Friday, July 3, 2015

5 Questions for Oregon's New Pay-Per-Mile Tax


For decades, funding for America's roads and highways has been paid for largely through the gas tax. But with the rise of fuel efficient cars that reduce motorists' reliance on gasoline, the ever-rising maintenance needs of our aging infrastructure, and resistance in Congress to increasing the gas tax, the cost of upkeep has far outpaced revenue.

To tackle this funding gap, Oregon is piloting a new program, OReGO, in which drivers pay a tax per mile driven, not per gallon of gasoline purchased. The program is currently limited to 5,000 vehicles as they test the new system, though so far 270 motorists have signed up on its first day.

How it Works

OReGO participants will pay 1.5 cents per mile while driving in Oregon, and receive a credit on their bill for the 30 cents-per-gallon state gas tax paid at the pump. - See more at: http://tinewsdaily.com/stories/510625101-oregon-launches-nation-s-first-pay-per-mile-tax-system#sthash.14CPn28X.dpuf
Under the OReGO pilot program, participants will pay 1.5 cents per mile while driving in Oregon, and receive a credit on their bill for the 30 cents-per-gallon state gas tax (to avoid being double-taxed). To track their mileage, participants will have to get a tracking device from one of three vendors. That device will collect data on their speed, mileage, fuel usage, and other emissions-related information. Only the mileage data will be shared with the Oregon Department of Transportation (ODOT) for tax purposes, so it's not entirely clear why that other information will be collected.

Questions for the Pilot Program

The whole point of a pilot program is to test it out before releasing it at-scale. There are a number of questions, then, that program administrators will want to answer in running this pilot. Here are four that I am particularly interested in:
OReGO participants will pay 1.5 cents per mile while driving in Oregon, and receive a credit on their bill for the 30 cents-per-gallon state gas tax paid at the pump. - See more at: http://tinewsdaily.com/stories/510625101-oregon-launches-nation-s-first-pay-per-mile-tax-system#sthash.14CPn28X.dpuf
OReGO participants will pay 1.5 cents per mile while driving in Oregon, and receive a credit on their bill for the 30 cents-per-gallon state gas tax paid at the pump. - See more at: http://tinewsdaily.com/stories/510625101-oregon-launches-nation-s-first-pay-per-mile-tax-system#sthash.14CPn28X.dpuf
OReGO participants will pay 1.5 cents per mile while driving in Oregon, and receive a credit on their bill for the 30 cents-per-gallon state gas tax paid at the pump. - See more at: http://tinewsdaily.com/stories/510625101-oregon-launches-nation-s-first-pay-per-mile-tax-system#sthash.14CPn28X.dpuf
OReGO participants will pay 1.5 cents per mile while driving in Oregon, and receive a credit on their bill for the 30 cents-per-gallon state gas tax paid at the pump. - See more at: http://tinewsdaily.com/stories/510625101-oregon-launches-nation-s-first-pay-per-mile-tax-system#sthash.14CPn28X.dpuf
OReGO participants will pay 1.5 cents per mile while driving in Oregon, and receive a credit on their bill for the 30 cents-per-gallon state gas tax paid at the pump. - See more at: http://tinewsdaily.com/stories/510625101-oregon-launches-nation-s-first-pay-per-mile-tax-system#sthash.14CPn28X.dpuf
OReGO participants will pay 1.5 cents per mile while driving in Oregon, and receive a credit on their bill for the 30 cents-per-gallon state gas tax paid at the pump. - See more at: http://tinewsdaily.com/stories/510625101-oregon-launches-nation-s-first-pay-per-mile-tax-system#sthash.14CPn28X.dpuf

1. How much more revenue does the new tax generate?

The adequacy of the tax will be one of the most crucial aspects of the program. In order for the program to be successful - both as a replacement for the gas tax and as a means of funding infrastructure maintenance - the per-mile tax has to bring in more revenue than the gas tax does.
Administrators will need to determine the difference between the amount of revenue generated in this pilot program and the amount they would have brought in if the same cars had been paying the traditional gas tax.


