhaps drive across state borders for a lower tax rate or, go fill up somewhere where they're not actually doing most of their driving. it has made it so that the gas tax, again, it is, isn't perfect. It's never been perfect, but this, this VMT has the ability to, get a lot more accuracy when it comes to aligning road use. And. actually paying for that road use. So the reason that I'm so excited about VMTs is that I think what we'll see is that if if we get well calibrated rates again, I mentioned Oregon is is two cents per mile. Three other states currently have VMTs. Each are slightly less than the two cents per mile in Oregon. But if we can calibrate these road fees accurately, then we can really see VMTs replace gas taxes. and do a better job of, I like the accuracy here, of trying to align when people use the roads and then charging people for those roads and then we can direct the funds toward those roads for maintenance and more construction if needed. There's also a really high upside if we maybe we, if we have time later, we can get into some of the, higher tech options of, of what VMTs can get into, but, uh, they have the potential of doing a better job of, internalizing the external effects associated with driving. So, we can use them to do more than just fund roads, but also, try to incorporate all of the things that go into driving a car and using a roads and, and how those affect other people.

Kyle Hulehan: 12:33

No, Adam, I know you're excited about VMTs, and it does sound like a really great policy that kind of has a very direct link, um, a very understandable link, which is helpful for taxpayers. You're paying for what you're getting. Unfortunately, everything in life has a downside, and a major concern people seem to have with, vehicle miles, travel taxes, involves privacy. People are concerned, with their mileage being tracked. Do you see this as a genuine invasion of privacy or is it, you know, maybe just a necessary trade off for road funding? We need this to not have potholes. We need this to have safe bridges. We need this in our life.

Adam Hoffer: 13:10

Yeah, so privacy is a real concern here. Let me, let me start by addressing what I think is probably the scariest scenario, right? We can probably picture if, you know, there's either a device in the car or they're using our phone and every movement that you or your vehicle makes is sent directly to the government. That's scary. I think it should be scary and give people some, some pretty strong hesitation. on, wanting to implement any kind of policy like that. But I think the good news is, is that the actual implementation of a VMT should be a lot less scary than the government tracking where you go at all times. Some of the best solutions I've found and ways to address the privacy issue regarding VMTs come from a California experiment that's been running for about a decade now. All they've been experimenting with different ways of running a VMT, and reporting on all the things that they found, and I'll, I'll try to summarize some of the main conclusions here, first is that the, the lowest tech solution seemed to work kind of well, and that is simply, people manually reporting how much their odometer changed from year to year. Again, this isn't perfect. There can be the real risk of under reporting or, um, you know, you have to separate out how much of that you were driving in one state versus another state, how much of that was on public roads versus private roads. But again, it's Big picture here, simply capturing how much your odometer has changed can be a pretty reliable indicator of how much you've driven, and a fraction of that can be assigned to how much you've driven on public roads. This process, just reporting your odometer change, can easily be incorporated with, any state's process of annual vehicle registration or inspection. So states have all sorts of different policies here on how you have to register your vehicle and or get the vehicle inspected. States can just insert this, odometer change from last year into the process and we can get some, measure of, VMT. The high tech solutions are also not as scary as the, you know, potential grim picture of, of being monitored at all times. When it comes to the, the higher tech options of, literally being able to say you drove, 121. 3 miles on routes two, for example, the way in which we can sort of use and apply that are through a couple of different pieces of technology. The most popular ones are either a smartphone app, a piece of technology that is built into most newer vehicles already, or some kind of add on device. A lot of these pieces of technology and hardware and or pieces that integrate with software, closely resemble products that are already on the market. So you might've seen commercials or you might even use something like snapshot from Progressive or drive safe and save from State Farm, insurance companies have figured out that, um, they can better identify driver behavior and how safe of a driver you are. by allowing people to opt in to some form of monitoring system that tells the insurance company how you drive. Personally, I use DriveSafe State Farm, There's a little device. I put it in the, um, I put it in my car somewhere. Um, and it links up with an app on my smartphone. It knows when I drive. It tells State Farm how much I drive. And because I'm a pretty safe driver, I save a lot on my insurance. And what some of these early pilot studies in California have found is that a lot of people really don't mind this kind of technology use. I'm not going to say it's for everyone, but these kinds of technologies are already out there and a lot of people are using something similar to them already. The, the thing that I think is the key piece in this, in these higher tech options is what happens with the data and, you know, how your personal driving use gets read, interpreted, or sent to any sort of government agency. And the real sort of important and key piece here is the use of third party private sector commercial account managers. Basically all this means is that you put a third party between you, your use, your data, and the government agency that's responsible for assigning you a charge for your road use. So the simplest way I can explain that this happens, I mean, and you could even think about maybe your insurance company being a third party agency here. The way it works is all of your individual driving data gets sent to this third party private sector company or this account manager. And so they hold your data, And then the only data that they release to the government is the aggregate number of miles, right? So, they might get data that says I drove 1. 2 miles here and 2. 4 miles there and then 40. 3 miles here. And then all they report to the government is the aggregate total. And it would say, Adam drove for 45 miles on public roads. And then they can use that for assigning the toll to me. So I think it's a really interesting way of keeping a separation of the monitoring and the, private data from, the government. Now, of course, no, no system is perfect. There's always the risk of, that data could be hacked at some point. Um, there's a, a real, I mean, this is a, it's currently an issue, in the, In the court systems for particularly when you're dealing with some of these insurance companies or even toll records from state governments, what the government is allowed to access via a search warrant or without a search warrant, or if they're ever allowed to access it. Um, I think, you know, data use is a real question for the future, but when it comes to funding roads with vehicle mile travel taxes, it seems like we have some policy solutions that are you know, really implementable now. Exactly what it looks like in the next couple of years. I don't know yet, but I think we have the tool in place and we just need to figure out how to use it.

