Dedicated Revenue Mechanisms for Freight Transportation Investment (2012)

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61 Concept An annual or periodic federal vehicle registration fee appears to be a flexible candidate mechanism for funding freight infrastructure. Such a system has the advantage of simplicity, low implementation and collection costs, and potential application to non-highway modes. Non-fuel federal excise taxes and fees currently apply almost exclusively to the heaviest truck classes. Due to this limited scope, non-fuel excise taxes and registration fees have received little atten- tion as replacements for the fuel tax. Excise taxes are typically assessed on sales or commercial transactions of some type. Registration fees are typically annual, periodic, or one-time assessments for owning and operating a vehicle on public rights-of-way (including waterways or airports). Although excise taxes and registration fees are not directly related to vehicle infrastructure use or impacts, a carefully constructed system could use such levies to approximate use and fund freight infrastructure. NCHRP Web-Only Document 102: Future Financing Options to Meet Highway and Transit Needs considered vehicle registration fees to be a potential “high yield,” program-based revenue source (Cambridge Systematics, Inc., et al., 2006). Vehicle ownership per se is only a rough proxy for infra- structure use, but it offers a simple, low-cost option for gen- erating revenue. An annual federal freight vehicle registration fee, either paid directly or added on to state registration fees, could be targeted or graduated for specific vehicle types or sizes, since all on-road vehicles must be registered with the states already. The federal taxes on new heavy vehicle sales and on heavy vehicle tires also generate highway funds. These taxes, however, have, with some justification, been criticized for discouraging the purchase of new vehicles or tires when such purchases could advance safety, fuel efficiency, and emissions reduction efforts. Unless graduated by age, an annual registration fee would be neutral with respect to new vehicle purchases. If graduated by size or weight, an annual registration fee could encourage users to choose the smallest (and presumably most fuel-efficient and lowest emissions) truck that will perform the task at hand. Federal and State Excise Taxes and Fees This section discusses federal excise taxes and registration fees—the HVUT; the tire tax; and federal truck, tract, and trailer tax on retail sales—as well as state registration fees. Federal Excise Taxes and Registration Fees At the federal level, heavy-duty trucks currently pay HVUT, a tire tax, and a sales tax. The three federal non-fuel taxes single out heavy trucks and are understandably unpopular with truck owners and operators. In the past, there have been taxes on automobiles, motorcycles, buses, parts and accessories, inner tubes, and tread rubber, but all have been repealed. As Figure 9 shows, since the late 1980s there have just been the three truck taxes (HVUT, sales tax, and tire tax). Figure 9 also graphically illustrates the volatility of the revenues from these taxes and fees and their vulnerability to economic cycles. The sales tax, in particular, drops drastically during recessions when truck sales drop and recovers dramatically thereafter. Currently, these three federal non-fuel excise taxes (HVUT, tire tax, and sales tax) account for 10% of the Highway Trust Fund revenue used for highway purposes—about $3.2 billion. (See Figure 10.) The three non-fuel federal taxes would have expired September 30, 2011[Sections 4051(c) (first retail sale), 4481(f) (heavy vehicle use tax) and 4071(c) (tires) of the Internal Revenue Code of 1986, as amended (IRC)], but have been extended into 2012. Within the industry, there were those who favored allowing the three taxes to expire and folding their functions into the fuel tax. Exactly how that would have been accomplished is not clear. C h a p t e r 5 Federal Registration Fee

62 0 1,000,000,000 2,000,000,000 3,000,000,000 4,000,000,000 5,000,000,000 6,000,000,000 Cu rr en t D ol la rs LUBE OIL PARTS TREAD RUBBER SALES INNER TUBES HVUT TIRES Figure 9. Federal excise and sales tax revenue. HVUT $962,528,000 3% SALES $1,890,021,000 6%TIRES $314,276,000 1% DIESEL & SPECIAL $7,000,779,000 23% GASOLINE $19,984,381,445 67% SOURCE: FHWA Figure 10. 2009 Highway Trust Fund highway revenue sources.