It seems, at least at face value, that this new tax will be more adequate - that is, will bring in more revenue - than the gas tax. Currently, the state gas tax in Oregon is 30 cents per gallon. Assuming an average fuel-economy rating of 25.4 mpg (note this is an average for new vehicles, not for all vehicles currently on the road), the current state gas tax comes to 1.18 cents per mile driven. This is less than OReGO's per-mile tax of 1.5 cents.

However, if we use a lower fuel-economy rating (say, 20 mpg) in the above gas-tax-per-mile calculation, that comes to 1.5 cents per mile driven, same as the new per-mile tax. This would indicate that, as the fuel-economy of cars increases over time, the difference between gas tax revenue and per-mile tax revenue will widen. This makes a strong case for implementing a per-mile tax from a revenue generation perspective.

2. How regressive is the new tax?

Both the gas tax and the per-mile tax are a flat tax: all motorists pay the same rate regardless of their income, what kind of car they drive, or how much they drive. But the effective tax rate of flat taxes is almost always higher for low-income individuals and families, as they spend a greater proportion of their income on the products that get taxed (as an interesting side-bar, groceries are often exempt from sales tax to account for this regressivity). To illustrate this point, imagine two motorists: one who makes $20,000 a year, and one who makes $100,000 a year. Both drive the same amount per month (500 miles, an arbitrarily round number) and of course pay the same per-mile tax rate. As you'll see, their effective tax rate is quite different:




Low-Income
High-Income
Income
$20,000
$100,000
Miles Driven
500
500
Per-mile tax rate
$.015
$.015
Tax paid
$7.5
$7.5
Effective tax rate (% of income)
.0375%
.0075%


The effective rate is quite low in both cases, but it's five-times higher for low-income drivers than for high-income drivers. If administrators are interested in fixing the regressivity of this tax, they may have to introduce some kind of progressive structuring (essentially asking higher-income drivers to pay a higher per-mile rate). Or, on the other end, they could provide particularly low-income drivers with some kind of tax credit, though that would reduce the revenue generating capacity of the tax.

3. How much greater is a Hybrid owner's tax burden?

When Congressman Earl Blumenauer (OR-3) announced on his Facebook page yesterday that he would participate in the pilot program, responses were mixed. One of the main criticisms of the program is that it is unfair to drivers who invested in a car with a greater fuel efficiency (such as a hybrid, electric car, etc) so that they could avoid paying for gas. They will still buy less gas after this new tax is implemented, but part of the cost of gas that they are avoiding - the state gas tax - is being shifted so that they can no longer avoid it. That's essentially the point of the new tax: to make up for lost revenue due to greater fuel efficiency. What's more, drivers of particularly inefficient vehicles will see their gas bills lowered because they're now paying for miles driven, not for gallons consumed. This seems, at face value, to eliminate an incentive for driving a more efficient car. Put by the Oregon Electric Vehicle Association:
"Why does this program give a tax break to gas guzzlers? Establishing a minimum rate so that everyone pays is fine, but reducing taxes on the most polluting vehicles on the our [sic] road as a method of funding our roads makes no sense."
Indeed, the program isn't designed - at least, not ostensibly - to give a tax break to gas guzzlers, but it does have that effect. The gas tax, in my view, helps offset the externalities of an inefficient vehicle - there are real economic costs associated with pollution and other environmental hazards - though I don't believe that was ever the actual intent of the gas tax. Inefficient motorists seem to get a pretty good deal here, while drivers of more efficient cars will be left paying more than they bargained for.

