Dedicated Revenue Mechanisms for Freight Transportation Investment (2012)

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1 s u m m a r y This research explores potential sources of revenue that might be dedicated to support freight-oriented investment in the nation’s surface transportation system. The objectives of this research were the following: • Identify feasible, practical options for providing dedicated federal revenue and finance mechanisms to support investment in freight transportation infrastructure. • Provide a comprehensive analysis of the functioning and implications of the most potentially viable options. • Assess the relative merits of these most potentially viable options and describe in detail requirements and steps required for their implementation and operation. For purposes of this analysis, it is assumed that the federal fuel and excise tax system remains in place as the major revenue source for federal transportation infrastructure funding, and that any dedicated mechanisms would be used to fund a national infrastructure program analogous to the Highway Trust Fund. Some of the mechanisms considered in this study were found to be more suitable for project-specific funding. While project-specific alternatives are valuable and can reduce the need for national-level funding, those options were analyzed separately. Candidate Revenue Mechanisms and Screening The research team evaluated a wide range of proposed federal freight infrastructure rev- enue generation mechanisms and concluded that the leading feasible options are a fuel tax surcharge, distance/vehicle “vehicle miles traveled” (VMT) fees, and federal vehicle registra- tion fees. These options were described and analyzed in detail. Other options were excluded for reasons of feasibility and applicability to freight infrastructure. These included inter- national trade fees, freight tonnage or ton-mile fees, freight value or value-added taxes, waybill taxes, and carbon taxes or cap-and-trade proceeds. Public-private partnerships (PPPs) have received considerable attention in the literature and are frequently included in proposed strategies for mobilizing infrastructure funding. For railroads, and potentially for other modes, investment tax credits (ITCs) for capacity enhancements are widely considered a viable means of inducing additional beneficial private investment. Both options were found to be more suitable as project-specific strategies than as candidates for a national program. PPPs and ITCs are given extensive treatment in Appendix E. Dedicated Revenue Mechanisms for Freight Transportation Investment

2Fuel Tax Surcharge Increasing the existing federal fuel taxes on diesel fuel and gasoline would appear to be a straightforward way to increase overall revenue for transportation infrastructure. However, such an overall fuel tax increase would not yield a dedicated revenue stream for freight infrastructure. Most discussions to date of fuel tax increases, conversions, or improvements have not been focused on trucks or freight. The exception has been the Freight FOCUS Act of 2010, which proposed a $0.12 per gallon increase in the diesel fuel tax with income tax credits or refunds for exempt or non-freight uses. Fuel Tax Options The fuel tax options considered in this study would most accurately be labeled fuel tax surcharges, levied on some subset of the truck population. The fuel tax options considered in this study are the following: Diesel Fuel Tax with Non-Freight Refunds. This option, similar to what is proposed in the Freight FOCUS Act of 2010, would target freight highway users through an increase in the diesel fuel tax coupled with annual tax refunds or tax credits for non-freight vehicles. Freight vehicle operators would simply see a tax increase with no new record-keeping or filing requirements. Other diesel fuel purchasers would have to incorporate refund or credit requests in income tax filings. The fuel tax surcharge itself would be collected through the existing system with no incremental cost. Diesel/Gas Tax with Non-Freight Refunds. To cover all highway freight vehicles, or all medium- and heavy-duty trucks, it would be necessary to cover all fuel types, including gasoline, natural gas, ethanol, etc. Doing so would spread the tax burden more equitably across freight vehicles, but would dramatically expand the scope and costs of compliance. Diesel Fuel Tax with Vehicle ID. Another option for a freight-only fuel tax surcharge is an electronic tag, on-board unit (OBU), or radio frequency identification (RFID) system to identify the vehicle at fueling locations. There are several technologies available, most relying on dedicated short-range communications (DSRC) or other wireless systems. Federal implementation costs would be substantial, as would collection and enforcement costs. Diesel/Gas Tax with Vehicle ID. Expanding a high-tech vehicle ID system to cover all fuel types while distinguishing freight from non-freight vehicles would increase implementation, collection, and compliance costs significantly. All U.S. vehicles would have to be equipped with ID tags to signal the appropriate tax rate at fueling locations. Collection In all of these fuel tax options, the incremental collection, implementation, and compliance costs are attributable to the need to distinguish freight from non-freight vehicles. The Leaking Underground Storage Tank (LUST) Trust Fund is a mode-neutral fund created in 1986 to fund federal oversight or cleanup of leaking underground fuel storage tanks. The LUST fund is capitalized through a $0.001 per gallon excise tax on gasoline and other motor fuels and provides a precedent for operating a mode-neutral freight fund. The federal fuel tax is very economical to collect. The tax is paid to the Internal Revenue Service by the producer or importer of the fuel twice each month from roughly 1,000 “rack” locations—the points at which fuel leaves wholesale storage for delivery to retail outlets. The system is highly efficient because it does not require vehicle identification or vehicle- by-vehicle transactions and accounting. Making a fuel tax vehicle-specific negates much of the fuel tax’s efficiency advantage.

