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Alternatives to the Taxation of Heavy Vehicles Applications Manual- Evaluation Cntena 2.0 Evaluation Criteria There are six major criteria for analyzing heavy-veE~icle taxes and tax systems: Adequacy; A~ninistrative efficiency; Equity; Economic efficiency; · Evasion and avoidance; and · Feasibility. Each of these criteria incorporates several different considerations or issues, as outlined in Exhibit 2.~. These criteria are discussed in some detail below. 2.1 Adequacy Adequacy is the criterion of most concern to transportation administrators. Adequacy is determined by revenue yields in relation to funding requirements, the stability of revenue streams over time, the responsiveness of revenue yields to inflation and increases in needs, and the ease of revising fees or tax rates when needs increase faster than revenue. The obvious test for a revenue source is whether it provides enough revenue. Adequacy in the highway field has traditionally been defined to be the revenues required to satisfy "needs," which usually are clefined to be the costs of improvement, operations, ant! maintenance programs driven by accepted engineering standarcls. Most highway standards are based on professional judgment rather than rational economic criteria. In a few of the more complex needs studies, engineering standards are varied to analyze the tradeoffs between the standards and total program costs. The academic transportation economics literature, in contrast, would implicitly define adequacy as He amount necessary for an ~nvestment~Drogram Hat max~nizes net benefits to the economy. The Highway Economic Requirements System (HERS)i has been Fecleral Highway Administration, Highway Economic Requirements System, Four Volumes, 1995- 1996. Cambridge Systematics, Inc. 3
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4 Alternatives to the Taxation of Heady Vehicles Applications Manual- Evaluation Cntena Exhibit 2.1 Criteria for Evaluating Heavy-Vehicle Tax Systems Adequacy Yield Stability and certainty Responsiveness to changes in needs Responsiveness to inflation Potential for increases when needed Administraffve Efficiency Achninistradve costs Enforcement costs Compliance costs Implementation issues liquid Allocation of public agency costs Among motor vehicles of the same class (horizontal equity) Among classes of motor vehicles (vertical equity) Relative to competing modes Economic Efficiency Charging based on fuD marginal costs Public agency costs and over external costs Spatial and temporal variation Evasion ant! Avoidance Illegal evasion Legal avoidance Feasibility Availability of necessary data and technology Political acceptability/opposition Constitutional prohibitions Cambridge Systematics, Inc.
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Alternatives to the Taxation of Heavy Vehicles Applications Manual - Evaluation Cntena applied to data for an extensive sample of highway sections to estimate national highway needs on this basis.2 However, we know of no application of this criterion for actual selection of highway projects or progranuriing of agency buclgets. Most heavy-vehicle taxes relate directly or (as in the case of registration fees) indirectly to usage of the roar! system. Hence, most of these taxes produce revenues that tend to grow with increasing real needs. However, except for ad valorem taxes ant] those fuel gallonage taxes that are automatically adjusted for inflation, these taxes generally produce revenues that do not grow win inflation. Accordingly, most heavy-vehicle tax systems perioclicaDy require legislative increases in tax rates. · 2.2 Administrative Efficiency From a narrow public-sector perspective, administrative efficiency is measured by comparing public-sector administrative and enforcement costs to total revenue collected. From a broader perspective, administrative efficiency can be measured by also including the costs incurred by the private sector in complying with the administrative requirements of a tax. AD three types of administrative cost shouic3 be measured as incremental costs resulting from any tax or set of taxes that is being evaluated in the context of all existing taxes and related programs that are assumed to continue in effect. Thus, the enforcement and compliance costs of operating weigh stations should be attributer! to a weight-distance tax only to the extent that imposition of such a tax results in increasing weigh-station activity above the level adopted for enforcement of truck weight laws, safety regulations, and registration fees. Similarly, in an evaluation of registration-fee apportionment and fuel-tax reporting, the recor~keeping requirements imposed on the carriers may be viewed as a joint cost of the two programs. However, if one accepts reg~stration-fee apportionment as a given, the incremental compliance burden of fuel-tax reporting consists only of the costs of completing additional forms and maintairung any additional records