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Alternatives to the Taxation of Heady Vehicles Applications Manual-Admini.~trnti7,P, FffiriPnm, 5.0 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. For the evaluation of alternative tax options, all three types of administrative cost should be measured as incremental costs resulting from any tax or set of taxes that is being evaluated in comparison with all existing taxes and related programs that are a.~.~um~d to rontin11~ in effect for a base-case option. ~ Or- Amp, ~ .~ ~,,~,~- ^,, For existing taxes to be administered using existing procedures, administrative and enforcement costs can be estimated by analyzing agency budgets. However, estimation of private-sector compliance costs will require a more detailed analysis of the procedures used by various categories of taxpayers and estimation of both the unplementation and annual costs of the proposed system. 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 adoun~strative efficiency of the system as a whole. Evaluation of each system as a whole may 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 a set of several taxes and fees. 5.l Public-Sector Administrative and Enforcement Costs The steps involved in estimating public-sector costs of administering and enforcing highway user taxes are: I. Identify all agencies and divisions of agencies responsible, including all supporting services and management functions; 2. Assemble and analyze budget data and actual expenditures for each agency and division responsible for aU functions related to the user taxes; 3. Interview agency staff a) to develop the proper basis for fully allocating costs for the existing tax structure, and by to develop the basis for estimating avoidable costs and for estimating any additional new costs for alternative taxes and fees; Ca mbndge Sys tema tics, In c. 33
Alternatives to the Taxation of Heavy Vehicles Applications Manual - Administrative Efficiency 4. Fully allocate costs for each tax and fee for the existing tax structure; and 5. Estimate avoidable costs and incremental new costs for each tax option. The Oregon Weight-Mile Tax Stucly provides Me best available example of the application of these procedures.) The agencies and divisions diet were found to be responsible for at least some costs associated with the Oregon weight-mile tax (WMT) were: · The Motor Carrier Services (MCS) Division of the Oregon Public Utilities Commission (PUC), which is responsible for registration and audits: ~ The Transportation Administration Division of PUC; · The Policy and A~ninistrabon unit of PUC; . Services provided to PUC by other state agencies; The Motor Carrier Services Group (Weighmasters) of Me Oregon Department of Transportation (ODOT); and State Police. Review of other units resulted in a conclusion that none of the costs of the other divisions of the PUC (Rail Service, Transportation Safety, or Economic Regulation) and none of the prorate (IRP and lFlA) functions of the MCS Division should be charged to the WMT because they incur no costs directly or indirectly related to the WMT. Exhibit 5.! shows four flow charts (on three pages) summarizing the overall approach used. Except for some small costs incurred by other agencies (discussed later), the administrative costs associated win the WMT involve four components of the PUC, represented by the numbered boxes in the exhibit: 1. WMT registration expenditures; 2. WMT audit expenditures; 3. WMT transportation administration expenditures; and 4. WMT policy and administration expenditures. The basic costs to be estimated, following the procedures outlined In Exhibit 5.l, are fully allocated costs including ah overhead items, as distinct from avoidable costs (i.e., costs that could be avoided if the WMT was e~irninated). Avoidable costs are considered for other tax options in Step 5 after fully allocated costs are estimated for the current tax structure. Cambridge Systematics and Sydec win Pacific Rim Resources, Technical Memorandum No. 5 - Administrative Costs of Oregon's Weight-Mile Tax, prepared for the Oregon Legislative Revenue Office, the Oregon Public Utilities Commission, and Me Oregon Depart lent of Transportation, Salem, Oregon, January 1996, pp. 5-1 to 5-9. 34 Cambridge Systematics, Inc.