63 Heavy Vehicle Use Tax The HVUT is assessed annually on heavy vehicles operat- ing on public highways at registered gross weights equal to or exceeding 55,000 lb. The gross taxable weight of a vehicle is determined by adding the unloaded weight of the motor vehicle and any trailers together with the maximum load customarily carried on road by the truck-trailer combination. Trucks with a registered weight of 55,000 to 75,000 lb pay $100 plus $22 for each 1,000 lb over 55,000 lb to a maximum of $550. The HVUT is a significant source of transportation funding. As of 2009, the HVUT brought in $963 million to the High- way Trust Fund. In 2001, HVUT receipts slumped due to the sagging economy and its impact on the motor carrier industry. Between 2001 and 2006, the HVUT rebounded due to eco- nomic growth and the incentive to “pre-buy” or purchase trucks prior to 2007 to avoid the new EPA emissions rule. Thereafter, HVUT revenue has been relatively stable. Because it is applicable only to vehicles in the highest gross vehicle rating classification, the HVUT is targeted at—but not exclusive to—freight-carrying vehicles. The HVUT tax rate rarely changes, and it is not indexed. The last change was in 1984. All proceeds go to the highway portion of the Highway Trust Fund. The HVUT is not a use tax, as it does not vary with highway use, but it can be regarded as an additional annual fee to cover some of the cost impacts of heavier vehicles. A tax of this type could be a companion to fuel or VMT user fees, which are largely distance-based, or a standalone revenue source for freight infrastructure. Tire Tax The federal tire tax is applicable to new tires sold by manufacturers or importers at a rate of $0.0945 for each 10 lb of load capacity over 3,500 lb. The rate is lower for bias ply or “super single” tires, and certain federal government agencies are exempt. This formula exempts many tires and concentrates on those used by trucking. The rate of taxation rarely changes, and it is not indexed. The last change was in 1981. All proceeds go to the highway portion of the Highway Trust Fund. Tire taxes provided $314 million to the Highway Trust Fund in 2009. The tire tax has simplicity of administration, collection, and payment in its favor. The collection activities are limited to businesses that sell new commercial vehicle tires, not the 10 million trucks themselves. The tire tax is a user fee in the sense that tire consump- tion and purchase of new tires is a direct result of road use (although off-road vehicle tires can also be taxed). Federal Truck, Tractor, and Trailer Tax on Retail Sales There is a federal tax on the first retail sale of trucks, trac- tors, and trailers, including parts and accessories when these are purchased with the new vehicle. The tax applies only to the largest such vehicles, based on the manufacturer’s rated gross vehicle weight. The rate of taxation rarely changes (the last change was in 1983), and it is not indexed. All proceeds go to the highway portion of the Highway Trust Fund. Trucks over 33,000 lb GVW (Class 8) and trailers over 26,000 lb GVW pay 12% of the retail sales price. New Class 8 tractors and straight trucks typically sell for $100,000 or more, so the average federal sales tax would start at around $12,000 per unit. This tax provided about $1.9 billion to the Highway Trust Fund in 2009. Like the tire tax, this federal tax has simplicity of admin- istration, collection, and payment in its favor. The collection activities are limited to businesses that sell new trucks. Vehicles that do not haul freight are included. This tax does, however, require a lump sum payment with vehicle purchase, so it is not a “user fee.” The general economic downturn has dramatically affected heavy-duty truck sales. There was also a decline in heavy-duty truck sales in 2006 and 2009 because of the 2007 and 2010 requirements to use diesel engines with reduced emissions (but with higher purchase prices and fuel consumption). As of late 2010, new truck sales remain depressed. According to the Truck and Engine Manufacturers Association (formerly the Truck Manufacturers Association), OEMs faced the follow- ing losses in sales from 2006 to 2009 (Truck Manufacturers Association, 2009): • Sales of Class 6 trucks dropped from 70,000 sold in 2006 to 22,000 sold