Kyle Hulehan: 19:49

And I'll follow up with this to say that, the privacy concerns are very valid. I totally understand that. But also if you're listening to this podcast, you're likely listening to it on a phone that you take everywhere with you. That's tracking a lot of your movements. That's monitoring you already. And you already have agreed to that and signed up for that in, and you're being tracked everywhere you go now. And now that's not for everyone. And I totally understand that. And some people maybe don't have smartphones in that way or use them in that way. But, you know, there is a lot of this going on already. It's already a thing that we're used to that's in our daily lives. That's, that's kind of around already. And, and so it's not quite as scary as it seems, especially given the way that we interact with technology, the way we're already using it in our lives. And I think, maybe for some people who would be concerned about privacy, there, there's the option to go to the lower tech, you know, report odometer report, something, maybe there could be some options for people. Um, but I think those high tech options sound really great to me. And also maybe a little bit of a commercial for Progressive now, because I just want to save money, um, on my insurance, that's all I want to do. I don't want to, I was like, Oh my God, less, I can pay less. Okay. Let's do that. Let's figure out how to do that. Um, now, now one thing I think, that's interesting with this VMT, you were talking about Oregon and that state and there isn't, you know, maybe a unified Federal approach to VMTs because we're, we're on the frontier of this really. What do you see, like how do states manage this lack of a unified approach and what would be the impact of maybe a federal solution? Are there examples of states experimenting, you know, in other ways or are there any, innovative funding methods?

Adam Hoffer: 21:39

It's always been a bit of a challenge, even when we were talking about gas taxes, right? I think most people who drive know where they can find the cheapest gasoline and whether that's at the cheapest station within their state or I know many of our listeners are located in the dc area they probably know whether they can get cheaper gas in Virginia versus in the district or in any other state that they may travel to in the near area. VMTs are no different here. In the Oregon example that I referenced earlier, the onus is on the user to tell the states how many of those miles were driven outside of Oregon or on private roads. Private roads are a bigger issue in some states than others. Um, often a bigger issue around rural communities and or on farmland. So, there are challenges with, You know, getting, you know, converting that miles traveled to attacks. And it's also just a challenge across states. So what we're seeing early developments of right now are regional partnerships, where states can share data. This is obviously going to be a bigger issue if a truck is picking up a load of cargo in Los Angeles and driving it the whole way across the country to the East Coast. They're going to go through a lot of states. And have a lot of different, you know, state systems to deal with, you know, some of the states might have VMTs and some might not. But I think that, again, it's possible to implement, a solution where, um, you know, most truckers have some sort of tracking technology if it's a commercial operation. For private organizations that there are smartphone apps right now that you can use to track your own driving most of those are designed for um, you know, you tell it when you're driving for a business purpose so that when it comes time to file your taxes you can deduct the miles you've driven for business. We have a lot of tech solutions that I think can solve this issue. It's not going to be perfect, but I'm optimistic that it'll be a movement in the right direction.

Kyle Hulehan: 23:52

I'm wondering if, if privacy concerns become too much with, with VMTs, you know, and I wonder maybe like, could an expanded toll system or increased fuel taxes be viable? Or how do you, how do you see something like that playing out?

Adam Hoffer: 24:10

It's certainly possible, and I think that's what we've seen in the past several years in most states is a growing toll system, right? Not only expanding or increasing the tolls on roads, if they have them, right? I mean, states vary widely in their use of tolls. In some places it's, it's only on things like bridges. Sometimes it's only on one or two major, interstates or, you know, major roads across the whole state. And in other states it's, it's widely used. And, in, in those states where tolls are widely used, you often see things that, you know, devices that you can put into your car that will let you skip the toll line, if you will, right? I think of, you know, Easy Passes in Pennsylvania, the Sunshine Pass in Florida. Um, lots of states have the system designed to just track your tolls. And so, the expansion of tolls, I think, will certainly come if we don't, you know, move to something more like a VMT system. The other alternative is a, continual increase in gas tax rates, which are among the most unpopular taxes to increase. But, um, I, I think that it would be a needed solution, simply because cars are so much better and so much more fuel efficient these days than before, and, um, again, then you try to add on top of that issues to try to deal with, the growing market share of electric vehicles. again, we've seen several states increase or set aside, you know, some new, electric vehicle specific tax. via, you know, whether it's an annual registration fee, or some sort of system that gets at, vehicle charging. Obviously the public EV charging stations are the easier targets, but, um, you know, could it expand to an added statewide tax on all electricity usage? I mean, that's, it's not infeasible, based on the growing transportation needs that we're seeing. And if, if EVs really do. take over the majority of road usage, then, you know, absent of VMT tax, I think states would be looking for ways to capture the fact that these vehicles are using the roads and trying to find a way to charge them for doing so.