not required by reg~stration-fee apportionment. For erasing taxes to be administered using existing procedures, administrative and enforcement costs can usually be estimated by analyzing agency budgets (though these costs are unlikely to appear as separate line items). However, resonation of private-sector compliance costs will require a more detailed analysis of the procedures used by various categories of taxpayers. ~ He case of new or proposed taxes, the estimation of all Tree types of costs requires specification of He procedures and technology to be used for a~ninister~ng the taxes and estimation of both the unplementation and annual costs of 2 U.S. Depa~lu~ent of Transportation, 1995 Status of the Nation's Surface Transportation System: Conditions and Perfonnance, Report to Congress, 1995, pp. 298-305. Cambridge Systematics, Inc. 5
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6 Alte, '`atives to the Taxation of Heady Vehicles Applications Manual- Evaluation Cntena Me proposed system. One-time implementation costs may be an important factor when deciding whether or not to change or modify the tax system, but they are likely to appear less significant when viewed from a long-run perspective. The evaluation of administrative efficiency should give balanced attention to each tax or fee within an overall tax system alternative, and should also consider the a~ninistrative efficiency of the system as a whole. Evaluation of each system as a whole may lead to the identification of ways ~n''wh~'ch'overaD costs can be reduced through integration of We elements of the system. It win also help to determine whether there is a potential for savings by combining fees or selecting a tax system composed of only one or two taxes instead of several (which tends to be selected in order to spread the pain around). 2.3 Equity . ~ , .. In the United States, the principle that highway users should pay the public agency costs of highways has been widely accepted at the state and Federal level for decades. The equity criterion usually is interpreted as measuring the extent to which the allocation of these costs among user groups (particularly vehicle classes) is in proportion to their estimated responsibility for these costs. The other external costs of highway use, which we shad refer to simply as the external costs, have traditionally been excluded from consideration when evaluating equity. We shall adhere to this somewhat arbitrary convention in our definition of equity (but we shall inclucle external costs in our economic efficiency criterion). Considerable attention has also been paid in research studies to equity based on benefits derived by user classes, but no major studies have actually used this criterion. The types of user fees proposed for achieving equity may also result in greater administrative costs and more difficult enforceability than for more general taxes. Since transportation taxes generally have been levied as user fees, there usually has been little concern win how impacts differ among industries. Because highway user taxes are a small percent of costs, industry impacts have not often been an issue, except to the for- hire motor carrier industry. States frequently give tax brealcs to important local industries such as agriculture or forestry, but these tax breaks are seldom based on criteria that are subjected to any analysis. The userwharge principle requires that we charge each vehicle In proportion to its estimated responsibility for public agency costs. Departures from this distribution of the tax burden result In inequities, and such inequities become a particular concern when they provide a competitive advantage to vehicles that pay lower shares of their cost responsibility Wan do other vehicles. Cambridge Systematics, Inc.
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Alternatives to the Taxation of Heady Vehicles Applications Manual - Evaluation Cntena The use of the user-charge principle to evaluate the equity of heavy-vehicle tax systems requires the use of estimates of cost responsibility for all significant groups of heavy vehicles. The development of these estimates has been the subject of extensive research that lies outside the scope of the present study. For the purpose of our evaluation procedures we shall simply assume the use of an accepted set of such estimates. The issue of equity also arises when considering how the tax system affects competition between motor carriers and~otlier modes, particularly rail. If one of these modes pays its fun cost responsibility and the other does not, the latter mode is, In effect, receiving a public subsidy that provides it with a competitive advantage. When focusing on the issue of heavy-vehicle taxation, concern about such potential competitive advantages translates into a concern about whether or not rail-competitive motor carriers pay their full cost responsibility. · 2.4 Economic Efficiency Related to equity, the goal of economic efficiency Implies that we