in 2009. • Sales of Class 7 trucks dropped from 91,000 sold in 2006 to 39,000 sold in 2009. • Sales of Class 8 trucks dropped from 284,000 sold in 2006 to 95,000 sold in 2009. The sales base for any new revenue stream will presum- ably recover over time to sustainable, fleet-replacement levels somewhere between the apparently unsustainable peak of the last expansion and the current trough. A proposal to impose a new tax on purchases will probably elicit strong opposition from an already depressed industry, and any such revenue source will likely be cyclical. State Registration Fees In 2008, state vehicle registration fees generated about $6 billion from trucks. State registration fees are based on combinations of vehicle weight, age, value, and use, with weight

64 being the dominant factor. Every state includes vehicle weight in fee calculations, with most using GVW class designations. Vehicle weight is the only registration factor in 30 states and the District of Columbia. These 30 states either assign a fee to each weight class or assess a flat fee plus an increment for additional weight. As an example, California’s registration fee weight table is shown in Table 32. A number of states also include either vehicle age or model year in fee calculations. These states include Arizona, California, Iowa, Minnesota, Mississippi, Missouri, Montana, Nevada, New York, North Dakota, and South Dakota. Such registration fees generally decline with age, reflecting declining value and productivity. Several states include vehicle purchase price or value in the registration fee calculation, including Colorado, Maine, Nevada, and West Virginia. A few states include vehicle type or use in registration fees, including Indiana, New York, and Washing- ton. Nevada also considers the number of axles. Washington has a Vehicle Safety Inspection Fee of $16. Nevada has a Basic Government Services Tax of 4% of vehicle value (see Table 33). This tax also applies to other types of goods and services. Utah and Wyoming have equalized highway use taxes (EHUTs) that take vehicle age and weight into account. Utah’s fee schedule is shown in Table 34. Indiana has a Commercial Vehicle Excise Tax (CVET). A federal registration fee could use one of the state systems discussed or be based on a separate federal schedule. Collection Mechanism Fee collection mechanisms already exist that, if expanded or modified, could be used to collect federal registration fees. The following options are discussed below: • Expanding the current HVUT collection mechanism. • Building on existing registration fee allocation systems— the International Registration Plan (IRP) and the Unified Carrier Registration Plan (UCRP). • “Piggybacking” on the state registration fee process. Gross/Combined Vehicle Weight Range Fee 10,001 - 15,000 $ 332 15,001 - 20,000 $ 447 20,001 - 26,000 $ 546 26,001 - 30,000 $ 586 30,001- 35,000 $ 801 35,001 - 40,000 $ 937 40,001 - 45,000 $ 1,028 45,001 - 50,000 $ 1,161 50,001 - 54,999 $ 1,270 55,000 - 60,000 $ 1,431 60,001 - 65,000 $ 1,562 65,001 - 70,000 $ 1,701 70,001 - 75,000 $ 2,004 75,001 - 80,000 $ 2,064 Table 32. California state registration fee weight table. $20,000 x .35 $7,000 x .85 $5,950 x .04 $238 DMV Valuation - will not change over time (NRS 371.060) DMV Valuation is depreciated 15% when vehicle is two years old (NRS 371.040) Government Services Tax is 4% of valuation (NRS 371.040) Source: International Registration Plan, Inc., n.d.(a). Table 33. Nevada Basic Government Services Tax for a $20,000 sale price. Vehicles or Combination Registered Weight 12,000 pounds or less 12,000 pounds or less 12,000 pounds or less 12,000 pounds or less 12,000 pounds or less Vehicles or Combination Registered Weight 10 to 12 Mo Reg 7 - 9 Mo Reg 4 - 6 Mo Reg 1 - 3 Mo Reg 12,001 - 18,000 pounds $ 150.00 $ 135.00 $ 90.00 $ 45.00 18,001 - 34,000 pounds $ 200.00 $ 180.00 $ 120.00 $ 60.00 34,001 - 48,000 pounds $ 300.00 $ 270.00 $ 180.00 $ 90.00 48,001 - 64,000 pounds $ 450.00 $ 405.00 $ 270.00 $ 135.00 64,001 pounds and over $ 600.00 $ 540.00 $ 360.00 $ 180.00 Age of Vehicle Equivalent Tax 12 or more years $ 10.00 9 to 11 years $ 50.00 6 to 8 years $ 80.00 3 to 5 years $ 110.00 less than 3 years $ 150.00 Source: International Registration Plan, Inc., n.d.(b). Table 34. Utah equalized highway use tax.

