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7 CHAPTER 2 Overview of Existing and Alternative Revenue-Generation Systems Historically, the bases of taxation underlying transporta- tolling, VMT fees, cordon/congestion pricing, and parking tion revenue-generation systems have focused on specific fac- pricing. Each of these revenue-generation systems has been tors that tie vehicle ownership and operation to individual applied both within the United States and internationally. In motorists or motor carriers. Since 1919, when Oregon imple- addition to providing an overview of these systems, this chap- mented the nation's first gasoline tax, motor fuel taxes have ter examines the lessons learned from real-world applications. served as the primary source of funding for our nation's roads and bridges; however, there is a broad spectrum of revenue sys- 2.1 Motor Fuel Taxes tems that are either in operation or have been proposed across the United States. These systems can be organized into the Revenues from motor fuel taxes represent the primary following categories based on the basis of taxation: funding source supporting the nation's highway programs. In 2007 alone, state motor fuel taxes raised more than $37 billion Vehicle ownership for the improvement of highway facilities (FHWA, 2008). In Registration fees recent years, the financial limitations of the current system Licensing fees have become evident as revenues have failed to keep pace with Personal property taxes the demands for additional highway investment. Furthermore, Highway user fees a number of constraints could collectively limit the long-term Toll roads viability of the motor fuel tax as a major funding source, includ- Congestion/cordon pricing ing increased fuel efficiency, market penetration of alternative High occupancy toll lanes fuels, price inflation, and volatility with respect to motor fuel VMT fees prices. Energy consumption In addition to the aforementioned revenue constraints, Motor fuel taxes there is evidence to suggest that motor fuel taxes have histor- Sales taxes on motor fuels ically suffered from a persistent problem with evasion. His- Utility fees toric changes in administrative and enforcement practices Beneficiary and local option fees designed to address the evasion issue (e.g., diesel fuel dyeing, Beneficiary charges/value capture taxation of kerosene and other alternative fuels, enhanced Transportation impact fee auditing practices, moving the point of taxation up the distri- Local option sales taxes bution chain) have increased revenues deposited in highway Local option property taxes funds across the nation. The alternative revenue-generation systems examined in this chapter move beyond the traditional methods of rais- 2.1.1 Motor Fuel Tax Administration ing revenue based on motor vehicle ownership and fuel con- and Enforcement Practices sumption toward systems that tie tax payments more directly to system usage. Movement in this direction would enhance In the United States, motor fuel taxes are collected by states the efficiency, equity, and long-term stability of the nation's at the terminal, first receipt/sale, distributor, or retail level. transportation revenue system. From an administrative cost standpoint, there are trade-offs This chapter presents an overview of the existing motor fuel associated with moving the point of taxation up the distribution tax system and the alternative revenue-generation systems of chain. Taxing at the retail level vastly increases the number of

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8 Terminal First Receipt/Sale Distributor Retail Source: Weimar et al., 2008 Figure 1. State points of taxation for diesel fuel. taxpayers. Consequently, there are more motor fuel tax returns from state to state based on the number of inspections and to process and operations to audit. Moving the point of tax- the type of personnel used. Dyed fuel inspections can be per- ation up the distribution chain, while reducing the population formed during the operation of other safety inspections, or of taxpayers and greatly reducing the number of audits, requires they can be the responsibility of state police officers. Dyed a refund program, including associated auditing requirements. fuel inspections can be conducted at checkpoints, weigh sta- Figure 1 and Figure 2 document state points of taxation for tions, or when vehicles are pulled over by police officers. gasoline and diesel fuel (Weimar et al., 2008). On-road state enforcement sample statistics are presented The Omnibus Budget Reconciliation Act (OBRA) of 1993 in Table 1. mandated the dyeing of tax-exempt diesel fuel. This provision As evasion techniques have evolved so too have auditing enabled law enforcement officials to detect visible evidence of practices, with compliance agencies focusing more resources on tax-exempt fuel during roadside inspections. When caught field audits and joint stateIRS audits. The Intermodal Surface using tax-exempt fuel on-road, motor carriers were assigned Transportation Efficiency Act (ISTEA) of 1991 authorized the a federal penalty of $1,000 or $10 per gallon (Baluch, 1996). In allocation of $5 million in annual federal Highway Trust Fund 1994, the first year the law took effect, federal diesel fuel tax (HTF) proceeds to the states and the IRS for enhanced audit collections grew by $1 billion, leading the FHWA to attribute and enforcement operations. Programs established with these $600 to $700 million of that amount to the administration funds have led to greater coordination between states. The Fed- and enforcement provisions contained within the 1993 OBRA eration of Tax Administrators (FTA) established a uniformity (GAO, 1996). subcommittee that issued a model-legislation checklist for As of 2008, 38 states had enacted dyed fuel statutes. In states moving the point of taxation up the distribution chain order to be effective, however, these dyed fuel statutes must and also established an 11-point plan for enhancing uniformity be accompanied by on-road inspections, which can be expen- between states (FTA, 2003). sive and time consuming. Some states have left the inspec- The goal of eradicating all forms of evasion, however, is not tions up to the 150 Internal Revenue Service (IRS) officers only unachievable, it is inefficient. When focusing enforcement nationwide dedicated to conducting dyed fuel inspections. and collection resources, there is a theoretical optimum level Many states, however, use designated officers to conduct of tax evasion. The optimum level of evasion is at the point of fuel dipping in order to detect the misuse of dyed fuel. The equilibrium between marginal revenue losses and marginal costs associated with on-road dyed fuel inspections vary enforcement costs. That is, it is impractical and inefficient to

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9 Terminal First Import Distributor Retail Source: Weimar et al., 2008 Figure 2. State points of taxation for gasoline. spend $2 million to reduce evasion by $1 million. With that In an analysis of a proposed replacement of the Oregon weight- noted, there is evidence to suggest that most states have not yet distance tax with a motor fuels tax, the Oregon Department of met the point of equilibrium. Transportation (ODOT) concluded it would take 15 full-time The costs associated with enhanced motor fuel tax auditing equivalent (FTE) employees to implement a refund program and enforcement operations can serve to discourage states and 30 FTEs to conduct distributor and International Fuel Tax addressing budget shortfalls and uncertain financial outlooks. Agreement (IFTA) audits. Further, the report concluded that Table 1. On-road enforcement sample statistics, 19952004. States with On-road Total Total Violation Total Assessments Dyed Fuel Enforcement Samples Violations Rate Alabama 84,823 824 0.97% $874,000 California1 161,690 752 0.47% $612,248 Minnesota 31,840 587 1.84% $670,260 Montana2 42,855 273 0.64% $34,125 Nebraska 44,570 506 1.14% $409,375 Nevada 43,303 326 0.75% $170,070 North Carolina 12,107 125 1.03% $90,000 Pennsylvania3 162,341 788 0.49% $1,198,092 Texas 3,175 29 0.91% $63,050 Virginia 21,239 280 1.32% $606,346 West Virginia4 23,901 231 0.97% $198,271 1 California Total penalties assessed are from years 1999 to 2004 only. 2 Montana Data cover the 20022004 time period only and were supplied by MDT. 3 Pennsylvania 164 kerosene inspections were conducted resulting in 46 violations for illegal use of the untaxed fuel. 4 West Virginia No samples were taken in first quarter of 2003 due to weather. Source: Balducci et al., 2006