Mileage Based User Fees - what's going on in the US?

Mileage Based User Fees (MBUF), Vehicle Mileage Taxation (VMT), distance based charging, distance based road user/usage charges, these are all different terms for essentially the same thing, which to me is simply road pricing with the base chargeable event being distance.

I attended and spoke at the IBTTA's Transportation Finance and Mileage-Based User Fee Symposium in Philadelphia a week ago (which explains the gap in blogging). Whilst the presentations from that Symposium will shortly be available here, I thought I'd give a quick summary on some of the interesting points I picked up from the occasion.

It's worth noting that the Mileage Based User Fees Alliance (MBUFA) has a new website with some useful content including "five myths".  It should be a useful platform for updates on the development of distance based road pricing in the United States, as various states pursue different approaches to this solution for raising revenue to pay for roads.  I met Barb Rohde, Executive Director, who is enthusiastic about MBUFA, and I sincerely hope it shows the baton of developing such systems is moving more clearly from Europe to the United States, which faces some different challenges (as in Europe many such systems have been in addition to existing charges and have only been applied to heavy vehicles).

I obviously did not go to every session, so my summary really only notes a few points I wasn't previously aware of.  As usual, if anyone has a different recollection or believes the statements below are not true, I'd appreciate any comments:

30 June 2013 is key for Oregon, as it will be the point by which the state legislature ought to have passed the bill to authorise the introduction of distance based charges for ultra-fuel efficient vehicles (all vehicles with fuel efficiency of greater than 55MPG).  If it does, then Oregon is on the way to being the first state in the US to introduce distance based taxes for cars.  If not, then it is expected that further work will be done on the proposal (as it is not significantly controversial at present).

More people are killed in road accidents in California due to poor road maintenance, than from alcohol or drug use while driving combined (not directly a fault of road pricing, but ought to cause some serious rethoughts of the state's governance of highways).

Pennsylvania is increasing fuel tax by 5c/gallon (1.3c/litre) per year for the next five years, all of which is to be dedicated to transport funding.  78% to roads, the rest to public transport.  This in itself wont be enough, and will be supplemented by tolls where feasible.

The Pennsylvania Secretary of Transportation, Barry Schoch, said that he would surrender 12c/gallon in gas tax if he could be allowed to toll the interstate highways in the state.

Former Governor of Puerto Rico, Luis Fortuno, said that the territory did not look to the United States to provide a model of PPP type funding for highways, but rather Canada, the UK and Australia provided the most relevant and useful experiences.  I've written previously about Puerto Rico's radical approach to privatisation of its tolled highway network.

Sweden is currently looking at using existing interoperable DSRC toll tags in foreign vehicles travelling in the country to apply the congestion taxes of both Stockholm and Gothenburg to foreign vehicles.  In both cities, foreign registered vehicles are exempt.  Many Norwegian registered cars have toll tags (given Norway's extensive toll road network).

Conclusion

Overall, a lot is riding on Oregon, with Washington State following close behind and increasing interest from the likes of California.  Whilst work has been done in Minnesota and Colorado, it doesn't appear that either state is very close to making progress in distance based charging.   The biggest conclusion I derived from the event was that quite a lot of states are interested and following what is happening, but few are willing to do more than investigate options at this stage.  Certainly one trick few have noticed is that distance based charging could be lucrative in charging transit traffic.

A few states have moved on increasing "gas tax" or using other taxes to help plug the gap, but the bigger trend does appear to be more use of what I would call "conventional" tolling - using tolls to help fund new infrastructure by tolling the new infrastructure itself.  There is also interest in using existing toll facilities to cross subsidies adjacent roads.

If Oregon presses forward, I expect momentum to come from Washington state and possibly California (although it is far more difficult there).  I also expect other states to start to show serious interest in distance based charging as an option.  If it stalls, the problem of revenue will remain, but I still expect many states to expand the use of tolling regardless.  That remains an option for many (and most states still have more scope to use tolls) and states such as Texas and Florida remain at the forefront of expanding tolls.

What is sadly lacking in all of the debates around revenue for roads in the US is discussion about governance, delivering better value for money in road maintenance and construction programmes and moving to distance based pricing because it is fairer and will result in more efficient economic outcomes (even ignoring charging by time and place).

Moving to charging motorists directly according to usage and away from proxies like fuel tax means some serious additional questions need to be asked:

1.  What should be the basis for the level and schedule of charges?  The default has been to match existing gas tax levels, but it would make far more sense to understand what levels of revenue are needed to maintain and improve highway networks, and how to allocate the cost of doing this amongst groups of road users.  That debate simply doesn't happen, and currently means significant transfers between different taxpayers/road users on grounds that are far from efficient.

2.  What should decide on what such revenue should be spent on?  The default has been to assume that the predominantly engineering based assessments of what is needed is an efficient and appropriate measure of future spending.  This seems difficult to sustain given that these assessments are not based on market or commercial measures of optimising expenditure, returns or costs, but rather bureaucratic/political measures which in most other sectors it would be recognised as being inferior.   Giving motorists confidence that they are getting value for money is critical to building support for user charges, and to do that there needs to be greater involvement of the private sector, more commercial imperatives in decision making and a withdrawal of politics from decisions on specific projects.  Longer programmes of expenditure, dedicated budgets over multiple years and performance based contracting and asset management systems (all of which are the norm in some other developed countries) could save up to 20% of the costs of maintenance.  Motorists and taxpayers are right to ask if money is well spent, I'd be astonished if a serious investigation into applying global best practice didn't show scope for significant savings in spending on US highways.