65 Expanding the Current HVUT Collection Mechanism The HVUT is an annual lump sum and can be a signi- ficant cash flow impediment for some motor carriers. For large carriers with 25 or more vehicles, electronic filing is accomplished using a credit card or other means of electronic payment. Because the fee is payable by the vehicle owner, owner-operators must make the payments even if they are subhaulers for larger firms. The current HVUT collection mechanism could be used as is, but expanded to cover Class 4–8 trucks. There would be a relatively small increase in labor and electronic processing capability required, but no new technology. Building on Existing Registration Fee Allocation Systems Truck owners pay registration fees that vary by state and which must be apportioned among the states in which they operate. There are two systems in place that could become building blocks for a low-cost federal registration fee collection system—the IRP and the UCRP. International Registration Plan The IRP is a registration reciprocity agreement among states of the United States, the District of Columbia, and prov- inces of Canada providing for payment of license fees on the basis of fleet distance operated in various jurisdictions. Essentially, all larger trucks and buses that operate across state lines (“apportionable” vehicles) are required to register and pay fees according to a schedule set by each jurisdiction. Trailers are not covered. Unified Carrier Registration Plan This is a program under which interstate commercial truck and bus carriers register their interstate fleets with a base state and pay a fee based on the number of vehicles in the fleet. The level of the fee is set by FMCSA, but is collected by the relevant state. The funds are used to assist the states in carry- ing out certain safety and carrier monitoring functions. The Unified Carrier Registration (UCR) Agreement is established by federal law in the UCR Act, which is part of SAFETEA-LU, enacted August 10, 2005. The UCRP is the organization of state, federal and industry representatives responsible for developing, implementing, and administering the UCR Agreement. The UCR Agreement is the interstate agreement, developed under the UCRP, governing the collection and distribution of registration information and fees generated (“UCR fees”). Section 4304 of the UCR Act imposes fees, for example, on motor carriers first applying for federal authority and on some third parties accessing data in the system. Their only purpose is to provide funds to maintain the UCRP. The IRP, UCRP, or a new, similar type of organization could conceivably replace the existing HVUT collection system at a comparable cost. “Piggybacking” on State Registration Fees 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. Annual registration fee notices would include both a state fee amount and a federal fee amount. All trucks, regardless of where they are operated, have a “base state” for licensing and registration under the UCRP. The federal fee would be added only in the base state. Truck owners would make one annual payment covering both state and federal fees. The federal portion would be aggregated and forwarded on a monthly or biweekly basis, with the states benefiting from the “float” between collection and forwarding. The “float” would help to offset the additional state record-keeping and accounting cost, most of which should be automated. Besides the lower collection cost, “piggybacking” would reduce industry com- pliance costs. Revenues and Costs The following aspects of revenues and costs are discussed below—fee structure, federal collection and enforcement costs, implementation and compliance costs, and net revenue and revenue efficiency. Fee Structure The registration fee rates would depend on the revenue goal and the classes of vehicles covered. Table 35 shows the relation- ship for an annual gross revenue target of $5 billion. Application of the fee to Class 7 and 8 freight trucks only (by body type) would require average annual fees of $1,206 per vehicle, more than twice as much as the current HVUT maximum. The average registration fee required would drop from $1,206 to $555 if the fee were applied to all Class 4–8 trucks rather than applied to just Class 7 and 8 freight trucks. This is effectively equivalent to expanding coverage of the HVUT (which has a maximum of $550 per vehicle) to all Class 4–8

