Winners and Losers: Distributional Impacts of Highway User Fees

B. Starr McMullen

Lei Zhang

Kyle Nakahara

Oregon State University

Case Study: OregonProposed change in highway user charges: From a Gasoline Tax to Vehicle mile fee

Purpose of Tax: To Collect Road User Fees (We will not consider congestion fees here)

Intent: Revenue Neutral FeeIntent: Revenue Neutral Fee

VMT tax set at $.012/mile to replace $.24/gallon gasoline tax ($.012 = $.24/20 mpg)

Background

Oregon legislature has realized the futility of trying to fund highways with the current 24 cent/gallon tax

No political support for raising the tax Given trend towards more fuel efficient vehicles, fuel tax

now serves as a road user fee as light vehicle road damage is more related to miles rather than fuel consumed

Suggestion by legislatively appointed Road User Fee Task Force (RUFTF): Replace gasoline tax with a Vehicle Mile Tax (VMT)

Who Gains and Loses From This Change ?

Distribution of Costs:

Between Income Groups

Between regions (urban/rural)

Identification important for decisions regarding revenue distribution

Regressive, Progressive, and Proportional or Neutral Tax/Fee Structures

A regressive fee takes a greater percentage of income from lower income groups and higher income groups pay a smaller percentage of income

A progressive fee means that higher income

groups pay a progressively higher percent

of their income in fees

In a proportional or neutral fee structure all income groups pay the same percent of their income in fees

Average Oregon Household Expenditures With Oregon Gasoline Tax of $.24 (2001, with average Oregon gasoline price of $1.46/gallon)

Income group

Number of Households

Average HH expenditure with gas tax $.24/gallon

Average HHexpenditure

as % of income

Average tax revenue

with gas tax of

$.24/gallon

Tax as % of income under

$.24/gallon gas tax

1 39 658 6.63% 108 1.09%

2 75 918 4.09% 151 .67%

3 65 1174 3.17% 193 .52%

4 62 1595 3.06% 262 .50%

5 40 1859 2.75% 3066 .45%

6 67 1993 1.81% 328 .30%

Average HHincome

9935

22433

37038

52096

67500

109962

Average Household taxes under Gasoline tax of $.29/gallon (Using 2001 Average Oregon price of $1.46/gallon)

Income group Number of households

Average tax revenue with

gas tax of $.29/gallon

Tax as % of income under

$.29/gallon gas tax

Average change in Tax

revenue for $.05 increase in tax/gallon

($)(as %of income)

1 39 131 1.32% 23 (+.23%)

2 75 182 .81% 31 (+.14%)

3 65 233 .63% 40 (+.11%)

4 62 317 .61% 55 (+.11%)

5 40 369 .55% 64 (+.10%)

6 67 396 .36% 68 (+.06%)

What has the rise in gasoline prices done to the incidence of overall gasoline expenditures?

Average 2001 gasoline price in Oregon was $1.46/gallon with a $.24/mile tax – and this was regressive

What has happened as gasoline prices have risen – let’s use a gasoline price of $2.64/gallon including $.24/mile gas tax

Average Oregon Household Gasoline Expenditures as a Percent of Income With Oregon Gasoline Tax of $.24

Income group

Number of Households

With an Average

gas price of $1.46/gallo

n(2001)

With an Average

gas price of $2.64

Change in incidence

1 39 6.63% 11.99% +5.36%

2 75 4.09% 7.40% +3.31%

3 65 3.17% 5.73% +2.56%

4 62 3.06% 5.54% +2.48%

5 40 2.75% 4.98% +2.23%

6 67 1.81% 3.28% +1.47%

Average HHincome

9935

22433

37038

52096

67500

109962

The SUITS INDEX The Suits Index, bounded between -1 and 1 A value of -1 implies the lowest income

group bears the entire burden of the tax; A value of 1 implies the highest income

group bears the entire tax burden. A value of 0 implies the tax is proportional.

Suits Index= -0.17623

Suits Index based on Oregon static model

Income group Accumulated income (%)

Accumulated tax (%)

1 2.179938882 5.3804729982 11.64535438 19.793825033 25.18959838 35.771774594 43.36117767 56.478710525 58.5510772 72.046961286 100 100

•The change from a Gas Tax to a VMT will result in an increase in the cost per mile of driving to some; a reduction in the price of driving to others

• Price Increase: Vehicles with MPG >20• Price Decrease: Vehicles with MPG< 20• No Change: Vehicles with MPG =20

Objections raised to change to VMT

1. It will be regressive: Households in lower income groups will be the “losers,” higher income households will gain or lose less

2. Rural areas will lose from the change in policy

3. This policy will not encourage use of high fuel efficiency vehicles

Is the Proposed Change in User Fee Structure a Regressive Change?