3 A low-tech tax collection mechanism would use the current system. The additional diesel or gas tax would be collected for all fuel delivered from wholesale “rack” locations, and all customers would pay the same tax rate at the pump (or equivalent purchasing method). Eligibility for a refund or credit would depend on vehicle type. Trucks that operate and purchase fuel in more than one state are required to reconcile taxes paid and fleet VMT by state under the International Fuel Tax Agreement (IFTA) system. An annual or periodic statement reconciling fuel taxes owed could also be a means of collecting or adjusting a federal tax or surcharge. A high-tech approach would involve the use of wireless technology to identify the vehicle and the appropriate fuel tax rate at the point of purchase. A high-tech approach of this kind would be similar to gas station payment for VMT fees. In both cases, the gas station itself would have to be equipped with technology to identify vehicles and charge the appropriate tax rate. Tagging all diesel vehicles (or for a diesel/gas option, all vehicles) would be very costly. VMT Fees A VMT system would charge vehicle owners based on the number of miles traveled on public roads and highways. VMT fees (also known as mileage-based user fees, or MBUFs) have been proposed as a broad-based replacement for fuel taxes. VMT fees have poor support or face opposition from the public and the transportation industry. Types of VMT Fees While there are numerous variations on VMT fees, they can be split into two basic types, distance/vehicle VMT fees and time/location VMT fees. Distance/Vehicle VMT Fees. Distance/vehicle VMT fees would vary by vehicle class and charge operators according to the miles traveled by each vehicle. VMT fees would vary directly with mileage, fulfilling the policy desire for “user fees” instead of taxes. VMT fees could be implemented through a more costly, high-tech, OBU system or through a low-cost/ low-tech mix of OBU, commercial, and self-reporting systems. In either case, there would be high federal implementation, collection, and enforcement costs, and a longer implemen- tation period than other options. Distance/vehicle VMT fees would not support conges- tion pricing or transportation demand management/travel demand management (TDM) options. Time/Location VMT fees. Time/location VMT fees would permit incorporation of TDM, tolling, and congestion pricing. National time/location VMT fees for freight and service trucks, however, do not appear to be publicly acceptable for the foreseeable future due to high costs, lack of national benefits, and persistent privacy issues. Collection The complexity of distance/vehicle and time/location VMT fee systems requires more elaborate collection mechanisms than other revenue-generation strategies. For passenger cars (and light trucks used for personal transportation), it is generally thought that implementation of VMT fees will eventually require universal installation of on-board devices to track miles traveled and automatically communicate either the raw information or a VMT fee total to the tax-collecting authority. Implementation of distance/vehicle VMT fees in much of the freight and service trucking sector may be much easier than implementation in the passenger sector due to existing reporting systems, use of commercial OBUs, and other options not ordinarily available to passenger-car owners.