66 trucks (the HVUT currently covers Class 8 trucks only). The amount that would accrue from applying a registration fee to all Class 4–8 trucks would be in addition to excise taxes (HVUT, sales tax, and tire tax) paid into the Highway Trust Fund. If those existing taxes expire or are folded into a revised fuel tax, the amounts in Table 35 would be the only annual federal excise taxes or registration fees on trucks. The figures in Table 35 are averages; a sliding scale would likely be applied to reflect size and weight. If the tire and sales taxes were allowed to expire, federal Highway Trust Fund revenue would be reduced by about $2.2 billion annually (see Figure 10). In this case, there would be a need for a registration fee that was 44% higher (e.g., $799 versus $555 for all Class 4–8 vehicles in Table 35) to make up the lost revenue. Federal Collection and Enforcement Costs The collection cost of a federal vehicle registration fee for Class 7 and 8 freight vehicles is estimated at 5% of the current HVUT revenue (see Table 36). The average cost is shown as declining for increasing vehicle fleet coverage, with the total cost capped at $50 million annually. This assumption reflects expected economies of scale and potential piggybacking on state registration fee systems. There is no separate credit card fee allowance for excise taxes because credit cards are already used for the HVUT and should be reflected in the 5% rule of thumb. Implementation and Compliance Costs There are no significant federal or industry implementation costs for registration fees. The compliance cost for registration fee systems (see Table 37) was roughly estimated at $25 per vehicle per year, the same as the commercial fee for IFTA filing. This is the cost of paperwork or services to pay the fee, not the fee itself. Net Revenue and Revenue Efficiency Table 38 provides estimates of total net annual federal revenue ($5 billion less collection and annualized imple- mentation cots) and total annual industry cost ($5 billion plus annualized implementation and compliance costs) and also shows these costs broken down to net annual revenue per vehicle and annual cost per vehicle. Table 38 also provides the ratio of net federal revenue to annual industry cost. The very high efficiency ratios for a federal registration fee are due to the low collection cost, low compliance cost, and Excise Tax Options 2008 Vehicles $/Vehicle Required for $5 Billion Gross Revenue Annual Registration Fee Class 7&8 freight 4,147,443 1,206$ Class 7&8 all types 4,327,163 1,155$ Class 4-8 freight 7,075,838 707$ Class 4-8 all types 9,006,738 555$ Source: Tioga Group Analysis of 2002 VIUS (U.S. Census Bureau, 2004) and Table VM-1 of Highway Statistics 2009 (FHWA, 2009). Table 35. Registration fee rates for $5 billion gross revenue. Excise Tax Options Annual Federal Collection and Enforcement Cost Average Collection Cost per Vehicle Annual Registration Fee Class 7&8 freight 46,150,189$ 11.13$ Class 7&8 all types 46,517,004$ 10.75$ Class 4-8 freight 50,000,000$ 7.07$ Class 4-8 all types 50,000,000$ 5.55$ Source: Tioga Group Analysis of 2002 VIUS (U.S. Census Bureau, 2004) and Table VM-1 of Highway Statistics 2009 (FHWA, 2009). Table 36. Estimated annual collection and enforcement costs.

67 absence of implementation costs. A registration fee would use existing collection systems without the need for deploying new technology. Evasion and Enforcement To evade a federal registration fee, vehicle owners would have to either misclassify their vehicle or not register it. Piggy- backing on the state fee system would reduce the potential for evasion and the federal enforcement cost. Since federal fees would be paid with state fees, only the existing state enforcement efforts would be required. Behavior Incentives The federal excise taxes have, with some justification, been criticized for discouraging the purchase of new vehi- cles or tires when such purchases could advance safety, fuel-efficiency, and emissions-reduction efforts. Regis- tration fees avoid the disincentives that truck sales or tire taxes create. Registration fees are also less cyclical than sales taxes. While truck sales can vary widely with econom- ic conditions, the working fleet tends to grow slowly from year to year. Unless graduated by age, an annual registra- tion fee would be neutral with respect to new vehicle pur- chases. If graduated by size or weight, an annual registra- tion fee could encourage users to choose the smallest (and presumably most fuel-efficient and lowest emissions) truck that could perform the task at hand. A higher or broader federal registration fee would discourage operators from keeping older medium- and heavy-duty trucks for occasional or seasonal use. Such uses are often dominated by old, inefficient, high-polluting trucks with questionable safety status, so such