Static Analysis: Assumes that behavior is not affected by a change in fee structure; each driver drives exactly the same amount with each vehicle as before the fee was implemented

Dynamic Analysis: Tries to account for the fact that consumers will change driving behavior in response to the change in the price of driving that the tax change causes

Static Analysis: Impact of a Change from a $0.24/gallon gasoline tax to a $.012/mile VMT (2001)

Income GroupNumber of

Households

Average HH Expenditures

including $.24/gallon tax

Average HH Expenditures including $.012/mile VMT

Change in Expenditure (as % of income)

1 39 658.90 666.72 7.81 (+.07%)

2 75 917.84 923.03 5.19 (+.02%)

3 65 1169.61 -4.40(-.01%)

1595.10 1595.33

0.23(<0.01%)

5 40 1858.85 1833.51

-25.34 (-.04%)

6 67 1992.60 1986.60 -6.00(<.01%)

624

1174.01

Static Analysis: Impact of a Change from a $0.24/gallon gasoline tax to a $.012/mile VMT (2001) cont.

Suits Index= -0.22542

Suits Index based on Oregon static model

Income group Accumulated income (%)

Accumulated tax (%)

1 2.179938882 7.5455912252 11.64535438 26.456692223 25.18959838 42.126194474 43.36117767 59.059735435 58.5510772 72.501016076 100 100

Alternative Policy Scenarios:

Alternative Policy 1: Gas Tax of $.24/gallon for vehicles with < 20 mpg; VMT of $.012/mile for vehicles with mpg > 20 mpg

(2001 gas prices)

Alternative Policy 2: Step fee: a. MPG < median MPG pays 2 cents/mile; b. between median MPG and 20 MPG pays 1.5

cents/mile; c. MPG >20 pays 1 cent/mile

 

Static Model Alternative Policy 1: Gas Tax of $.24/gallon for vehicles with < 20 mpg ; VMT of $.012/mile for vehicles with mpg > 20 mpg (2001 gas prices)

Income Group Average Expenditures

Under Gas Tax

($)

Average Mixed Policy

Expenditures ($)

Change in Expenditures (as

% of income)

1 658.90 675.36 16.46 (+1.66%)

2 917.84 935.01 17.17 (+.08%)

3 1174.01 1191.91 17.90 (+.05%)

4 1595.10 1623.57 28.47 (+.05%)

5 1858.85 1881.25 22.40 (+.03%)

6 1992.60 2023.68 31.08 (+.03%)

Suits Index = -0.18493

Alternative Policy 2: Step fee: a. MPG< median MPG pays 2 cents/mile; b. between median MPG and 20 MPG pays 1.5 cents/mile; c. MPG>20 pays 1 cent/mile

Income group Number of Households

Average HH tax revenue

@24 cents/gal

Average tax revenue step

fee

Average revenue change

1 39 108.31 123.60 15.29 (+1.54%)

2 75 150.88 176.66 25.78 (+1.15%)

3 65 192.99 223.88 30.89 (+.08%)

4 62 262.21 305.32 43.11 (+.08%)

5 40 305.56 380.27 74.71 (+1.11%)

6 67 327.55 404.11 76.56 (+.07%)

Suits Index = -0.16165

DYNAMIC ANALYSIS:

Once behavior changes by the consumer are considered

(movement along the demand curve), the relevant

measure of the change in welfare for consumers is the

change in consumer surplus (CS)—not simply the

change in tax revenue (TR)

For a tax increase, consumers may end up paying less in

taxes, but they may do so by driving less—and that

involves another loss

To get dynamic response, we need a model that take into account the behavioral responses – which may differ by income group and by location

We first use an OLS model – this gives an estimation of changes in vehicle use (i.e. changes in household vehicle miles traveled)

Dynamic Model 1: Ordinary Least Square (OLS) Regression

OLS MODEL VARIABLES Our OLS model is based on the following equation

M = f(Pf,I,U,C,SUB,CHILD,WORKER,MALE)

Where M is the total annual miles driven by the household, Pf is the fuel cost per mile under the gasoline tax I is annual household income U is a dummy variable, = 1 if urban, = 0 else C is the number of vehicles the household owns. SUB = 1 if the household has more than one type of

vehicle, = 0 else CHILD number of children WORK number of workers MALE = 1 if respondent male, = 0 else

