Wednesday, 30 May 2012

Update, changes soon

Readers

I have been offline for a few weeks for unfortunate personal family reasons.  Apologies for this, I intend to return to "regular service" next week, following the Queen's Diamond Jubilee.

I look forward to having more regular articles, a series of minor catchups on the sector and to dedicate a little more time to updating on tolling and road pricing across the world.

Regards

Scott Wilson

Thursday, 3 May 2012

Mileage based usage fees - distance based charging - vehicle mileage tax - a future?

I just returned from the International Bridge, Tunnel and Turnpike Association (IBTTA) Symposium on Mileage Based Usage Fees (MBUF) in Jersey City, New Jersey, USA, where the main theme was around whether such fees could replace existing forms of charging road users as a source of funding for highways.

Terminology

Before I get onto some key conclusions from that Symposium, it is worth clearing up terminology.  MBUF is the latest acronym applying to something that is also called VMT (Vehicle Mileage Tax).   What is common with all references is that it is a form of road pricing based on distance travelled.  At its simplest, it means a vehicle pays on a per kilometre (or mile) as distinguished from traditional tolling which I describe as "point based" charging (whereby the chargeable event is crossing a tolling point, regardless of how far one travels), or even the amount of time spent on a network ("vignette" systems in Europe are the closest parallel to that, but the London congestion charge is effectively the purchase of 11 hours access in one calendar day to the area subject to the charge).

In the UK, the acronym "TDP" has been used to describe "time distance place" charging, primarily because the economic advantages of distance based charging primarily arise from the ability to charge road users different prices at different times on different roads.  This means truly economically efficient road pricing that could target congestion, and see revenue and pricing related to infrastructure costs. The UK's road pricing feasibility study in 2004 estimated road pricing could save the UK economy £12 billion (US$19 billion) a year in congestion costs - which is 25% more than total spending on highway infrastructure by central and local government.   In effect, delays would be halved as severe congestion was priced off the network at peak times, either suppressing trips or shifting trips into other modes or less congested times of the day.

It's about revenue

However in the USA, the driver for distance charging is not the benefits that could come from the "TDP" model, as attractive as it is for transport economists.  It is more fundamental, it is about revenue.

In the USA, a significant source of revenue for highway funding is hypothecated fuel taxes (or "gas tax" as it is called there).  This has been under pressure for two reasons, both of which one presenter at the forum (Travis Dunn) estimated have been equally responsible for creating a "challenging" funding environment that means revenue is now (at the federal level) 30% lower than budgeted expenditure.  Fuel taxation in the US is at the federal and state levels, and while the situation in each state varies, by and large a majority of states - and the federal government - no longer collect enough revenue from fuel taxation to fund the maintenance of the highway network.

The two issues are:
-  Inflation eroding the purchasing power of fuel taxation faster than politicians are able to increase the tax;
-  Fuel efficiency of vehicles eroding the per mile revenue per vehicle.

Why not raise fuel taxes?

In the US, the political environment is absolutely toxic around increasing fuel taxation.  For the Federal Government and most states it is pretty much impossible to increase fuel taxes according to inflation, let alone to catch up with the rising fuel efficiency of vehicles.  Even given that, the fuel efficiency argument suggests serious equity issues arising if fuel taxation is increased, and the people able to avoid this are those that either live parallel to viable public transport alternatives (which will always be very few) or those who can afford new fuel efficient vehicles (again, most car owners buy second-hand vehicles).

An additional argument is the predicted rise of electric vehicles and plug-in hybrids, neither of which use gasoline as a fuel.  If either take-off as an option, then fuel taxation is simply useless as a revenue raising source, and it raises equity implications as well, given that most who purchase such vehicles will not be those on low incomes.

The obvious answer for Europeans is to raise fuel taxes in the meantime, given that is exactly what European governments do.  The UK government infamously had a fuel excise "escalator" that increased fuel tax every year by inflation plus 3% (or 5%) since 1993.  That was not to raise money for transport, but as a general revenue source as the revenue today is around four times what is spent on roads by government (and none of it is hypothecated).  Of course this has now become politically toxic as well, as the UK government cut excise duty by 1c/litre last year, to provide some relief on fuel prices (given increases in the wholesale price of petroleum), although it is due to rise by that amount and more (£0.0302 in August 2012 or US$0.184 per gallon), simply as a measure to reduce the overall budget deficit.

Although the politics in Europe make such rises difficult, they are almost impossible in the US.  The rise of the anti-tax Tea Party driving part of the Republican Party agenda means that proposals for such rises are vehemently resisted, and such opposition is popular among voters for fairly obvious reasons given the prevailing economic climate.

Even if it was not so difficult, the fuel efficiency/alternative fuels issue means that such increases may not be sustainable in the long term.  So rather curiously, debate and discussion among transport policy and operational professionals has moved to a truly long term sustainable solution - distance based charging - as the US political environment is making it impossible to agree on the obvious short term solution of increasing existing charges (or drastically cutting back existing expenditure programmes).

Increase other taxes or reduce spending?

The other options are barely considered at all.  One would be increased annual ownership taxes (registration fees), but these face exactly the same political pressure and also present their own issues of equity and enforcement.   Increasing the cost of owning a vehicle reduces mobility overall.  Even the small minority of Americans who have alternative commuting options are almost certainly likely to own a car, so to penalise those who may use a subway, bike or walk as much as those who may drive into downtown Manhatten or San Francisco, appears perverse.  

