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Alternative Approaches to Heady Vehicle Taxation Applications Manual - Adequacy 4.0 Adequacy The adequacy criterion incorporates five related considerations: · Yield; Stability and certainty; Responsiveness to changes In needs; Responsiveness to inflation; and Potential for increases when needed. Of Me five considerations, yield is the most important adequacy consideration. Yield is discussed in the first section of this chapter, and the other four considerations are discussed in the second section. 4.1 Yield The yield of a tax or system of taxes can be measured as gross yield, or as net yield after subtracting some or aD of the administrative costs. It can be measured as actual yield for a recent year or forecast yield for future years. The most important criterion in evaluating any tax system is whether its forecast yield will be adequate to cover revenue requirements. We discuss below the forecasting of yield for existing taxes and for proposed new taxes. Existing Taxes Forecasts of the yield of taxes are developed by obtaining data on the current or recent yield of these taxes and determining what changes can be expected in the future. If no changes in the tax system are planned, reasonable forecasts can be obtained by extrapolating past trends observed over one or more business cycles. If tax rates have been constant, these forecasts should be based on trends in the total yields of each tax. If tax rates have varied, the forecasts should be based on trends in normalized yields (e.g., Cambridge Systematics, Inc. 27
Alternative Approaches to Heavy Vehicle Taxation Applications Manual - Adequacy yield per penny of tax, possibly incorporating some adjustments discussed in the last paragraph of this subsection. If changes In the tax systems are being considered, then separate forecasts are required for each potential set of changes, and the forecasts should reflect the effects of both the changes in tax rates and any significant effects that these changes may have on evasion and on highway usage (particularly VMT). A ten percent increase in fuel-tax rates is likely to increase fuel-tax revenue by somewhat less Man ten percent because of an increase in fuel purchases in neighboring states by vehicles not subject to fuel-tax reporting (avoidance), changes in the avocation of mileage among states on fuel-use reports (evasion), changes in Me use of other evasion strategies, anal reductions In fuel use (price elasticity). A change in We avocation of mileage on fuel-use reports may also affect mileage avocations on reports used for apportioning rorn.ctTAhnn f~c an an in~r==c=A ~ , ~ r r ~- ~~~ ~O ~~~~~~~~~ ' I i fuel-tax rate may result In some reduction In reg~stration-fee revenue (and increased registration fees may also result In some reduction in fuel-tax revenue). Similarly, a ten percent increase In tolls is likely to increase toD revenue by less than ten percent because of diversion to alternate routes (changes in highway usage). The expected effects on evasion, avoidance, and highway usage usually are estimated judgmentally on the basis of past experience in the affected jurisdiction and In other similar jurisdictions. Major changes in enforcement activities may also have an effect on tax revenue that warrants some consideration In the forecasting effort. If such a change were to reduce a current five percent evasion rate bv half. revenue wolild ins he ~li~htiv mire than 2.5 percent. ~J ~. ~. . ~ ma_ ~ ~_^ ~.~dL L~L ~L L L=1 = ~ 1~ L Finally, we note that past changes In tax rates and in enforcement activities are likely to have affected normalized yields and the past trenches in these yields. When using these trends as the basis for forecasting future Welch, to the extent practical, adjustments should be macle to eliminate the effects of these changes on the trends. New Taxes Forecasting the yield of proposed new taxes requires information on the proposed tax rate and on the revenue base (VMT, vehicles, sales, etc.) as wed as estimates of likely evasion and avoidance and of any over significant effects that We tax is likely to have on the revenue base. Forecasts of net yield also require estimates of a~ninis~ative and enforcement costs to be subtracted from the forecasts of gross yield. (Administrative and enforcement costs are cliscussed In Chapter 5.) It is also possible to base forecasts of VMT-related taxes on trends in VMI by vehicle class. However, estimates of VMT by vehicle class are significantly affected by procedures used for developing these estimates (factoring procedures, automatic vs. manual counting and vehicle classification, etc.~. Since these procedures have changed over time, changes in reported VM1 actually reflect a combination of the effects of c Ranges in these procedures and actual changes in VMT. 28 Cambridge Systematics, Inc.