Alternatives to the Taxation of Heady Vehicles Applications Manual - Administrative Efficiency Exhibit 5.] Process for Allocating Expenditures to WeighI-Mile Tax Administration Allocating Registration ExpendFihlres Motor Carrier Services: Registration Expenditures Subtract IRP expenditures Allocate remaining registration among taxes: · Weight-Mile Tax, 85% · Other taxes, 15% Allocating Audit Expenditures Motor Carrier Services: Audit Program Expenditures Allocate audit expenditures among taxes: · Weight-Mile Tax, 85% · Other taxes, 15% Registration Expenditures Weight-Mile Tax Registration Expenditures 1 Weight-Mile Tax Audit Expenditures , ...... ....... . .. . .. ........................... . ""","" i.~.~.E~ 0 Cambridge Systematics, Inc. 35
Alternatives to the Taxation of Heady Vehicles Applications Manual - Administrative Efficiency Exhibit 5.1 Process for Allocating Expenditures to Weight-Mile Tax Administration (continued) Allocating Transportation Administration Expenditures Transportation Administration (TA) Expenditures Divide TA in thirds to: · Tax administration · Economic regulation · Transportation safety Allocate tax administration share among taxes: · Weight-Mile Tax, 85% · Other taxes, 15% Tax Aclministration Share of TA Expenditures Weight-Mile Tax TA 36 Cambridge SystemaNcs, Inc.
Alternatives to the Taxation of Heady Vehicles Applications Manual - Administrative Efficiency Exhibit 5.1 Process for Allocating Expenditures to WeighI-Mile Tax Administration (continued) Allocating Policy and Administration Expenditures PUC Policy and Administration (P&A) Expenditures Divide PEA costs among PUC programs: · Transportahon, 72% · Other, 28% Divide transportation PEA share in thirds to: · Tax administration Economic regulahon Transportahon safely Divide tax administration P&A among taxes: · Weight-Mile Tax, 85% · Other taxes, 15% Transportation P&A Expenditures Tax Administration P&A Expenditures Weight-Mile Tax P&A Expenditures WeighI-Mile Tax Administration Cost = 0 + 0 + ~ + 0 Source: Cambridge Systematics and Sydec with Pacific Rim Resources, Technical Memorandum No. 5 - Administrative Costs of Oregon's Weight-Mile Tax, prepared for the Oregon Legislative Revenue Office, the Oregon Public Utilities Commission, and the Oregon Department of Transportation, Salem, Oregon, January 1996, Figure 2.1, pp. 5-3 to 5-~. Cambridge Systen2atics, Inc. 37
Alternatives to the Taxation of Heady Vehicles Applications Manual - Administrative Efficiency As summarized in the flow charts, estimating each of these expenditures involves the aBocation of major portions of overall PUC expenditures to the WMT. The allocations are based either on assigning costs directly involved with administration of the tax or on estimating shares of overhead costs that must be divided between the WMT and other responsibilities of the PUC. The basic cost data used for this analysis consisted of the agency's budget document and computer printouts of detailed monthly expenditure reports for each unit of interest. Nearly one hundred categories of expenditures are reported each month for each major unit of PUC, showing expenditures to date and unobligated balances for each category. These detailed expenditure reports were reviewed in the process of deciding how to properly allocate aD costs to the WMT. The costs of the registration program of the MCS Division include the costs of administering the TRP program, so they had to be subtracted out, as shown in the first step in the first flow chart of Exhibit 5.1. The cost of administering the Alla program did not have to be subtracted out because it is a separately reported cost center and was not included in the division's cost data. The most logical way of allocating the remaining costs of the registration program among the WMT and other taxes is In proportion to the amount of related revenue collected, because Me jusUficabon for incurring Me cost of the registration program was primarily based on Me amount of taxes collected Trough Me program. The relevant revenues used In Me analysis are shown In Me following table: Oregon MCS Division Revenues (1993 - 1995 Biennium) Revenue Source Percent of Revenues Total Weight-mile tax $125,690,503 (85.2%) Prorate revenues collected 2,274,715 (1.5%) Prorate revenues from other states 2,204,036 (1.5%) Commercial registration revenues 3,214,545 (2.2%) Prorate revenue collected for transmission to over states 14,068,133 (9.5°/O) Source: Cambridge Systematics and Sydec win Pacific Rim Resources, Technical Memorandum No. 5- Administrative Costs of Oregon's Weight-Mile Tax, prepared for Me Oregon Legislative Revenue Office, Me Oregon Public Utilities Commission, and Me Oregon Department of Transportation, Salem, Oregon, January 1996, p. 5-7. These percentages were used for the allocation of registration costs to the WMT, as shown in the second step of the first flow chart in Exhibit 5.~. The costs of the audit program were allocated using the same allocation factors, following the same logic as for the registration program. It was not necessary to subtract In 1 A or IRP prorate functions, because the audit program covers only costs associated with auditing for Me taxes listed above, and it excludes other costs of administering these taxes. 38 Cambridge Systematics, Inc.
