For What the Tolls Pay: Fair and Efficient Highway Charges

By Penner, Rudolph G. | Issues in Science and Technology, Spring 2006 | Go to article overview

For What the Tolls Pay: Fair and Efficient Highway Charges


Penner, Rudolph G., Issues in Science and Technology


Hydrogen cars, expensive oil, fuel efficiency standards, and inflation frighten those interested in maintaining and improving U.S. highways. All of these forces could erode the real value of fuel taxes that now are the largest single source of funding for highway programs and an important source of transit funding as well. Because of this worry, the Transportation Research Board convened a committee to carefully examine the future of the fuel tax.

The committee uncovered both good and bad news. The good news is that there is nothing structurally wrong with the fuel tax that will cause the real value of revenues to decline dramatically over the next couple of decades. The bad news is that it is a very crude way to raise revenues for our highway system. Switching to per-mile fees, the committee concluded, would be a much more efficient and equitable approach.

Looking at the good news first, worries that alternative fuels and improving fuel efficiency will undermine the finance system are definitely exaggerated. Radical improvements in efficiency will take a long time to develop and be implemented, and even less radical improvements, such as hybrid engines, affect fuel consumption very slowly because it takes so long for new models to replace old models in the U.S. car fleet. Moreover, Americans are addicted to oil partly because they are addicted to power. If you make an engine more efficient, they will want it bigger. Consequently, improving technology does not reduce real fuel tax revenues per vehicle mile nearly as much as one might think. Indeed, they have been roughly constant for a long time.

One cannot be quite as certain regarding the future price of oil. There is some possibility that demand may erode because of an upward trend in the price of gasoline. Department of Energy projections (which have been generally consistent with those from other prominent sources) are optimistic that the price of oil will not surge over the next 15 years or so. But it must be admitted that energy experts did not anticipate the recent price increase to over $60 per barrel.

However, the evidence strongly suggests that recent oil price increases are as much the result of geopolitical forces as they are the result of fundamental supply shortages. It is true that China and India are becoming major oil consumers as they grow rapidly, but it is also true that supplies are increasing. There may be limited supplies of the type of oil that we pump from the ground today, but as one expert puts it, the sources of oil will just become heavier and heavier. If light crude runs out, we'll turn more to heavy crude. If that becomes scarce, tar sands will be exploited more fully, and if they become expensive, we'll turn to oil shale. In the process, oil will become more expensive, but it will be a slow process. Of course, wars, boycotts, and other disturbances can cause major price spurts that make optimistic forecasts look foolish, but one has no choice but to base long-run forecasts on fundamental trends, and they are not alarming.

The imposition of severe fuel efficiency standards could upset the gasoline-powered apple cart, but new radical regulation seems politically implausible in the near future. Currently, our two political parties are so closely competitive that no one wants to ask the American people to make major sacrifices. We may be addicted to oil, as the president suggests, but as Mae West remarked, "Too much of a good thing can be wonderful."

Inflation concerns

The possibility of accelerating inflation raises more of a political as opposed to a technical concern. The federal fuel tax is a unit tax. That is to say, it does not vary with the price of gasoline as would a percentage sales tax. Inflation therefore erodes the purchasing power value of the tax. Some, like the Chamber of Commerce (in the National Chamber Foundation's 2005 report Future Highway and Public Transportation Finance), have suggested indexing the tax for inflation. …

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