Alternatives to Fuel Tax: a State Level Perspective

Abstract

Under the current fuel-tax-based highway financing system, the funding gap between highway needs and revenue available is expected to grow as vehicle fuel economy improves and use of alternative fuels increases. Consequently, the highway financing mechanism needs to be restructured or a different financing strategy undertaken. Previous research provided examples of successful implementation of pricing schemes in terms of design of pricing scheme, technology issues, legal and institutional issues, and public acceptability. Synthesizing this information, a methodological framework was established for evaluation of alternative user charging schemes. Based on the assessment of the current and projected highway revenue and the needs and demand of Indiana, the study developed three alternative financing schemes: (1) enhancement of the current tax system; (2) addition of new funding sources to supplement the current system; and (3) replacement of the current system with new financing schemes. The first alternative suggests an increase and/or indexing of fuel taxes and vehicle registration fees, supplemented by adjustments in other general taxes where possible. The second alternative includes an option to impose tolls, which was estimated to yield annual revenue in the range of $40-$90 million, depending on the toll rate schedules. The third alternative is to establish a distance-based charging scheme (VMT fees), the rates of which can be calculated from highway expenditure and demand information. Based on the past three-year data, it was found that on average 2.9 cents need to be charged per vehicle-mile traveled, with separate rates varying by road functional class. More rigorous analysis was conducted on the basis of a highway cost allocation study to calculate separate unit rates by vehicle class as well as road functional class. Under the suggested pricing structure, named as Indiana Statewide Comprehensive Usage-based Road Pricing (ISCURP), automobiles are charged 1.21 cents per mile, single unit trucks 9.18 cents per mile, and combination trucks 23.54 cents per mile. Each alternative was evaluated on the basis of the established criteria and compared with the other two alternatives. The third alternative, to replace the current fuel tax system with VMT fees, was found to have the best potential in achieving revenue adequacy, system efficiency, and equity. The implementation of this alternative, however, could be cost-prohibitive and could face opposition from the public. Based on evaluation results, a stepwise modification of the current system was proposed, aiming at a long-term goal of implementing ISCURP. In the short-term, it is suggested to

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