should charge vehicles a fee equal to their marginal cost responsibility both for public agency costs and for other externalities resulting from vehicle use. If one motor vehicle pays less than its full social cost responsibility while another vehicle or competing mode does not enjoy such a subsoils, we will experience overuse of the highway system by the underpaying vehicle, resulting In both an Increase In real resource costs and In the implicit public subsidy of the first motor vehicle. The economic efficiency goal differs from the most generally accepted version of the equity goal in four ways: · In addition to public agency costs, the efficiency goal includes the other external costs of vehicle use; · It is based on marginal costs rather than average costs; · These costs are compared to the sum of all user charges (Federal, state and local) rather than to charges imposed by a single level of government; and · The marginal fee paid for vehicle use should, to the extent practical, match the marginal social costs attributable to that use. Because of economies of scale in pavement and bridge costs, for new facilities, marginal public agency costs attributable to heavy vehicles are somewhat lower Man average public agency costs- the costs mat are most commonly used in operational definidons of me equity goal. 3 E.g., see FHWA, 1997 Federal Highway Cost Allocation Study, August 1997. Cambridge Systematics, Inc. 7
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Alternatives to the Taxation of Heavy Vehicles Applications Manual - Evaluation Criteria The external costs of vehicle use include the costs of the resulting congestion, noise, and emissions of air pollutants and greenhouse gases, as wed as those crash costs that are not paid for by highway users or their insurers. For most heavy vehicle operations, the most unportant external costs are those relating to congestion and emissions, but marginal agency costs for pavement damage frequently are greater than any individual component of marginal external costs (and they can be greater Man ad marginal external costs comb~nect).4 As In We case of agency costs, there is substantial variation among vehicle classes In external costs per ve~cle-mile, though this variation is not as great as it is for pavement costs. On Me other hand, there is a substantially greater difference between the overall marginal external costs per vehicle-mile in urban areas and those in rural areas than is the case for agency costs; and marginal external costs exhibit significant time-of- day variation, particularly in the case of congestion costs. Furthermore, plausible high and low estimates of marginal external costs differ by an order of magnitude or more.5 Several issues have been raised about how best to charge for external costs. The substantial uncertainty that exists in estimates of these costs means that some care is required in determining the extent to which they should be reflected in highway user charges. Nonetheless, it is clear that the goal of economic efficiency is better served by setting charges to reflect external costs at the low end of Me plausible range than by ignoring these costs entirely; and this goal probably would be even better served by sewing charges to reflect consensus estimates of the extent of these costs. IdeaBy, the economic efficiency criterion would require that user charges vary by route, time of day, and environmental factors, to match the marginal costs of congestion, emissions, pavement impacts from axle weights, ambient air quality conditions, and other factors. Such user charges would result in changes In highway use on the most congested routes In peak periods, particularly in areas with serious air quality problems. Many of these changes would involve changes In travel patterns in terms of choice of route ancI/or time of day. However, truck is the most efficient mode for the vast majority of shipments moving by truck even if ad external costs of truck use were to be covered by user charges. Hence, the implementation of marginal cost pricing wouIcl not be expected to result in significant shifts of shipments from truck to other modes. A closely related issue is the relationship among externality charges applied to competing modes of transportation. IdeaDy, such charges should be applied at appropriate levels to aD competing modes. However, sunultaneous introduction of such charges for aD modes may be unpractical. If these charges are applied to highway users but not to railroads, then, in order to avoid diverting more traffic to railroads than can be justified on the basis 4 For five-axle combinations, marginal pavement costs are estimated to represent about 35 percent of total social costs when operating at 60,000 pounds and about 65 percent of these costs when operating at 80,000 pounds. (FHWA, 1997 Federal Highway Cost Allocation Study, op. cit., Table ES 6.) s 1997 Federal Highway Cost Allocation Study, op. cit., Tables V-22 - V-24. 8 Cambridge Systematics, Inc.