3.  What sort of entities should be operationally responsible for US highways in the future?  This follows the previous question, but comes about when there is a new relationship between road users and road providers.  When people are charged directly for road use, they will expect customer service, they will make queries and complaints.  They will want a better service than they currently get for licensing vehicles and drivers, and it is an opportunity to use the feedback from that relationship to improve how roads are managed.  I doubt very much whether traditional DoT structures are the best way to achieve that, and that the possible options include looking at establishing separate stand alone agencies, with independent boards supervised by DoTs, as a first step to developing fully professional providers of highway services.

Meanwhile, there is plenty of cause for the US to be proud that it is having this debate.  There remains a climate of denial over declining fuel tax revenues in Europe.  In Australia the debate has emerged, but hasn't quite progressed as far (although Australia's governance of highways and system of setting charges is more sophisticated than what is seen in most US states).

May the debate continue, may Oregon progress and may more US states start to ask the hard questions about revenue options, but also the more difficult questions I have listed above.  You cannot separate revenue raising, from charge setting, expenditure management and highway governance and expect to make transformational changes.

IBTTA launches campaign to promote tolling in the USA

The International Bridge Tunnel and Turnpike Association (IBTTA) is probably the nearest there is to a global industry association for providers of tolled roads, regulators and policy makers, and suppliers of the technology, systems, services and equipment for tolling and road user charging.  However, it does have primarily an interest in the United States market, and as such its focus and its value is primarily in networking within that country.  The IBTTA was founded in 1932 and its name clearly was too, as it implies a fascination with bridges and tunnels, with toll roads almost being tacked onto the end, but have no doubt about it - this is essentially a body of toll road operators and public and private bodies responsible for charging road users directly.

Given it is a tolling industry association focused on the US, it is not surprising and indeed welcome that it has launched a campaign in the United States to promote the use of tolls as a means of paying for road use.

The press release says:

Generating more than $10 billion in annual revenues from 5,431 miles of tolled highways, bridges and tunnels, tolling is already a big part of the solution to the challenge of creating new, dedicated revenue streams to support our country’s transportation infrastructure needs.

A blog post by IBTTA President Bob Horr says:

Everyone in this industry knows that tolling delivers a safer, more reliable drive for many millions of customers each year. With the launch of Moving America Forward, IBTTA has assembled the financial and staff resources to translate that knowledge into action. With the transportation funding crisis receiving significant attention, and severe events like Hurricane Sandy putting a different kind of spotlight on highway infrastructure, this is our moment to put forward the arguments and win the decisions that will benefit our members, our customers, and the public at large.

In short, the tolling industry in the US is going to be loud and proclaim that more tolls are a key part of the answer to the highway funding crisis in the country.

IBTTA is also quoting statements from the free market oriented Reason Foundation.  Dr Daryl Fleming  and Robert Poole, Director of Transportation Policy produced a report in November 2012 where they claimed tolling was no more expensive that fuel taxes, because the latest technology can reduce collection costs to as low as US$0.16-$0.25 per transaction (and they believe fuel tax administrative costs are underestimated, and pale in comparison to the opportunity cost of not being able to charge by time/location to influence congestion). 

The report from Reason is here.  It suggests that the Federal Government should remove prohibitions on tolling the Interstate network, and that many roads (freeways/limited access highways) could be switched to tolling now, as a precursor to vehicle mileage tax in the longer term.

It is good that the tolling industry sees that it can explicitly play a role in dispelling myths about itself, and promote greater use of tolling across the US.  I suspect the Federal Government's attitude to it will remain lukewarm, as it was in the first term of the Obama Administration.  However, some of the states are far warmer towards tolling and if this causes them to think more broadly than some crossings and manual toll booths, all the better.

Certainly it is a welcome antidote to the bizarre policy swing seen in Virginia.  It will also be interesting to see if the information and work done by IBTTA and its members will percolate beyond the United States, to influence debates elsewhere.

In any case, the idea that the user pays principle can be sold as being fair and that modern tolling with electronic free flow technology can be sold as the norm (in the UK at least, far too many people think tolls must mean manual barrier controlled tolling), ought to help change the debate about funding highways.

However, part of this must be some understanding that toll prices should be related to the costs of the infrastructure being operated on, with factors to manage demand at times when it gets close to exceeding capacity. A reasonable rate of return should also be part of any toll (that being a return on the cost of capital), and what is done with that should be up to the owner of the road.  The policy that will not promote acceptance of tolling is using tolls to extract monopoly rents that are used to pay for other government activities largely unrelated to the road.  The controversy over using the Dulles Toll Road to pay for a parallel rapid transit railway is in this category.

The simple points that politicians and policy makers should take from the campaign ought to be clear:

- There is no longer any need to think of tolling as involving manual tolls with barriers, in any modern economy with good enforcement systems, laws and reliable motor vehicle registries;

-  Electronic free flow point tolling, on crossings and on limited access highways can be cost effective and efficient in collecting revenue, with the key limitation being issues of diversion onto untolled roads;

-  Vehicle mileage tax (VMT) or distance based charging is likely to be the long term best answer, but in the meantime much can be achieved with electronic point tolling on limited access highways.

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.