Policy Perspective #5
November, 1995

COST-BASED ROAD TAXATION

Economic analysis usually concludes that taxes reduce economic efficiency by creating distortions in the market, so it may be useful to look at a taxing system that actually promotes efficiency. One condition for economic efficiency is that each person face the cost of their actions. Thus, if a person consumes something, paying the price for that good or service forces the consumer to evaluate the benefits from this form of consumption relative to others which are available. When goods and services are appropriately priced, Adam Smith's "invisible hand" can lead to an efficient allocation of resources. Pricing information is typically missing from the public sector, but there are a few areas where some form of pricing is feasible and appropriate. Taxes can act as a price signal when the tax burden is related to the cost which an activity generates.

Oregon has been a leader in cost-based road taxation since it adopted the gasoline tax as a primary source of road funding in 1919, and the current system of road finance is based squarely on the principle that those responsible should pay for costs incurred. This is accomplished through a three-tier financing system, using registration fees, fuel taxes, and weight-mile taxes. First, fixed costs are supposed to be covered out of the registration fees paid for various vehicles. Second, road users are expected to pay for road improvement and maintenance on the basis of the costs they impose. This is accomplished through gasoline and diesel taxes for most vehicles, and the weight-mile tax for heavier vehicles. Each heavy vehicle pays a tax for each mile driven in Oregon based on the weight of the vehicle. The weight-mile tax is the key difference between the Oregon system and those used in most other states.

There are many ways to generate funds for building and maintaining roads. Roads can be treated as part of the general obligation of government and funded from general revenue sources, such as income, sales, and property taxes. Alternatively, they can be funded from taxes on road users, or by some combination of general taxes and taxes on users. Taxes on users are broadly viewed as being the more equitable way to fund roads; and, from an efficiency perspective, such taxes are also the more efficient method to generate road funding. However, the efficiency effects can only be generated if costs are internalized to road users, and weight-mile taxes appear to be the most efficient method to internalize construction and maintenance costs for heavy vehicles.

To an economist, efficient road user taxes would vary directly with the costs associated with travel. Ideally, each vehicle would pay its share of the cost of constructing the road capacity which the vehicle uses and its share of the maintenance costs necessitated by its use. In urban areas, road users would pay the cost of the additional congestion each vehicle causes. This cost information would then allow users to optimize travel levels and patterns based on the full cost of each trip. In practice, the efficiency incentives must be balanced against other concerns, such as administrative cost. Thus, while most transportation economists favor congestion taxes as a method to fund roads in urban areas, this has not been viewed as a feasible alternative.

The costs of road construction and maintenance depend to some extent on different factors. Road construction at even the most basic level requires land for right-of-way, design and engineering, and construction to some minimal standard. Construction beyond the minimum standard will be determined by the type of traffic which the road is expected to bear. If a road will carry only small, light-weight vehicles, it can be built to lower standards than one which must carry large and/or heavy vehicles. The incremental cost of accommodating larger and heavier vehicles is correctly attributed to these vehicles while the basic cost is associated with all vehicles.

Road maintenance is based on deterioration. While roads will deteriorate if simply left unused, most deterioration is associated with use; and the damage caused by vehicles goes up much more than proportionately with size and weight. Hence, costs associated with maintenance are greater for trips made by heavy vehicles. A single large truck can cause as much damage as thousands of automobiles, and the configuration of the truck can affect the amount of damage as well. If the load is spread over more axles, so there is less weight on each wheel, then the damage is reduced.

The Oregon system attempts to allocate both the cost of new construction and the cost of maintenance to those who generate the cost requirement. Thus, relatively more of the cost of new capacity is assigned to automobiles, while trucks pay a larger share of the cost of road maintenance. It is important that the weight-mile tax rates give appropriate price signals to truckers. The taxes are set based on the weight of the truck, and for larger trucks, the number of axles is also taken into account.

By setting tax rates based on the cost which a truck imposes on the road system, owners of trucks have an incentive to make efficient choices. If the cost of an additional axle or of using a lighter truck is offset by a lower tax, then the owner will be induced to make the efficient choice of a truck with more axles or a lighter truck. In the absence of the weight-mile tax, the owner has no incentive to take road damage into consideration.

Truck owners often argue that weight-mile taxes are ultimately passed on to consumers, but that is precisely the way the market system ought to work. Transportation is an input into the production process, and like all other inputs it affects the ultimate price of output. Only if prices charged to consumers reflect the full cost of all inputs will the consumer make economically efficient choices. It makes no more sense to subsidize the transportation input than it would to subsidize steel or energy as inputs.

It is also important to remember that the cost of road construction and maintenance must ultimately be paid by someone. If these costs are not paid as part of the cost of products, then taxpayers or other road users must bear the burden through other taxes or through lower levels of service.

As with other taxes, the weight-mile tax has drawbacks. Ideally, the tax would be levied based on the weight of each vehicle and the ability of the road being used to withstand wear, but this is clearly not feasible. Some states use a different form of use tax called a ton-mile tax. This tax is levied based on the actual weight being carried for each trip and the number of miles travelled. The administrative costs of these taxes appear to be quite high, and some states that previously used ton-mile taxes have repealed them. However, Oregon's weight-mile tax rates are based on the average weight carried by a vehicle of each class, so it is only necessary to keep track of mileage rather than mileage and weight. Since truckers typically keep track of mileage anyway, this method greatly reduces the administrative costs. As more automated systems of tracking this information become available, Oregon may want to change its system, but the present compromise appears to generate an appropriate price signal without undue administrative costs.

For cars and smaller trucks, the tax is collected by means of gasoline and diesel fuel taxes. Diesel trucks subject to the weight-mile tax are exempted from the fuel tax. This again represents a trade-off between more accurate pricing and administrative costs. One can question the most appropriate point at which to switch from fuel taxes to weight-mile taxes, but it is clear that the weight-mile tax is more appropriate for heavy vehicles since the damage to pavements is closely related to the weight on each axle. The fuel tax is not appropriate for larger vehicles because the damage done to pavements is not proportional to fuel usage. For example, a diesel automobile may get five times the mileage per gallon of a diesel truck, but the truck may do thousands of times more pavement damage. Hence, a fuel tax could not accurately reflect the differences in the cost imposed on the road system.

Registration fees are typically varied based on the weight of a truck, and many states use registration fees to allocate costs among different road users. However, registration fees do not differentiate between trucks which travel many miles per year and those which travel few miles per year. Further, there is no additional charge for an extra trip, but the extra trip will cause extra damage. The road-damage price signal will not exist in determining whether additional trips should be made. Hence, registration fees fail to generate as clear a price signal as weight-mile taxes.

Oregon has been a pioneer in the use of cost-based taxes to fund the road system. While the current financing system is not perfect, it comes closer to an economically efficient price for road usage than the alternatives. As technology improves, it may become desirable to allocate costs of construction and maintenance even more closely to the generators of those costs. In any case, it is important to recognize that market-type price signals can be generated in the public sector, and we should look for other opportunities where Oregon can lead the way.

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