Alternatives to the Taxation of Heady Vehicles Applications Manual - Administrative Efficiency Out-of-state and foreign (Canada) travel expenses connected with audits are reimbursed directly by carriers and constitute a small proportion of audit costs. These were induded as part of the cost of administering the taxes, even though they are paid for by the carriers rather than through the tax-administration system. More properly, these costs should be induded as part of the estimates of compliance costs to industry. The costs of Transportation Administration (flow chart on the second page of Exhibit 5.1) were allocated in three equal parts among the three functions of {ax administration, economic regulation, and transportation safety. The staff of this unit spend about equal time with these three functions, exclusive of time spent with the Commission's office (a cost discussed below). The tax administration portion was further allocated among the WMT and other taxes, in accord with the amounts of the five categories of taxes shown in the table above, based on the same logic used for allocation of the cost of the registration program. The costs of the Policy and Administration (P&A) unit, which includes the Commissioners' office plus administrative services to the above functions and others, was allocated among all other PUC functions in proportion to the size of the programs, because the costs of these functions were primarily based on the relative size of these programs. The exceptions to this were that: 1) the costs of Administrative Hearings are reported and charged to specific cost centers of the PUC (47 percent of these costs were charged to Transportation Administration); and 2) 100 percent of Consumer Assistance was charged to Utility Regulation because it deals only with consumer concerns over utilities. All other P&A costs were allocated among the various cost centers based on the number of full-time staff equivalents, which is essentially the same as allocation based on costs. The result of the avocation of an P&A costs to cost centers is that 72 percent of the total is allocated to Transportation, as shown in the first step of the final flow chart in Exhibit 5.1. The final two steps in the allocation of P&A costs to the WMT are repeats of procedures described above, as shown at the end of Exhibit 5.1. The WMT shares of the costs of services provided to the PUC by other state agencies were estimated using the same allocation factors as used for the other components of Transportation Administration. These induded substantial charges for services to PUC provided by the Attorney General's office and various other administrative services. Exhibit 5.2 presents the results of the analysis described above, with the addition of small amounts of costs associated with the WMT for the Oregon State Police and the Weighmaster unit of ODOT. These include staff time spent recording license plate numbers and transmitting them to the PUC, and time spent issuing citations for violations of WMT requirements. The table in the first part of Exhibit 5.2 shows the total costs for the various units of the PUC responsible for activities related to the WMT tax, along with breakdowns by major category. The lower table shows the results of the allocation of PUC costs, plus the small amount of State Police and Weighmaster costs. It also shows the projected total WMT Cambridge Sysfemofics, Inc.
Alternatives to the Taxation of Heady Vehicles Applications Manual - Administrative Efficiency EM ~En O ~ 0 O ~ 0 0 ~ ~u, .> _. . 14 oh ._ ~X ·0 - ¢ ~ Ed 0 O ~ ~0 ·_ ·~ PA ILL - ~s" so O U. _ 06 · · - x 40 ;^ e 10 O Ed ~1 O ~ a ~ . ~ E 0 ~ 8< 85 ~ - c: ~ 0 0 s o a ma ~ ·f .% o .~ U. . 04 it: O - 00 Cal _ -4 d ~ °° _ O ~ O 00 ~ 00 O ~ ~ \0 In 00 0 00 ~ o0 _ ~ _ 00 O O _ ~ O C~ 00 _ ~ o · t_ 00 _4 o 00 00 00 0\ 00 C~ - _. C~ ~0 as oo _ U, - O ~ = ~ g C~ # E~ ._ o 0 a: o = ~¢ o ~Q X o ·_' C) = ¢ [3 6° ~- ·§ ¢ o 8 ~ ~ o~ 3 E o S ~ _ .C) ~ 8 ~ ·" ~ o - oo ,~ ~ c: o .e~ ~ -^ 0 ~ ~ ~ t!e O ~ a =^ V i-.C ~: - -0 E~ . ~- ~¢ 08 00 E 0 sa 0 1 {_ ~ o oo ~ ._ 3 fi U) o oo~ ~ ~: o o o ~ o o ;- . Ct U, . U) U, o - . _ ~ _ ~ _J . C~ _ 0 3 O O 5: ~ _ ^ O O ~ . · ~ Ct ~4 U~ ~ 3 es ~ oo - ~ mo o n ~ o c) c~ ~ ~ .o ~ ~ o & u ~ ~ ~: ~o e o ~ - c~ u, :: o · - c) o v, Cambridge Systetnatics, Inc.
