Tuesday, March 29, 2011

Brilliance or Big Brother? The VMT Tax

Angry about those mammoth potholes that are resurfacing as the snow melts? Many craters in Minnesotan roads go unfilled partially because of the insufficiency of fuel tax funds to fully cover the maintenance of federal, state and local transportation infrastructure. At a national average of 48.1 cents per gallon, the decline of the effective tax rate and a recent trend in fuel-efficient cars (which has led to decreases in fuel consumption) has lessened both the efficiency and adequacy of the excise gas tax. To address this dilemma, many policymakers are taking a second look at the vehicle miles traveled (VMT) tax. Instead of taxing by the gallon, the VMT tax is based on the distance traveled– a direct user-fee for driving on roads. The tax utilizes GPS technology in the form of a small, on-vehicle-device (OVD) which collects miles traveled and transmits that information electronically when drivers fuel up at the pump.

Despite its potential, many serious concerns arise when considering the efficiency, adequacy, equity and feasibility of the VMT tax:

  • Efficiency: Compared to the fuel tax, the VMT tax has the potential to change driver behavior in a positive way by reducing average daily mileage (moving society to a more socially beneficial equilibrium in terms of congestion and pollution). Also, if the VMT was designed to charge more during peak periods, the transportation system would become more efficient by reducing congestion and distributing trips more evenly across multiple modes.

  • Adequacy: As the VMT tax can be imposed on every vehicle for each mile driven regardless of fuel efficiency/type, it will have a more complete tax base and still relatively low tax rates, thus having a higher tax adequacy relative to fuel tax. Also, the sustainability is enhanced since fluctuating fuel prices, increasing fuel efficiency and alternative fuels would have a lesser impact on VMT tax revenue.

  • Equity: Unlike the fuel tax, the VMT tax is not influenced by fuel efficiency or fuel type, improving equity in terms of benefits received and horizontal equity. However, considering vertical equity, a flat-rate VMT tax is still highly regressive, though to a lesser-extent compared to the fuel tax. A possible way to improve vertical equity is applying a higher tax rate to luxury sport cars than vehicles for ordinary uses.

  • Feasibility: Due to incredibly high public visibility and low opportunity for tax exportation, the VMT tax faces major political feasibility issues. On the administrative side, costs needed to develop new accounting systems, technology, and infrastructure at each gas station (and on every vehicle) are daunting. Yet privacy concerns are paramount when considering the overall feasibility of the VMT tax, as many assert that the tracking device impinges on their freedom and hearkens back to “Big Brother” government:

Despite these concerns, as more and more people change their consumption habits away from gasoline, will the burgeoning holes in transportation budgets around the country change public opinion of the VMT tax from “Big Brother” to revenue brilliance?

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