an incentive might be seen as a public benefit. Implementation An expanded federal registration fee would require legislation to extend the HVUT, expand it beyond Class 8 trucks (preferably to all Class 4–8 trucks), and set an appro- priate rate schedule and administrative expansion of the HVUT collection system to accommodate more invoices and payments. Table 39 shows an illustrative phase-in schedule for a federal registration fee. It assumes that the fee can be made effective within the first year after legislation passes because no new technology need be deployed and the existing HVUT collection mechanism can be used. If the HVUT were to expire, there would be a need to rebuild a collection system. The phase-in schedule anticipates that only about a third of the fees incurred by truck operators can be passed on to customers in the first year due to rigidities of existing contacts and rigorous rate competition. By the third year, all the fees would have been passed onto customers in the form of rate increases. Advantages Annual federal registration fees have some compelling advantages: • Annual fees of various types are already being collected by every state and by the federal government. • While the current cost of collection is reportedly relatively high in percentage terms (5%), the collection cost is unlikely to rise significantly if fees are increased, yielding high overall revenue efficiency. Excise Tax Options Annual Private-Sector Compliance Cost Annual Registration Fee Class 7&8 freight 103,686,085$ Class 7&8 all types 108,179,079$ Class 4-8 freight 176,895,949$ Class 4-8 all types 225,168,441$ Source: Tioga Group Analysis of 2002 VIUS (U.S. Census Bureau, 2004) and Table VM-1 of Highway Statistics 2009 (FHWA, 2009). Table 37. Registration fee compliance cost estimates. Excise Tax Options Net Annual Federal Revenue Net Annual Avg. Rev. per Vehicle Annual Industry Cost Annual Registration Fee Class 7&8 freight 4,953,849,811$ 1,194$ 5,103,686,085$ Class 7&8 all types 4,953,482,996$ 1,145$ 5,108,179,079$ Class 4-8 freight 4,950,000,000$ 700$ 5,176,895,949$ Class 4-8 all types 4,950,000,000$ 550$ 5,225,168,441$ Source: Tioga Group Analysis of 2002 VIUS (U.S. Census Bureau, 2004) and Table VM-1 of Highway Statistics 2009 (FHWA, 2009). Annual Avg. Cost per Vehicle Ratio 1,231$ 0.97 1,180$ 0.97 732$ 0.96 580$ 0.95 Table 38. Registration fee net revenue and efficiency.

Revenue Option Years to First Revenue Federal Implementation Cost Phase-In Years Tax Burden Passed to Customers First Year Annual Registration Fee Class 7&8 freight 1 1 33% Class 7&8 all types 1 1 33% Class 4-8 freight 1 1 33% Class 4-8 all types 1 1 33% Source: Tioga Group Analysis. Tax Burden Passed to Customers Second Year Tax Burden Passed to Customers Third Year Implementation and Compliance Cost Passed to Customers First Year Second Year Third Year Implementation and Compliance Cost Passed to Customers Implementation and Compliance Cost Passed to Customers 66% 100% 33% 66% 100% 66% 100% 33% 66% 100% 66% 100% 33% 66% 100% 66% 100% 33% 66% 100% Table 39. Registration fee phase-in schedule.

69 • The public appears less sensitive to increases in registration fees than to other taxes or fees. Voters in California have recently approved increases in vehicle registration fees for specific purposes. • State and federal fees are already scaled by vehicle weight, providing a valuable precedent. • Vehicle excise taxes, sales taxes, and registration fees are independent of fuel consumed or mileage operated, and provide a means of addressing electric, hybrid, and alternate- fuel vehicles. • A registration fee offers the opportunity to selectively reduce or raise the fee for specific vehicle types. It would be possible to build in incentives to purchase new vehicles, smaller vehicles, or alternative fuel vehicles. In this respect, a reg- istration fee system could achieve some of the same goals as an investment tax credit. • A broader federal registration fee for trucks could be imple- mented very quickly, especially if undertaken as an extension and expansion of the existing HVUT. • Piggybacking on the state registration fee process may further reduce collection and enforcement costs. Disadvantages The disadvantages of registration fees include the following: • Lack of a direct linkage between the registration fee and highway use (registration fees are not true “user fees”). • Potential disincentives to renew vehicle registrations or incentives to operate unregistered vehicles. • Potential disincentives to purchase new vehicles if registra- tion fees rise as a result. • No potential for automated collection.