Alternatives to the Taxation of Heavy Vehicles Applications Manual - Administrative Efficiency receipts for the period covered by the analysis. As shown In the last part of the table, the total cost of a~ninister~ng the WMT was estimated to be 4.S percent of total WMT receipts. The procedures described above have been illustrated for a single tax, the Oregon Weight- Mile Tax. The same procedures can be used for each of the taxes and fees included in a state's tax system. The final step in estimating a~ninistration and enforcement costs is to estimate avoidable costs and incremental new costs for each tax option to be evaluated. These estimates are developed by focusing on proposed changes in the tax structure. This step is inherently less precise because of the lack of available budgets and accounting data, but must be done with equal attention to each specific administrative function in order to arrive at reasonably accurate cost estimates. Fully allocated agency costs provide the most complete estimate of the cost of a tax to taxpayers. However, these costs include fixed cost items such as buildings and equipment and cost items that can be reduced only partially if the tax was eliminated, such as many support services and management functions. Avoiciable costs exclude these fixed and partially fixed costs. Avoidable cost estimates should also take into account the costs of administering alternative taxes or tax increases that wouic3 occur under any alternative tax option. The basic approach in estimating avoidable costs and new incremental costs is to review every function and every line item in ah relevant budget accounts and to answer the following types of questions: I. What functions could be eliminated, if any, without risking increased evasion? 2. What reductions In staff couict be made, if any, for each function, without risking increased evasion? What increases in staff are necessary for any new tax or tax increase includes] in the tax option? 3. Can overheat] functions (services and management) be reduced proportionately if some existing functions and staff reductions can be made? 4. Are there any potential savings in building space or equipment that are achievable? 5. For any new tax that is acIded, could a~ninistrative efficiencies be achieved by combining any functions such as audits or accounting reports? 6. For any new tax that is added, are there any entirely new functions that should be created In order to reduce evasion or achieve other objectives? 7. What start-up costs will have to be incurred (e.g., building space, equipment, software development, or trairung)? In answering these types of questions, it may prove helpful to contact personnel in other states that have recently considered similar tax alternatives or that have Implemented taxes similar to Hose being evaluated. Cambridge Systematics, Inc. 41
Alternatives to the Taxation of Heavy Vehicles Applications Manual - Administrative Efficiency · 5.2 Compliance Costs Compliance cost is best clefined as the total nonrecoverable administrative costs that a taxpayer incurs In connection with the payment of highway user taxes and fees (exclucling the amount of taxes and fees paid). Compliance costs include the costs of ah tax-related work connected with preparing tax returns as wed as the cost of developing and unplementing procedures needed to prepare the tax returns. Compliance activities requires! by motor carriers include the following: · Registration - Costs of fining out forms on vehicles and firms; · Notification- Costs associated with informing the state of all configurations and operating weights in which a given power unit operates; · Recording- Accurate tracking of total mileage per truck for all operations within each state for each configuration; Reporting - Preparation of periodic reports on miles operated, fuel consumed, and fuel taxes paid; Permit Fees - Preparation and submission of applications for trip permits, fuel permits, oversize/overweight permits, etc.; and Audit- Assignment of the carriers' staff to assist the auditors during the periodic auditing process and storage of detailed vehicle records required for the audits. Fuel taxes and sales taxes also entail compliance costs borne by suppliers of fuel, vehicles and parts. Private-sector compliance costs are inherently more difficult to estimate than public-sector administration and enforcement costs because of the lack of any single source of data and the very high cost of obtaining accurate accounting data from a representative sample of firms. Furthermore, estimates that have been macle based on interviews with carriers are subject to an unknown amount of systematic upward bias because of the observed tendency of some respondents to impress interviewers with the burden caused by taxes. Compliance costs are low for most taxes and fees that are not VMT related, but are substantially higher for VMT-related taxes, and therefore analyses of compliance costs should focus on these taxes. Compliance costs have been reclucecI significantly in the last few years for interstate carriers as all contiguous states have become members of TRP and iF-1A, and they could be recluced further if the three basic forms of VMT-related taxes were combined into a single base-state reporting system. Compliance costs are now moderate for carriers which do not operate in weight-distance tax states but which are subject to base-state systems of fuel-use reporting and reg~stration- fee apportionment. Compliance costs are very low (a small fraction of one percent) for carriers not subject to any of these mileage reporting requirements. Although these reporting requirements need not apply to intrastate carriers for apportionment purposes, 42 Cambridge Systematics' Inc.
