The battle is on, as President Biden pushes a raft of tax hikes to pay for roads, bridges, green energy, and expansive new social programs. His plans are generally popular—but nobody wants to be the one footing the bill.
Business groups argue that instead of raising corporate taxes to pay for infrastructure, as Biden wants to do, the government should rely on user fees such as tolls and dedicated taxes, so that people getting the benefit of the new asset bear the cost. Higher corporate taxes can depress investing, send US companies overseas and trigger aggressive tax avoidance. Douglas Holtz-Eakin, president of the American Action Forum, calls corporate taxation “the most economically destructive tax” and says “a better way to go is to keep to the tradition of levying user fees, so that those who use (and wear out) the infrastructure pay for its construction and maintenance.”
Makes sense! And user fees work well in some instances. They help fund ports and airports, because it’s easy to assess the fees on companies that use them and then let those companies pass them on to their customers as the market allows—like the fees you see listed on an airline ticket. Tolls work too, to the extent that drivers are willing to pay $7 to cross a bridge or 25 cents a mile to use a turnpike. (Sometimes, they’re not.)
Other user fees that used to work are failing, however, and that suggests Biden’s tax-and-spend plans won’t be nearly as productive as advertised. The best example is the federal gas tax, which is supposed to finance construction and maintenance of the nation’s highways. As taxes go, the gas tax is a pretty good one. The people who use the roads pay the tax, and the more you use the roads, the more gas you buy and the more tax you pay. The government collects the tax at the wholesale level, which is relatively easy, and wholesalers pass the cost onto consumers. Evading the gas tax is nearly impossible.
But Congress hasn’t raised the gas tax since 1993, when it hit 18.4 cents per gallon. Users don’t like paying the user tax, it turns out, and Congress has let them off the hook. The government still builds and maintains roads, however, and the gas tax has failed to cover the costs it’s supposed to for nearly 20 years.
Inflation means the gas tax buys less than it used to. As cars continually get more efficient, drivers buy less gas and pay less in tax. And now electric vehicles that burn no gas let those users enjoy the roads for free, with gas-tax revenue declining even further. With the user fee failing to pay for what the users use, the government simply borrows to make up the difference.
A clever solution would be a vehicle-miles traveled tax, or VMT tax, which would assess vehicle owners for the distance they travel on public roads, regardless of what fuels the vehicle. In 1994, the gas tax was the equivalent of a VMT tax of 1.5 cents per mile, according to the Tax Foundation. That’s based on a car getting average fuel efficiency at the time, which was 20.7 miles per gallon, and driving the national average of annual miles.
Today, the gas tax equates to a VMT tax of around .75 cents per mile, adjusting for inflation and more efficient vehicles that now average 24.4 miles per gallon. That’s half the 1994 rate. The Tax Foundation thinks repealing the gas tax and imposing a direct VMT tax of 1.7 cents per mile, slightly higher than the tax burden in 1994, would fully cover the cost of federal highway spending, with no need for any borrowing. Adjusting the tax for inflation every year would keep the financing balanced with spending.
On March 26, Transportation Secretary Pete Buttigieg suggested Congress could impose a new mileage tax to help pay for Biden’s infrastructure proposals. Outrage ensued, and three days later Buttigieg said, never mind. Here are some of the reasons the idea blew up:
As a candidate, Biden said he wouldn’t raise taxes on any household earning less than $400,000 per year. Politically, that means Biden can’t impose any new tax on most families, even if he repeals other taxes, leaving the net tax hike at 0. Political opponents would pillory him in 2022 and 2024 for lying to voters. In effect, this means there can be no new user fees on anybody except those above the Biden income threshold.
A VMT would “punish” people who have longer commutes. The gas tax does too, but the tax you know is apparently better than the tax you don’t know.
A VMT wouldn’t be “progressive.” This means poorer people would pay the tax at the same rate as richer people—which is also true of the gas tax.
A VMT would eliminate the incentive to buy more efficient vehicles. True, but this will matter less as more vehicles become non-polluting electrics. The government could still offer other tax incentives for people to buy or use the most efficient electrics, most obviously at the point of sale.
None of this even gets to the most fatal feature of a mileage tax, which is that the government would have to track people’s vehicles in order to enforce it. The technology exists to do this automatically, with a GPS gizmo reporting your mileage to the government on, say, a monthly basis. You could pay the way you pay a utility bill. Or a technician could inspect your odometer on a regular basis and log the info manually.
See the problem? This is a country where people revolt over the oppression of having to cover their mouth with a cloth mask during a pandemic. Conspiracy sites and Fox News earn a fortune scaring millions of people into believing the government is their worst enemy. It works. Anti-government militants tried to kidnap the Michigan governor last year. We had an insurrection at the US Capitol in January, with confused “patriots” believing it was their civic duty to overthrow the government. Nobody tells Americans what to do! Buttigieg might be a technocratic whiz kid, but he needs to google “Alex Jones.”
A few virtuous states, such as Oregon, are experimenting with a VMT tax. Oregon’s program is voluntary and it relies on incentives, such as discounted registration fees for electric vehicles. It’s hard to see any program like this becoming mandatory or universal. If it did, cheating would probably be rampant and enforcement a nightmare. It’s not hard to imagine armed standoffs as federal inspectors try to log the odometer readings of extremist militiamen insisting they have the “freedom” not to pay for the roads they drive on.
It’s more plausible for the government to impose a VMT tax on trucking at some point, especially if 18-wheelers electrify as manufacturers promise they will. That would be much easier to enforce, and trucking companies might go for it if it included the elimination of the 24.4-cent-per-gallon surcharge on diesel. There would be opposition if it raised the overall cost of trucking, but truckers can pass on at least some of their cost increases as long as they apply to the whole industry.
At the consumer level, however, user fees are a rational idea that won’t work in an irrational climate. Biden wants to raise taxes that already exist because that’s basically a matter of turning a dial. It’s not the most efficient way to pay for his programs, but it’s easier than convincing voters to accept more government in their lives. Anybody who thinks user fees are the solution needs to convince the users, first.
Rick Newman is the author of four books, including "Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips, and click here to get Rick’s stories by email.
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