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Alternatives to the Taxation of Heavy Vehicles Applications Manual - Evaluation Criteria of economic efficiency, it would be desirable to reduce the level of charges applied to classes of trucks that include significant amounts of rail-competitive trucking operations.6 Other issues relating to charging highway users for the external costs of their use concern the administrative costs of such charges, evasion/avoidance problems, and applying the charges equitably across all user groups. For example, emissions fees charged only to vehicles registered in an area with air quality problems would not result in charges against out-of-area vehicles operating in the area ant! would-present opportunities for shifting subarea registrations to outside the area. Also, in the case of personal vehicles, Mere are significant issues of equity across income groups. The introduction of externality charges is likely to be a slow process, both because of problems related to the design of such charges and because of the political difficulty and economic undesirability of introducing major increases in user charges in a single stroke. The gradual introduction of such charges wouic! allow all highway users time to aciapt to their effects and would allow for-hire carriers time to adjust Weir rates. User charges designed to match full social cost responsibility would produce more tax revenue than required to cover public-sector highway costs. The resulting surplus could either be used for cost-effective measures to mitigate the externalities or be used as general revenue. · 2.5 Evasion and Avoidance Most major heavy vehicle taxes provide vehicle operators with some opportunity for underpaying their tax liabilities; and some of these taxes also provide operators with opportunities for legally avoiding the taxes. Some taxes, notably fuel taxes, provide Gird parties (not motor carriers) win substantial opportunities to profit from tax evasion. Examples of potential evasion include: use of untaxed fuel; registration of vehicles at declared maximum gross vehicle weights (GVWs) that are lower than the actual maximum GVWs; underreporting of mileage subject to weight-distance taxes; and m~saDocabon of mileage operated among states so as to reduce total tax liabilities. This last type of evasions has the effect of increasing tax payments to "low tax" states while 6 In this situation, the appropriate set of user charges applied to rail-competitive trucking operations should, on a ton-mile basis, approximate the difference between the full marginal social costs of truck operation and Me (unrecovered) marginal external costs of truck-competitive rail operations. This criterion can be restated as requiring Mat rail-competitive trucks be charged for their marginal public-sector infrastructure costs plus the estimated net difference per ton-mile) between the external costs of rail-competitive truck operations and those of truck-competitive rail operations. 7 Mileage can be misallocated differently for each type of tax reporting (a type of evasion Mat is relatively easily detected by comparing the separate tax-reporting forms), or it can be misallocated identically for each type of reporting (an alternative Mat is less readily detectable but that produces smaller savings to Me vehicle operator). For Me purpose of Me latter type of (Footnote continued on next page...) Cambridge Systematics, Inc. 9
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Alternatives to the Taxation of Heady Vehicles Applications Manual- Evaluation Criteria decreasing payments to "high tax" states by a greater amount. Examples of legal avoidance include: purchasing fuel in states that do not impose sales taxes on fuel; registering trailers In states that charge a low, one-time fee; and declaring vehicles to be based in states where they are not subject to property taxes or vehicle sales taxes or where the effect of these taxes is small. Both illegal evasion and legal avoidance have important implications for tax adequacy and for equity.~ Evasion and avoidance reduce tax yields and, if the reduction is appreciable, they may result in a need to increase tax rates. Perhaps more importantly, evasion and avoidance reduce tax equity by interfering with governmental attempts to tax carriers on the basis of their estimated cost responsibility. Trade-offs also exist between evasion and administrative efficiency. We can partially control evasion with improved auditing and reporting procedures (e.g., through combined auditing of registration-fee apportionment and fuel-use reporting). On the other hand, increases in tax rates in order to achieve adequate revenue result in increased incentives for evasion, which, if not accompanied by increased enforcement, wiD increase evasion. The relationship between evasion, administrative efficiency, and net revenue yield (adequacy) is shown schematically in Exhibit 2.2. The exhibit shows that, as enforcement effort increases, evasion drops while public-sector costs for administration and enforcement rise. The top curve in the exhibit is the sum of the other two curves and represents total costs to the public sector. The minimum point on the top curve corresponds to an enforcement effort of X and represents the point at which net revenue to the public sector is maximized for a given tax structure. Political considerations generally make it difficult to obtain the funding necessary for a minimum cost enforcement program. The best of existing programs for administering highway taxes have enforcement efforts, such as U in Exhibit 2.2, that are appreciably lower than the minimum cost effort and that result in slightly greater public-sector costs. Most programs entail even weaker enforcement efforts, such as V, Mat result in even greater costs to Me public sector. Although maximizing net public-sector revenue is one of the goals of tax administration, it is not the only goal. Exhibit 2.3 shows total public-sector costs (from Exhibit 2.2), private-sector compliance costs, and the sum of these two sets of costs, labeled total costs.8 Total costs are minimized win an enforcement effort of Y. which is somewhat smaller than the effort (X) required to maximize net public-sector revenue. misallocation, 'low tax" states are those whose combined effective tax rate per mile for apportioned registration fees, gallonage taxes on fuel, and weight-distance taxes is relatively low; and 'high tax" states are those for which this combined tax rate is relatively high. We have chosen to exclude from Me total-cost curve me illegal private-sector benefits resulting from evasion; i.e., we treat evasion as a pure cost rather than as a transfer payment (from Me public sector to the private sector). 0 Cambridge Systematics, Inc.