To their credit, I suppose, OReGO is pretty upfront about this on their website:



It's very interesting to think about the fact that the rise of efficient cars, having contributed to solving one problem (emissions pollution), has contributed to creating another problem (the inadequacy of the gas tax to paying for our infrastructure maintenance). A supporter of this program would no doubt argue that the per-mile tax ensures that people who use roads frequently but do not pay much in gas taxes (i.e. owners of fuel-efficient cars) pay their fair share towards maintaining the infrastructure they rely on to get around.

Ultimately, I'd like to know just how much the tax burden changes for drivers of cars of varying levels of fuel efficiency.

4. Is this administratively feasible at-scale?

The pilot program will reveal a lot about how difficult this program will be to administer across an entire state. There are some implementation challenges that will have to be overcome as the program gets rolled out at-scale:

First, it appears as though every single driver in the state will have to choose a provider for their tracking device. This immediately puts the burden of choice on the citizen. I'm confused as to why there is a choice here at all. It's not like shopping for health insurance where there are a lot of different factors to consider (premium and deductible costs, keeping your preferred doctor, coverage for specific procedures, etc). The vendor is just giving you a mileage tracker. It seems to me like everyone should get the same thing, since all of the trackers have to do the same thing anyway. The state should use the pilot program to determine which tracker works the best, and then give every driver that one.

Related to that, how is the state going to ensure that everyone is signing up? They could use the Department of Motor Vehicles registry, but what if I own a car and don't buy a tracker? How long does it take the state to find out, and then what is the punishment?

Speaking of which, outreach is going to be a major issue here. The gas tax is pretty easy to implement: whenever you buy gasoline, the price of the tax is included right there when you pay at the station. People don't have to worry about complying with it, or even have to know it exists, because it's right there by default. But if the burden of compliance is on me, the driver, to pick a vendor, get the tracker, and install it in my car, the state will need to run a fairly aggressive outreach program. Not everybody is going to see your press release or your Facebook post.

Lastly, I'd like to know how the credit works. It sounds like participants in the pilot program pay the per-mile tax and in return get a credit so that they don't also pay the state's gas tax when they fuel up. I wonder how the state will know how much of a credit to give each driver: different cars have different fuel efficiencies, so not every car will use the same amount of gas for a given number of miles. Perhaps that's why the trackers are collecting information on fuel usage.

5. Is it politically feasible?

It seems like this program is being piloted out of necessity, not out of popularity: nobody loves the idea of paying more taxes, but the state needs that money desperately to fund infrastructure projects. Both chambers of the state legislature passed the pilot program with strong bipartisan majorities, but we shouldn't underestimate the potential political difficulty of passing a state-wide program, particularly as the pilot gets implemented and criticisms continue to spread.

Many Republicans won't like it for fairly obvious reasons: it's a new tax, and as stated above, it's a higher per-mile rate than the current gas tax. But then again, those who drive fuel-inefficient cars may learn that their tax burden will decrease and support the bill for that reason.

Some Democrats may not like it because of its effect on the tax burden of drivers of fuel-efficient cars, and the fact that it dis-incentivizes the purchase of said cars. Environmentalists could thus prove to be a thorn in the side of elected Democrats who support the policy, particularly if they are well-organized and vocal in their opposition. The tax is also regressive when looking at the effective tax rate for low- and high-income drivers. But then again, the money is going towards paying for infrastructure, and those kinds of investments are generally quite popular in the Democratic Party.

Thus, there are reasons why those on the political left and right could either support or oppose the program depending on which of these issues they find most important and how they are personally affected by the program. This is one question we may not be able to answer until a bill establishing a state-wide program comes to the floor.

Conclusion

Over the past several years, the rise in infrastructure costs has far outpaced the revenue-generating capacity of the gas tax. Oregon's new per-mile tax program is an interesting way to solve the dilemma of increasingly fuel-efficient cars driving down revenues. However, there are a number of questions I have about OReGO - related to the adequacy of the tax, its fairness to low-income and fuel-efficient drivers, and its administrative and political feasibility - that administrators should answer through this pilot program.

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