4Annual collection costs for a distance/vehicle VMT fee are variously estimated to range from about $10 to $100 per vehicle. The lowest figures are informal “guesstimates” that are not backed by empirical data or formal estimation techniques. The research team’s informed estimate would be $35 per vehicle based on the administrative and collection costs of a state E-ZPass system. This estimate is used later in this report in cost comparisons of revenue options. Privacy VMT fee systems, particularly time/location VMT fees, raise serious public and political issues of privacy. These issues can be resolved legally and technologically but remain powerful emotional and political barriers. In particular, there appears to be strong public opposition to systems that use a global positioning system (GPS) or equivalent technologies to determine and record detailed vehicle location records. The concerns over privacy, and particularly over GPS, are a formidable barrier to time/location VMT fees. The technological issues can be resolved through the use of so-called “thick” OBU clients that calculate and pay VMT fees rather than transmitting location data. Commercial systems that aggregate and pay VMT fees for entire fleets likewise address the privacy issues. Legality is unlikely to be an issue for these approaches, although there are lingering legal concerns over the ongoing collection of detailed location data. Available surveys, however, strongly suggest that adverse public reaction to the perception of privacy invasion would create barriers to implementation of time/location or GPS-based VMT fees. Registration Fees The simplest and most cost-effective means of generating revenue for a dedicated freight infrastructure fund would be an expanded federal registration fee on Class 4–8 trucks of all types. While a registration fee would not be a direct user fee, it would be a proxy for potential impacts of truck size and load demands on infrastructure wear and design requirements. Federal registration fees could be implemented by expanding the Heavy Vehicle Use Tax (HVUT) system, which presently covers Class 7–8 trucks. A registration fee would be the quickest and most efficient option to implement because it would require no new technology and could be collected and enforced via minor expansions of existing systems. Such a system has the advantage of simplicity, low implementation and collection cost, and potential application to non-highway modes. The current HVUT collection mechanism could be used as is, but expanded to cover Class 4–8 trucks. The HVUT amount due is an annual lump sum. For large carriers with 25 or more vehicles, electronic filing is accomplished using a credit card or other means of electronic payment. There would be a relatively small increase in labor and electronic processing capability required, but no new technology. An alternative to direct federal registration fee collection would be “piggybacking” on the state registration fee process. All states currently factor vehicle weight or weight class into their registration fees, so a federal registration fee that varied by vehicle weight class should be compatible. Truck owners would make one annual payment covering both state and federal fees. Besides the lower collection cost, “piggybacking” would reduce industry compliance cost. Combined Strategy Options The complexity of the freight transportation industry and the infrastructure funding challenge suggests that the candidate funding mechanisms may be more effective in combination than separately. In particular, registration fees might supplement fuel taxes or

5 VMT fees to cover electric or hybrid vehicles, capture the impact of vehicle size or weight characteristics, or create policy-oriented incentives. A combined federal freight infrastructure revenue strategy could also embrace PPPs and ITCs. As the research team found, these options can facilitate access to multiple capital sources and accelerate the project funding and development process. The availability of multiple revenue and funding tools would thus increase the ability of federal planners and decision-makers to create an equitable, effective, revenue strategy with appropriate incentives. Summary Comparisons Table 1 summarizes and compares the leading revenue options based on key evaluation criteria. The ratings are relative rather than absolute. Moreover, many of the rankings depend on the details of revenue mechanism design rather than fundamental characteristics. Presented below is a discussion of how the revenue options compare on the evaluation criteria. Screening Criteria Fuel Tax Surcharge VMT Fee Federal Registration Fee Revenue Revenue potential High High High Stability/sustainability of revenues over time Moderate High Mixed Need for indexing High High High Implementation and Costs Time to implement Moderate Long Short Federal implementation cost Low High Very Low Recurring collection and enforcement cost Low High Low Industry implementation cost Low High None Industry compliance cost Moderate High Low Revenue Efficiency Collection cost efficiency High Low High Net federal revenue/net industry cost High Low High Scale economics otential High Low Technical Feasibility Technical feasibility High High High Potential for evasion Moderate High Low High vs. low tech High/Low High Low Multimodal Application Coverage of multiple modes Potential Low Potential Modal neutrality Potential Low Potential Linkage between Use and Payment Emphasize user fees over taxes Moderate High Low Proportional to truck size and weight High Potential High Incentives and Impacts Incentives for productivity gains Low Low Low Incentives for user behavior Low Low Low Transportation system impacts Low Low Low Modal shift (e.g., from truck to rail) Moderate Low Low Environmental impact Low Low Low Economic impacts Low Low Low Equity Between payers, users, and beneficiaries Moderate Potential Moderate Between public- and private-sector users Low Potential Potential Between freight, passenger, and service users Potential Potential Moderate Political and Public Acceptance Likely legal challenges Low Likely Possible Legislative feasibility Low Low Moderate Freight stakeholder positions Moderate Adverse Moderate International legality High Questionable High Public and commercial privacy issues None Serious None Table 1. Revenue mechanism comparison matrix.