Alternatives to the Taxation of Heavy Vehicles Applications Manual - Administrative Efficiency several states now require fuel-use reporting for ah heavy trucks as an aid in the states' enforcement efforts. Compliance costs for weight distance taxes vary widely depending on several factors: · Size of fleet (some fixed costs are high per truck for small fleets); · Extent of automation twhich can reduce costs by an order of-magn~tude>; · Type of operation (costs increase for firms with short trips and a variety of configurations); · Complexity of the tax (need to report configuration changes, etc.~; · Thoroughness of the documentation required by the auditors; and · Number of weight-distance tax states in which a carrier operates. Several different approaches can be taken to estimate industry compliance costs for an existing tax structure or for alternative tax structures. In many cases, more than one of the following approaches may be appropriate: 1. Literature survey and interviews with selected experts; 2. Survey of firms; 3. Interviews with auditors; and 4. Audits of compliance procedures of selectee! firms. Nearly ah previous studies have used variants of the first approach. One of the most complete, but dated, efforts of this type was a 1983 AASHTO stucly,2 which estimated total carrier compliance costs for all taxes, but which did not separate out costs for fuel taxes, weight-distance taxes, and registration fees. This study estimated compliance costs to be $60 to $750 (1983 clollars) per vehicle, varying primarily with the size of the firm. Estimates of compliance costs were also developed as part of the Oregon WMT study. 3 These estimates are the only ones we know of that are based on a survey of motor carriers. This study estimated that, for the Oregon weight-mile tax, compliance costs averaged 5.7 percent of tax payments, but varied from 2.6 percent for large firms to 7.S percent for small and medium size firms. For a given level of auclidng, the compliance costs for the weight-distance tax probably are not much higher than for fuel-use reporting. However, since many states audit much less aggressively than Oregon (anct accept correspondingly higher levels of evasion), many carriers experience appreciably lower compliance costs than Nose estimated In the Oregon study. 2 Sydec, Inc., AASHTO Study of Motor Carrier Taxation and Registration Issues, prepared for the American Association of State Highway and Transportation Officials, 1983. 3 Cambridge Systematics and Sydec with Pacific Rim Resources, Oregon Weight-Mile Tax Study, Final Report, prepared for Me Oregon Legislative Revenue Office, the Oregon Public Utilities Comoussion, and the Oregon Department of Transportation, February 1996, Chapter 4. Cambridge Systen~atics, I?'c. 43
Alternatives to the Taxation of Heavy Vehicles Applications Manual - Administrative Efficiency A ~ . ~ _ ~ . - . In inexpensive option for estlmatmg compliance costs is to update and adjust the results of the compliance-cost estimates made In the 1983 AASHTO and 1996 Oregon WMT studies and to augment them by Interviewing a few of the most knowledgeable professionads who have done similar studies or who are specialized In related tax i.~.~u~ in the state or in the" . . . ~ ~ ~ motor-caner industry. More accurate estimates of compliance costs for any particular state's tax structure can be made bv interviewing a samnIe c)f firrn.