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Alternatives to the Taxation of Heavy Vehicles Applications Manual - Evaluation Criteria u, _. in o so o oh := nil o ¢ to in o I! - u o ,, ·_ I X . - CtS a, ~ O ~ _ I Cal ~ Cal Cal ._ . Q no AS o - a, a) o -. CD i_ / o - ~ cn o ~ - 3 £ ._ ._ - - ~n cn o . o cn _~1 i /\ t I T l ~\ / \ (,, U) \ o \ / . , o a, . ~ a LL - - ~. ~n a · C-) ~ . ~ ~ 2 ~ ~: ~ <: .LL ~ 1 ~ ~ I I I ~ I I I 1 l I 1 r rT_ Sl,SO() Cambndge Systematics, Inc. o !t lL E a) o 11
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Alternatives to the Taxation of Hearry Vehicles Applications Manual - Evaluation Criteria on o o CC ·e - U = ~I - In o a! - o Cal · - ·~ X 12 - o C,7 o CO o I_ - c A_ o Ad_ Ct - o - ~J `18 ~1 I // - l ~ ~ ~ ~ I I I 1-: S\SO~ he: ' O C13 1 I 0 1 1 Co 'l'~ 0- E o ~ i_ ~ 2 ~ Q - - / 0 o C' - - 00 o o ID ._ AL In - CO o C) ._ - o 1 1 1 1 1 ~ 1 ~ 1 1 1 ~ X Cambridge Systematics, Inc.
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Alternatives to the Taxatior' of Heavy Vehicles Applications Manual - Evaluation Criteria Maximizing net public-sector revenue and minimizing total costs are two (m~Ic3Iy conflicting) goals of tax administration. A Gird goal is max~niz~ng equity. Since evasion rates frequently vary among competing carriers, evasion tends to reduce a tax system's horizontal equity. Hence, some additional enforcement effort is justified in order to reduce evasion. Given these three goals, the "best" enforcement program probably lies in a region to the right of Y. labeled "Best" Program in Exhibit 2.3. Increasing enforcement effort from current levels (U or V in Exhibit 2.2) toward this "Best" Program level would have three desirable effects: increasing net public-sector revenue; decreasing total public and private-sector costs; and decreasing inequity due to evasion. · 2.6 Feasibility Feasibility, the final criterion for evaluating taxes, is primarily a concern In the evaluation of new taxes but may also be a concern in the evaluation of Increases in the rates at which existing taxes are imposed, particularly if the proposed increases are large. Narrowly clef~neci, feas~b~ty addresses: · the constitutionality of a tax that is new or significantly altered; · the existence of the necessary technology and the availability of the necessary data to administer the tax; and . the political acceptability of a new tax, of an increase in existing taxes, or of any new technology proposed for administering a new or existing tax. More broadly, taxes or tax systems that fail any of the other criteria may also be classified as being infeasible. In the short run, the feasibility criterion is absolute. If there is a fairly immediate need for additional revenue, only the most feasible options will be considered. Fortunately for highway administrators, the user~harge principle for highway finance enjoys wide support in this country. Accordingly, when additional revenue is needed, it often is possible to marshal! support for rate increases for existing user fees and sometimes for the introduction of a new tax that does not encounter significant opposition. In the longer run, feasibility remains important but is no longer absolute. A new tax or a radically revised tax system may meet with substantial opposition when first proposed. However, if the tax or tax system is deemed to be superior on the basis of the other criteria, political opposition is not a sufficient reason for automatic rejection. Instead, it is necessary to- consider ~ educational effort Mat would be required to improve understanding of the new system and of its advantages. A decision as to whether or not to embark on such an educational effort can then be based on an evaluation of the advantages of the new system relative to the expected effort that would be required and the likelihood of its ultimate success. In the case of major tax-structure changes that are designed to unprove equity or economic efficiency, opposition may also be mitigated by phasing in any higher tax rates, allowing carriers tune to adjust to the changes in their costs by instituting appropriate rate increases. Cambridge Systematics, Inc. 13
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Alternatives to the Taxation of Heavy Vehicles Applications Manual - Evaluation Cntena When evaluating long-run feasibility, constitutional prohibitions clearly present a higher hurdle than political opposition, but even this hurdle is not necessarily insurmountable. Factors to be considered in determining whether or not a constitutional amendment is worth pursuing include: the requirements for such an amendment; the likely extent of support for and opposition to such an amendment (after an appropriate educational campaign); and, of course, the advantages of the tax in question. 14 Cambridge Systematics, Inc.
Representative terms from entire chapter: