Effectiveness and Equity of Vehicle Mileage Fee at Federal and State Levels

Abstract

As federal and state fuel tax rates stagnate in the United States and the average vehicle fuel efficiency increases, revenues from the fuel tax will likely decrease. An alternative source of revenue to the fuel tax should be considered and implemented to avoid the risk that the Highway Trust Fund may not be able to function as a dedicated user pay fund and may require yearly bailouts from the general fund. Practitioners and researchers have been considering alternatives to the fuel tax for years. The alternative revenue mechanism must ensure equity, or it will not be accepted as a politically viable option. The American Association of State Highway Transportation Officials and several congressional commissions have recommended that, in the interim, the federal gasoline tax be increased by 10 cents per gallon to ensure that the Highway Trust Fund is able to continue to pay its obligations and that, in the long run, the fuel tax be replaced or supplemented with a mileage-based user charge. This paper analyzes the distributional effects of an increased gasoline tax and vehicle mileage fees by considering both their effectiveness in revenue generation and their equity for different population groups at the federal and state levels. Both horizontal and vertical equity are considered for age groups, income groups, ethnicity groups, and geographic locations. With a better understanding of the effects of alternative transportation financing options, policy meters can design or select the most effective policy and the revenue that is generated can be used most effectively and equitably.