6Revenue and Costs For comparison purposes, the research team set an annual gross revenue goal of $5 billion for all three options. Table 2 shows revenue and cost estimates for the options described above as applied to either Class 4–8 freight trucks or all Class 4–8 trucks. As indicated, the rates required to yield $5 billion in gross revenue depend on the subset of trucks to which the rates are applied. Widening the scope yields lower rates. The three leading options all have the potential to yield substantial revenue to fund freight infrastructure. There are no inherent limits, so the revenue potential is primarily an issue of political, industry, and public acceptance of appropriate taxes or fees. The sustainability of fuel tax revenue over time in the freight sector is higher than in the passenger sector, but still subject to diminishing growth. VMT fees will grow as VMT continues to grow. Truck registration fees vary with the size of the fleet, which tends to diminish or not grow as quickly during economic slowdowns. Revenue mechanisms that build on existing tax, fee, or regulatory systems without introducing new technology or infrastructure have the lowest implementation, collection, and compliance costs, and the closest implementation horizon. A federal registration fee would be the quickest and least expensive. Estimates for industry compliance costs are lower for low-tech options and higher for high-tech options. For the fuel tax surcharges with tax system refunds or credits, the compliance costs would be borne primarily by non-freight purchasers who would need to file for refunds or credits. The differences in cost translate into differences in revenue efficiency. Table 2 provides estimates of net annual federal revenue ($5 billion less collection and annualized imple- mentation cost) and annual industry cost ($5 billion plus annualized implementation and compliance costs). From Table 2 it can be seen that • The highest efficiency ratios are for the diesel fuel tax with tax refunds and the vehicle registration fees due to their absence of significant implementation costs. Both of these options build on existing collection systems. • Options that rely heavily on technology, namely the fuel taxes with vehicle ID and the VMT fees, have high implementation and collection costs that dilute their revenue-generating effectiveness. • The lowest efficiency ratio is for the diesel/gas fuel tax with tax refunds since it would require the great majority of vehicle owners—about 240 million—to file for refunds. The low-tech variation on fuel tax surcharges and the federal registration fee yield the greatest net federal revenue at the lowest industry cost, and are therefore the most efficient. VMT fees would likely show the greatest scale economies, with efficiency rising as the fee rises. VMT fees for trucks would also be much more efficient if there were a national VMT system for passenger vehicles in place. The maximum long-term potential net revenue from the various options is influenced by the following: • Annual federal costs of collection and enforcement. • Diesel tax revenue lost from conversion to gasoline-powered trucks. • Fuel, VMT, and registration revenue cost from truck-to-rail modal shifts. Estimates of these adjustments and net federal revenue for 2012 are shown graphically in Figure 1. The research team calibrated the revenue model at $5 billion annually. Therefore, the net revenue results are most trustworthy at that revenue target. As the revenue target and tax burden escalate from $5 billion to $20 billion annually, the efficiency of most options declines slightly as transportation activity shifts from truck to rail. The exception is the

Table 2. Revenue and costs for $5 billion target. Source: Tioga Group Analysis of 2002 VIUS (U.S. Census Bureau, 2004) and Table VM-1 of Highway Statistics 2009 (FHWA, 2009). Notes: * “Gas” in this case includes gasoline, natural gas, propane, alcohol fuels, and blends. -

8diesel-only fuel tax surcharge, which loses much of its value due to increased conversion of medium-duty truck fleets to gasoline. The loss of revenue is limited by the underlying inelasticity of demand for freight trans- portation. As the economic impacts and analysis suggest, the adverse impact on commodity production and consumption would be relatively small. This observation is confirmed by the long-term resilience of freight demand in the face of steady increases in underlying fuel prices that exceed the tax or fee level envisioned in this analysis. Long-Term Revenue Outlook The long-run revenue available from each option depends on the growth expected in the tax or fee base—fuel use, VMT, or truck registrations—and the offsetting costs and diversions Figure 1. Revenue targets and net revenue. $5,000,000,000 $7,000,000,000 $9,000,000,000 $11,000,000,000 $13,000,000,000 $15,000,000,000 $17,000,000,000 $19,000,000,000 $5,000,000,000 $7,000,000,000 $9,000,000,000 $11,000,000,000 $13,000,000,000 $15,000,000,000 $17,000,000,000 $19,000,000,000 2012 Net Federal Revenue 20 12 R ev en ue T ar ge t Diesel Tax Diesel & Gas Tax VMT Fee Registration Fee Figure 2. Long-term revenue estimates. $4,000 $4,500 $5,000 $5,500 $6,000 $6,500 $7,000 $7,500 $8,000 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 $ M illi on s Tax Burden Net Diesel Tax Revenue Net Diesel & Gas Tax Revenue Net VMT Fee Revenue Net Registration Fee Revenue