~ a~ WA.C Bins in rho Oregon WMT Study. J con - ~ In the Oregon study, a total of 56 firms were interviewed - 17 small (operating fewer than six vehicles), 18 medium size (operating 6 to 49 vehicles), and 21 large (operating 50 or more vehicles). The 56 firms were selected to cover a representative set of carriers, In consultation with industry representatives. The resulting distribution is summarized in the table below: Carriers Surveyed in Oregon WeighI-Mile Tax Study Size Motor Carrier Type Small Medium Large Total Interstate 7 10 11 28 Intrastate 10 8 10 28 Private 5 6 4 15 Commercial 12 12 17 41 Truckload 5 5 9 19 Less-than-Truckload 0 3 5 8 Both 4 6 5 15 Log 6 3 0 9 Dump 2 2 2 6 - Source: Cambricige Systematics and Sydec with Pacific Rim Resources, Technical Memorandum No. 1- Compliance Costs of Oregon's Weight-Mile Tax, prepared for the Oregon Legislative Revenue Office, the Oregon Public Utilities Commission, and me Oregon Department of Transportation, Salem, Oregon, updated February 1996, p. 1-21. Compliance costs estimated from the Oregon WMT survey are shown below: Small Firms Medium size Firms Large Firms Overall Compliance Costs $207 $332 $25 Per-Truck1 Percent of Tax Payment 7.8% 7.8% 2.6% 5.7o/o Per-truck costs are based on the. firm's entire fleet, Not just trucks operating in Oregon, and therefore are not comparable among firm sizes. Most large firms have substantial operations outside of Oregon that are not subject to the Oregon WMT and which do not entail any corresponding compliance costs. Source: Cambridge Systematics and Sydec win Pacific Rim Resources, Technical Memorandum No. 1- Compliance Costs of Oregon's Weight-Mile Tax, prepared for the Oregon Legislative Revenue Office, the Oregon Public Utilities Commission, and Me Oregon Department of Transportation, Salem, Oregon, updated February 1996, p. 1-8. 44 Cambridge Systematics, Inc.
Alternatives to the Taxation of Heavy Vehicles Applications Manual - Administrative Efficiency A significant part of the difference in costs was found to be due to differences In the extent to which firms used electronic recordkeeping systems to aid in tax reporting and related functions. Electronic systems were used exclusively by 0 percent, 17 percent, and 19 percept of small, medium, and large firms, respectively; and some combination of electronic and manual systems were used by 18 percent, 39 percent, and 72 percent of small, medium, and large firms. Many firms had plans for adopting electronic systems, so that compliance costs could be expected to be reduced somewhat. - . . . Experience in We Oregon study suggests that a better understanding of compliance costs can be obtained by interviewing auclitors. They may not be able to aid significantly in refining estimates that are obtained from a survey of firms, but they can usually describe in detail the different types of recordkeeping systems that firms have and the procedures the firms use in preparing tax reports and providing information for auditors, as well as the types of equipment and services used and other related information. Such information can be very useful in estimating how compliance costs are likely to change for different types of carriers under tax options being evaluated. The last approach to estimating compliance costs listed above is audits of the compliance procedures used by a sample of firms. This approach probably has never been used in any heavy-vehicle tax study; however, it probably is the only way of obtaining accurate cost estimates, and it may be an appropriate subject for a future research project. Such a study could produce information that would be useful in assessing the accuracy of compliance cost data obtained from surveys of firms and in assessing potential ways in which compliance costs could be reduced. Audits of compliance procedures could be conducted in conjunction with routine audits for highway user taxes, but would probably have to be on a voluntary basis. Thus, in order to assure participation by a representative sample of firms, it would be desirable to pay for each firm's cost for participating in the audit process. This would have Me added value of encouraging the firms to actively help the auditor in developing recommendations for improvements in tax administration that would reduce costs and increase accuracy In the audit process. Cambridge Systematics, Inc. 45
Alternatives to the Taxation of Heady Vehicles Applications Manual - Administrative Efficiency 46 Cambridge Systematics, Inc.