OLS Results: Dependent Variable – Annual Household Miles (n=339)

Variable Name Coefficient Standard Error T-Statistic

Constant -17.72 6.25 -2.84

Fuel Cost -8.76 2.39 -3.67

Income 2.21 0.61 3.60

Fuel Cost * Income

0.72 0.24 3.05

Fuel Cost * Substitution

0.44 0.40 1.09

Urban -0.16 0.10 -1.67

#Vehicles 0.54 0.13 4.18

Vehicle Substitution

1.39 1.05 1.32

Male Head 0.17 0.09 1.94

#Worker 0.21 0.05 3.95

#Children 0.04 0.04 0.91

Italicized variables are logarithmic

Changes in Consumer Surplus, Tax Revenue and Welfare by Income with change to VMT = $.012/miIncome Group Average

Change in Consumer

Surplus

Average Change in Tax

Revenue

Average Change in

Welfare

1 -7.93 5.31 -2.61

2 -6.88 6.52 -0.36

3 9.97 -4.51 5.46

4 -2.58 8.61 6.03

5 30.44 -13.81 16.63

6 13.69 -2.78 10.91

Average Changes in Consumer Surplus, Tax Revenue and Welfare by Location ($/Household)

Impact of a Change from a $0.24/gallon gasoline tax to a $.012/mile VMT: Alternative Policy 1 and Alternative Policy 2

Suits Index= -0.133 with gasoline tax

Suits Index =-0.142 with VMT = 1.2 cents/miles

Suits Index = -0.145 with Alternative Policy # 1

Suits Index = -1.111 with Alternative Policy #2

Suits Index based on Oregon OLS model

Conclusions

1. The Dynamic Model Comparison of the change in tax revenues makes the policy impact appear less regressive than the static model (See Suits Indices)

2. However, is the appropriate measure the change in tax paid or the change in consumer surplus?

3. ALL of the VMT-fee policy scenarios have a considerably smaller impact on incidence than the increase in gasoline prices in recent years caused by external forces

4. Different VMT-fee structures have different impacts on incidence or equity, but the difference is not large

CONCLUSIONS/REMARKS (cont’d.)

If we go to VMT, very small impact: likely to have little impact on driving relative to recent increases in gasoline prices

Policy question: If we don’t go to VMT and can’t pass higher gasoline taxes, how do we fund roads?

Alternative funding sources? Local options taxes : sales taxes, local

gasoline taxes Higher Registration fees From General Funds BondingDo we really want greater reliance on non-user

fees?What effect would these taxes have on

regressivity relative to the VMT and gas taxes?

Other Possibilities for a VMT1. VMT-fees may also be designed to achieve

sustainability objectives, such as reducing fuel consumption, reducing greenhouse gas emissions, and encouraging the ownership of greener vehicles

2. Congestion pricing based on VMT-fee technology

3. VMT for congestion and environment in addition to gasoline tax?

Questions and Comments

This research was funded partially by ODOT and OTREC. The author would like to thank Alan Kirk, Jim Whitty, Betsy Imholt, Becky Knudson, Brian Gregor, Jack Svadlenak, Satvinder Sandhu, and Anthony Rufolo for their assistance. The authors are solely responsible for the opinions expressed here.

Contact Information

B. Starr McMullen Lei Zhang541-737-1480 541-737-2072s.mcmullen@oregonstate.edu lei.zhang@oregonstate.edu

Additional Slides

Conventional Wisdom

The static model will overestimate the impact of a

tax increase, underestimate the impact of a tax

decrease

Static model assumes that the change in tax

revenues paid is the only impact that a tax

change will cause – a direct transfer from

consumer to the Government

Change in Consumer Surplus with Demand Response

Price (p)

Pvmt

Pgas

Qvmt QgasQuantity (q)

Total Change in Revenue for an Increase in Price: B-A

B

A

Price (p)

Pvmt

Pgas

Qvmt QgasQuantity (q)

Total change in revenue to agency fromPrice increase = B-A;Price decrease = A-B

Elasticity by Income group – OLS based on Average Income

Income Group Average Income Elasticity w/ SUB Elasticity w/o SUB

1 $9,055.90 1.7577 2.2125

2 $21,983.11 1.128 1.5828

3 $36,899.07 0.7603 1.2151

4 $51,952.61 0.5174 0.9722

5 $67,394.80 0.3326 0.7874

6 $106,043.36 0.0108 0.4656