Cambridge Systematics, Inc. Alternative Approaches to Heavy Vehicle Taxation Applications Manual - Adequacy A procedure that can be used for estimating gross revenue that should be produced by a new weight-ctistance tax is presented In Section3.4. The procedure incorporates an adjustment that both eliminates the effects of any upward bias in the estimates of truck VMT (discussed in Section. and also incorporates the likely effects of evasion. A similar procedure for estimating gross revenue that would be producecl by extending fuel taxes that currently are exempt (as in Oregon) is presented in Section 3.3. Estimates of the revenue producecl by other proposed new user charges generally require estimation of the revenue base ant! the likely effect on this base of the new charge. For example, if electronic ton collection is being considered! as a means of implementing eternality charges for use of certain roads (e.g., aU freeways in a given area), revenue estimates require estimates of current use of these roads (the revenue base) and the expected reduction in use due to suppressed travel and diversion to other roacis. Adjustments should also be made for the expected effects of evasion, equipment malfunction, and exemptions. · 4.2 Other Considerations Stability and Certainty Since VMT varies with the economy, most heavy-vehicle taxes do not provide a completely stable stream of revenues. Fluctuations In VMT, though generally small, are greater for trucks (particularly those used In cyclical inclustr~es such as construction) than for automobiles, so revenues from weight-clistance and cliesel-fue] taxes are likely to fluctuate somewhat more than those from gasoline taxes. On the other hand, as a result of secular Increases in fuel efficiency, in the absence of rate increases, fuel-tax revenue grows more slowly than VMT; and, when VMT declines, fuel-tax revenue falls slightly more quickly. Furthermore, there is some concern that, in the future, fuel-tax revenue may fall as a result of increased use of alternative fuels, such as gasohol which receives tax breaks, and electricity which currently is untaxed and is difficult to taxi Registration fees are relatively stable, but even vehicle registrations (anc! particularly truck registrations) are influenced to some extent by changes In Me economy. Responsiveness to Changes in Needs Since highway needs tend to vary with highway use, taxes that relate to highway use directly (e.ge, tolls and mileage taxes) or indirectly (e.g., fuel taxes and, to a lesser extent, registration fees) are reasonably responsive to changes in needs. However, to the extent that VMT increases generate significant requirements for canacitv expansion needs mav grow faster Man revenues. ~ - 1 - ~ - -Rae ----I -I --~~~~ 2 Arlee T. Rena and Joseph R Stowers, Alternatives to Motor Fuel Taxes for Financing Surface Transportation Improvements, NCHRP Report 377, TRB, 1995, pp. 141-142. 29
Alternative Approaches to Heavy Vehicle Taxation Applications Manual - Adequacy Responsiveness to Inflation The only commonly used inflation-responsive heavy-vehicle user charges are indexed per-gaDon fuel taxes, gross receipts taxes, and venous ad valorem taxes. Gross receipts taxes and act valorem taxes on vehicles and parts are fully responsive to inflation. Ad valorem property taxes may also be considered to be fully responsive, though usually there is a signi£icant-lag before any increases ~ vehicle~value- (or- reductions in depreciation rates) show up In assessed values and In tax collections. Ad valorem taxes on fuel sales probably should be considered to be onIv oartiaLv responsive since fuel prices clo not always rise win general inflation. ' ~--a ~ Per gallon fuel taxes that are indexed may use any of several indicators. Indicators in current use are the Consumer Price Index (CPl) and various measures of fuel price. Another potential indicator is the FHWA index of highway-construction costs. When indexed to the fuel price, these taxes frequently are only partly indexed (usually 25 or 50 percept) or there is a minimum tax rate. Fuel taxes that have rates that are fully indexed to a general price index (such as the CPl) are fully responsive to inflation. However, since fuel prices do not always rise with general inflation, fuel taxes that are indexed to fuel-price measures are only partially responsive to inflation; furthermore, in several states, the responsiveness is further reduced by the use of either partial indexing or a minimum tax rate. If desired, the responsiveness of a tax system to inflation can be quantified using the formula: Inflation Responsiveness = A + FB R Where: R = Total revenue; A = Revenue that is fully responsive to inflation; B = Revenue that is partially responsive to inflation; and F = Responsiveness factor for B - i.e., the estimated percentage change in partially responsive revenue that would be generated by a one percent increase in prices. We suggest that 0.5 is an appropriate value for F for ad valorem sales taxes on fuel and for per-gallon fuel taxes that are fully indexed to the price of fuel. In the case of per-gallon taxes that are only partly-indexed, the value of-F should be-reduced accordingly (to 0.25 or 0.125 if the tax is only 50 percent or 25 percent indexed); and this value should be reduced further if Were is a minimum tax rate that is higher than the rate would be if it were determined entirely by the ~ncle~ang formula. 30 Cambridge Systematics, Inc.
Alternative Approaches to Hew Vehicle Taxation Applications Manual - Adequacy Potential for Increases when Needed An evaluation of the potential for tax increases when needec! should consider both the political and practical limits on such increases. Political limits reflect both a general unwillingness to pay higher taxes and a desire on the part of various interest groups to limit increases In taxes that particularly affect hem in favor of increases in taxes that fall disproportionately on others. Practical limits result primarily from the potential effects of higher tax rates on evasion, avoidance and traffic diversion. These practical limits may be particularly significant for some toll systems (particularly where good free alternatives exists and for fuel taxes unposed by some jur~sclictic~ns (particularly where there is a significant opportunity for vehicles not subject to fuel-use reporting to purchase fuel in other ~ur~scluchons). Cambridge Systematics, Inc. 31
Alternative Approaches to Heavy Vehicle Taxation Applications Manual - Adequacy 32 Cambridge Systematics, Inc.
