Future Financing Options to Meet Highway and Transit Needs (2006)

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NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs C-1 Appendix C Fuel Tax Vulnerability to Price Changes and Alternative Fuels „ Fuel Tax Vulnerability to Price Changes Figure C.1 shows how the real price of gasoline has fluctuated over the past 28 years in relationship to indicators of the economy. Even though the price of gasoline has increased significantly over the last couple of years, it has not reached the price levels from the early 1980s in real terms. Further, the price of gasoline is much lower in relation to personal income and GDP than in the early 1980s likely resulting in a lower demand elasticity to price. Therefore, in the short term, the impact of fuel price increases is likely to result in minor adjustments to travel behavior, such as reduced personal travel and potentially, some modal shifts where transit services are accessible. The Department of Energy (DOE) for example, assumes that the short term demand elasticity of gasoline due to changes in oil prices is estimated at -0.056, which means that for every increase of 10 percent in oil price, demand for gasoline declines by approximately 0.6 percent; a relatively low elastic- ity. However, in the long term, significant increases in fuel prices would likely influence the vehicle fleet composition, as drivers would be inclined to purchase more fuel-efficient vehicles. Most analysts, therefore, use higher demand elasticities for the long term. „ Fuel Tax Vulnerability to Efficiency Improvements and Alternative Fuels The report of the Transportation Research Board Committee for the Study of the Long- Term Viability of Fuel Taxes for Transportation Finance summarizes the future challenge to fuel tax-based revenue as follows: “Many public officials and transportation analysts are concerned with what they perceive to be the waning buying power of the motor fuels tax. Because the tax is levied on a per-gallon basis, revenues do not rise and fall with fluc- tuations in either inflation or vehicle fuel economy. Given the partisan political climate in which it has grown increasingly contentious to propose increased taxes, many are pessimistic about the prospects for significant increases in either state or Federal motor fuel tax levies in the years to come. The result has been a widening gap in many parts of the country between highway spending needs on the one hand and available revenues on the other. In the absence of significant fuel tax increases in the coming years, this gap is likely to widen

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs C-2 further, a trend that may accelerate in coming years with the gradual introduc- tion of alternative fuel vehicles that pay less, or even no, motor fuels taxes.”1 Figure C.1 Annual Indices of Real Disposable Income, Vehicle-Miles Traveled, Gross Domestic Product, and Real Average Retail Gasoline Price 1978-2005, 1985 = 100 0 20 40 60 80 100 120 140 160 180 200 Real Disposable Personal Income Real Gasoline Price Vehicle-Miles Traveled Real GDP 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Sources: Energy Information Administration, Household Vehicles Energy Use: Latest Data and Trends, November 2005. Note: Modified by Cambridge Systematics to include Real GDP (Bureau of Economic Analysis) and to include real fuel prices for 2005 and 2006. Crude Oil – $70 to $80 per Barrel (2005 Dollars) Crude Oil – $70 to $80 per Barrel (2005 Dollars) In regard to the possibility of more efficient vehicles for the future, Figure C.2 shows how fuel economy for new light-duty vehicles was dramatically improved from the late 1970s through the late 1980s but has been stagnant or declined slightly since that time. In fact, we are at a nearly 20-year low in new vehicle fuel efficiency. Improvements in technology 1 Review and Synthesis of Road-Use Metering and Charging System. Report commissioned by the Committee for the Study of the Long-Term Viability of Fuel Taxes for Transportation Finance, Transportation Research Board, Washington, D.C. Final draft, March 21, 2005.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs C-3 have been used for horsepower improvements in the recent period. We have the techno- logical capability to significantly improve fleet fuel economy but even if we start aggres- sively now, including the introduction of hybrids, it will take a relatively long period for more efficient vehicles to widely penetrate the overall vehicle fleet. For purposes of this report, we have used Department of Energy’s miles per gallon forecasts that show a grad- ual increase over the period of this study as more efficient vehicles penetrate the fleet. Figure C.2 Sales-Weighted Horsepower and On-Road Fuel Economy for New Light-Duty Vehicles 1975-2006 Model Years Source: Environmental Protection Agency, Light Duty Automotive Technology and Fuel Economy Trends: 1975-2006, July 2006. Horsepower 1975 1976 1977 1978 1979 1980 1982 1983 1986 1987 1988 1989 1991 1993 1994 1995 1996 1998 2000 2001 2002 2003 2005 2006 1981 1984 1985 1990 199 2 1997 1999 2004 90 110 130 150 170 190 210 230 12 14 16 18 20 22 24 Miles per Gallon 60 percent more energy performance 60 percent more output 0 0

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs C-4 NCHRP Study 8-36(23) found that erosion may accelerate after 2015.2 In a worst case sce- nario, growth in vehicle miles of travel (VMT) is offset by a 35 percent decline in motor fuel tax revenues by 2030 because of increasing fuel efficiency and the growing number of vehicles using untaxed fuels (e.g., electricity, hydrogen, natural gas, etc.). This impact is clearly beyond the 2017 of this study but is a long run concern as highlighted both in the recent TRB study noted above and the National Chamber Foundation study cited in the main report. 2 Review of the Potential Feasibility of Using Alternative Revenue Sources to Fund Future State Transportation Needs. National Cooperative Highway Research Program Report 8-36(23), Transportation Research Board, Washington, D.C., 2002.