The other obvious alternative of insufficient revenue is to check the efficiency of existing expenditure.  To discuss this is outside the terms of reference I set up for this blog, but my observations over the years do suggest ample scope for US federal, state and local agencies to make substantial efficiency gains in:

-  Highway maintenance using asset management systems and long term performance specified contracting to drive efficiencies in total lifecycle management of networks;
-  Capital programme spending based on prioritisation using benefit/cost criteria rather than politically driven "pork barrel" or subjective "fair share" criteria based on perceptions of fairness;
-  Public transit programmes which are heavily capital intensive (more rail than bus), built and managed by public sector operators rather than private contractors, with poor farebox revenue recovery also reflecting cutting corners on service quality/frequency as marginal cost pricing (including peak charges) are virtually unknown.

I'm sure that a fair proportion of the existing gap could be bridged by improving the quality of expenditure, the management of assets and operations, and use of private contractors.  However, that conversation and debate is not being had.  In the longer term this still will not be enough, as there are significant long term deficits in maintenance and renewals on many roads.

So what's happening about MBUF?

The conclusion of many in the US surface transport sector is that there needs to be a shift from fuel taxation to road usage based taxation.  Some suggestions are around greatly expanded use of tolls, where possible, but this Symposium was about something bigger than that - which is distance charging.
Oddly enough, there is little discussion about the fact that four US states already have a weight/distance tax for trucks which is similar to the systems in place in New Zealand and Switzerland.   Oregon, New York, Kentucky and New Mexico all charge trucks for use of their highways on a weight/distance basis in order to better recover the costs of highway maintenance.

However, it is Oregon leading the way on studies and a forthcoming pilot for charging cars on a mileage basis.  I'll write later about Oregon, but in essence what is progressing now is a forthcoming pilot for electric cars to be charged based on mileage.  Why electric cars?  Because they are a small proportion of the fleet, it makes programme development economical and possible to reduce risks with such a small startup.  They also do not pay fuel taxes now, so the argument that it is equitable to charge them on the basis of distance, is widely accepted in the state.   If it is agreed that electric cars move onto such a system, then there is potential to extend it to plug-in hybrids, other hybrids and other unconventionally fueled vehicles, and eventually the most fuel efficient conventionally fueled cars.

In short, Oregon is developing a platform that could enable a long term shift away from the "gas tax" to MBUF.   Other states are also undertaking studies.  Washington, Nevada, Colorado and Minnesota are all notable in this regard.   However, Oregon is widely acknowledged as the leader.  The Federal Government appears to have washed its hands of direct interest in any of this, for political reasons.   What appears to be happening is that funding for the Federal Programme is being approved, on a very short term basis, using general spending to cover the deficit in revenue from the Highways Trust Fund.  The states are pursuing their own initiatives because they, quite reasonably, think that as fuel tax increases, ownership tax increases, transfers from other taxes and cutting expenditure are not sustainable, MBUF are.  So the debate continues.

Outside the USA?

Of course distance based charging is not new.  Even excluding the handful of US states with rather simple paper based truck weight/distance taxes,  New Zealand has been a pioneer with distance based Road User Charges (RUC) since 1978 for all vehicles over 3.5 tonnes on all public roads, and all diesel vehicles (including cars, vans and other light vehicles).  Switzerland introduced distance based charging, called the LSVA, in 2001 on all vehicles over 3.5 tonnes on all public roads (after a referendum).  Germany more famously introduced distance based charging, called LKW-Maut, in 2005 on all trucks over 12 tonnes on all motorways (and some A roads).   Austria introduced distance based charging, called Go-Maut, for all vehicles over 3.5 tonnes on motorways in 2004.   The Czech Republic, Slovakia and Poland also have similar systems using different technology.  French and Belgian administrations are progressing such systems for introduction in the next couple of years, with the Danish government announcing it intends to introduce such a heavy vehicle charging system as well.

Watch this space

From economics, policy and technological points of view, distance based charging of vehicles is by far the most interesting concept of any form of road pricing.   It is directly tied to use, and has the potential to vary by factors that directly influence infrastructure costs and the efficient use of the infrastructure.  Debate on shifting from existing fuel and ownership taxes to distance based charging has only emerged in the United States in the past five years, and is also emerging in Australia.  The systems in Europe have been driven by the desire to gain revenue from foreign truck operators using national highways whether or not they ever pay fuel tax.   In the US and Australia, that dimension has largely been ignored (although it may prove lucrative for some states in both countries), but is more about replacing other taxes.  The questions arising from this concept form a very long list, and will challenge not only existing tax mechanisms, but also the management and governance of highways more generally, the allocation of expenditure on them and will mean, in effect, that all roads can be "toll roads".

The drivers of this debate are political and technological.  There are also substantial political barriers to progress on MBUF in the USA that cannot be underestimated, as motorists view paying as being a negative regardless of the means used.  However, the fact that most policy makers have started acknowledging that a shift to MBUF/distance based charging is desirable or even inevitable, is an enormous first step along a long path of transition.  For now the biggest issue is what such a transition will mean, and how to do it in a way that achieves public and political acceptability.  It isn't the technology that is the problem - it is how to address the enormous bubble of cynicism, distrust and ignorance around charging for using roads and spending money on roads that exists today.

I will be writing up a few points on the Symposium in coming weeks, focusing on some of the critical points as I see them in promoting and developing MBUF systems, acknowledging some key presenters.  Only a decade ago, it was Europe that was at the forefront of moving on road pricing with studies and interest in pricing to relieve congestion and better price road use to reduce externalities and finance infrastructure.  Today, that centre of gravity is moving to the United States.  Hopefully this will mean lessons learnt across continents in this sector can be shared, so that workable, affordable, acceptable and efficient options can be embraced in the years ahead.