Kyle Hulehan: 26:30

Yeah, and I mean, look, if VMTs don't come about, I think you've certainly put a great case for them here today, but if they don't come about, I mean, the toll system in New Jersey is honestly quite good. I live in New Jersey, and I think the parkways work pretty well. Work great. They're the best roads in our state that, um, most well paved, the easiest to drive on, they have lots of lanes. So, so there, there is something to be said for that maybe possibly. Um, but as we're, as we're reaching the end of the road here, of this podcast episode, um, Looking forward, how do you see, the landscape of transportation funding evolving over the next decade, especially with the usage like we've talked about and shifts, even in commuter behavior, I work remotely. So I don't drive that much. In the post pandemic era, a lot more people are remote or at least hybrid. So how do you see some of that?

Adam Hoffer: 27:19

Well, simply put, I think policy change is going to occur, and because of that, I think now is a great time to become informed and, make your decisions based on, what you think these policy changes will be. It's also a great time to enter the policy discussion and debate if you feel passionate about any of these issues. if, if nothing changes, we have pretty clear data that suggests the gas tax base, will continue to erode and we're going to be left with a lot of questions about how to fund transportation infrastructure. The good news is that we have policy solutions available to us. They all need to be fine tuned and adjusted. Policy experiments are going on in almost all 50 states right now to help determine what that transportation funding tool of the future would be. I think vehicle mile travel taxes have a really good chance at becoming a that tool, the other nice thing about that is, is if, if you don't care at all, there's not much work for you to do. I think at some point you'll get an option to download an app or put a device in your car, and you can just keep going as usual or simply record your odometer change from year to year. So these don't need to be, highly invasive. And I think whatever changes we pick can be done with, relative minimal cost. But I do think that change is going to come. And so right now is the perfect time to be thinking about what that change could be and what the future will look like.

Kyle Hulehan: 28:49

Yeah, absolutely. And I think, to that point, yeah, change is going to happen. We're kind of getting to, you know, a, inflection point here and that's okay. Like again, like you're saying, it may not be as invasive or, or it may not be some drastic change and it's something we'll just adapt to like everything else. Like we adapted to taking our phones everywhere. People used to use maps. People used to use MapQuest. People used to, you had to print everything out. I mean, I don't remember this that well. You probably maybe remember that a little bit better than I do. But like, I never have used a map ever. I've just, Google's taken me everywhere I need to go. So I think like we'll adjust, it will be okay. This is not, you know, some, something terrible to fear. I think privacy concerns are always valid. But like you said, you can kind of have a third party in the way that there's a lot here. Um, Adam, I'm really grateful that you've been on this show today and, and broken down maybe kind of the future of what we're seeing and how we're going to fund the roads. Is there anything else you want to plug today or just hit on that you're working on here at TF?

Adam Hoffer: 29:53

Yeah, so we are working on multiple projects related to road funding. We'll have a blog post coming out specifically related to VMTs. And then we're also looking ahead. We sort of foreshadowed the future of road funding. Road funding and challenges that we might face? 2025 is going to be a really big year at the federal level for, well a lot of things, but, in particular the future of, road funding in the transportation funding in our country. We're gonna have a lot to, to say about that. We're working on a longer form paper that, that discusses some of those issues and, recommendations for how we can make sure that we still have. well funded well built and well maintained roads. I think that's a fundamental part to, um, how we live our daily lives and how our economy operates. So we, we are going to have several pieces of work coming out on this. feel free to check it out. And, and, we always welcome inputs and feedback because like I said, these are the formative years for what the future of transportation policy is going to look like. And, I'll just say that if, if anyone's interested in this, like, now is the time to, get your opinion heard. I, I, I'm in a similar camp with you, Kyle. I don't mind, too much about having the, device in my car. But, if privacy is a bigger concern for you, now's the time to let people know.

Kyle Hulehan: 31:17

Yeah, Adam, thank you so much for being on the show today. It's always a joy to have you here. Please check out his work. He's doing amazing work on all of these things, not just vehicle miles traveled, but many other excise taxes. It's great to have you on the show today. Thank you for being here.

Adam Hoffer: 31:32

Thanks, Kyle.

Kyle Hulehan: 31:34

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