9 discussed above. The patterns and relationships are shown graphically in Figure 2. As the graph shows, there would be a multiyear implementation lag for revenue from the two technology-dependent sources, the diesel and gas tax with vehicle ID and the VMT fee. Net revenue from the vehicle registration fee and the diesel and gas tax surcharge tracks the gross tax burden closely. Net revenue from the VMT fee and the diesel-only tax surcharge grow at similar rates but at a lower level due to the high collection cost of VMT fees and the conversion to gasoline trucks for a diesel tax surcharge. Indexing Any proposed revenue mechanism would need to incorporate indexing or some other means of adjustment to fulfill long-term freight infrastructure funding needs. There are two cost indexes specifically designed to reflect highway construction costs: the FHWA’s National Highway Construction Cost Index (NHCCI) and the Bureau of Labor Statistics’s Producer Price Index (PPI) for the Highway and Street Construction Industry (“BHWY”). There are also indexes published by trade associations and industry journals. Technical Feasibility Technical feasibility within the freight sector is not an issue for any of the leading options, although time/location VMT fees do present some technical challenges. The differences show up in implementation time, cost, and evasion potential. For all three candidate mechanisms, low-tech implementation approaches result in lower implementation, collection, and com- pliance costs; shorter implementation timelines; and greater revenue-generation efficiency. In all three cases, low-tech collection methods could build on existing systems. High-tech collection solutions may offer greater precision, potential linkages to future traffic-management systems, or other non-revenue advantages, but would entail higher implementation, collection, and compliance costs. Multimodal Application The potential of fuel taxes and registration fees to cover multiple modes depends on system design and policy choices. A fuel tax surcharge could cover all modes that use fuel. A single multimodal fuel tax surcharge for freight infrastructure is technically feasible, but an attempt to create and allocate such a fund is likely to encounter serious political and institutional barriers. VMT is basically a highway transportation metric. Attempting to apply VMT fees to rail or water modes would entail costly and potentially onerous record- keeping, administrative, and enforcement costs without a clear connection between such fees and freight infrastructure requirements. Vehicle registration fees can conceivably be applied to the full range of freight transportation modes and the equipment they employ (absent any specific statutory prohibitions). Excise taxes have previously been assessed on a wide range of commodities, and there is no reason in principle why federal registration fees could not be assessed on other trucks, railroad cars or locomotives, or waterborne vessels. Linkage between Use and Payment There are challenges in making any revenue source correspond as closely as possi- ble to vehicle infrastructure impacts. As with other factors, the degree to which each option is a “user fee” depends on system design. Fuel taxes and VMT fees are user fees, with the linkage between use and payment dependent on program details. The ability of

10 distance/vehicle VMT fees to link use, impact, and payment depends on the payment scale applied to trucks of different classes and weights. Registration fees are not closely linked to infrastructure use. Incentives and Impacts The tax and fee rate levels contemplated in this analysis would not create strong incentives for change in freight industry operations. The changes in overall cost structure would be minor—far less than the fuel cost variability that the industry has recently experienced. Freight and service truck operators already have stronger cost incentives to minimize mileage and fuel use, so any new incentives would be slight. The transportation system impacts, environmental impacts, and economic impacts would all be modest. The exception would be a diesel tax surcharge that widened the cost gap between diesel fuel and gasoline, thus encouraging the substitution of gasoline-powered trucks for diesels. Equity Equity among users, vehicle types, and industry segments is again a matter of system design more than an intrinsic feature of each option. One serious issue is the definition of “freight vehicles” and the choice of fuels to tax. There is no straightforward, unambiguous way to classify vehicle types or industry segments as “freight,” and medium and heavy trucks use gasoline as well as diesel. Proposals to tax freight trucks exclusively would raise equity issues between freight and service truck operators. Each option, if implemented, would also have to cope with exemptions for off-road and public-sector uses; electric and hybrid vehicles; and international trucking. Combining revenue sources (for example, using registration fees to cover electric vehicles that would not pay fuel taxes) may be a more effective strategy than attempting to adapt one option for all applications.