# Presentation: 458578

## Winners and Losers: Distributional Impacts of Highway User Fees

- B. Starr McMullen
- Lei Zhang
- Kyle Nakahara
**Oregon State University**

## Case Study: OregonProposed change in highway user charges: From a Gasoline Tax to Vehicle mile fee

**Purpose of Tax**: To Collect Road User Fees (We will not consider congestion fees here)
**Intent**:  Revenue Neutral Fee
**Intent**:  Revenue Neutral Fee
- VMT tax set at $.012/mile to replace $.24/gallon   gasoline tax ($.012 = $.24/20 mpg)

## Background

- Oregon legislature has realized the futility of trying to fund highways with the current 24 cent/gallon tax
- No political support for raising the tax
- Given trend towards more fuel efficient vehicles, fuel tax now serves as a road user fee as light vehicle road damage is more related to miles rather than fuel consumed
- Suggestion by legislatively appointed Road User Fee Task Force (RUFTF):
- 	Replace gasoline tax with a Vehicle Mile Tax (VMT)

## Who Gains and Loses From This  Change ?

- Distribution of Costs:
-        Between Income Groups
- 	  Between regions (urban/rural)
- Identification important for decisions regarding
- revenue distribution

## Regressive, Progressive, and Proportional or Neutral Tax/Fee Structures

- A **regressive** fee takes a greater percentage of income from lower income groups and higher income groups pay a smaller percentage of income
- A **progressive** fee means that higher income
-      groups pay a progressively higher percent
-      of their income  in fees
- In a proportional or neutral fee structure all income groups pay the same percent of their income in fees

## Average Oregon Household Expenditures With Oregon Gasoline Tax  of $.24 (2001, with average Oregon gasoline price of $1.46/gallon)

| Income group | Number of Households |  | Average HH expenditure with gas tax  $.24/gallon | Average HH
expenditure as % of income | Average tax revenue with gas tax of $.24/gallon | Tax as % of income under $.24/gallon gas tax |
| --- | --- | --- | --- | --- | --- | --- |
| 1 | 39 |  | 658 | 6.63% | 108 | 1.09% |
| 2 | 75 |  | 918 | 4.09% | 151 | .67% |
| 3 | 65 |  | 1174 | 3.17% | 193 | .52% |
| 4 | 62 |  | 1595 | 3.06% | 262 | .50% |
| 5 | 40 |  | 1859 | 2.75% | 3066 | .45% |
| 6 | 67 |  | 1993 | 1.81% | 328 | .30% |

**Average HH**
**income**

**9935**

**  ****22433**

**   ****37038**

**  ****52096**

** ****67500**

**109962**

## Average Household taxes under Gasoline tax of $.29/gallon (Using 2001 Average Oregon price of $1.46/gallon)

| Income group | Number of households | Average tax revenue with gas tax of $.29/gallon | Tax as % of income under $.29/gallon gas tax | Average change in Tax revenue for $.05 increase in tax/gallon ($)
(as %of income) |
| --- | --- | --- | --- | --- |
| 1 | 39 | 131 | 1.32% | 23 (+.23%) |
| 2 | 75 | 182 | .81% | 31 (+.14%) |
| 3 | 65 | 233 | .63% | 40 (+.11%) |
| 4 | 62 | 317 | .61% | 55 (+.11%) |
| 5 | 40 | 369 | .55% |  64 (+.10%) |
| 6 | 67 | 396 | .36% | 68 (+.06%) |

## What has the rise in gasoline prices done to the incidence of overall gasoline expenditures?

- Average 2001 gasoline price in Oregon was $1.46/gallon with a $.24/mile tax – and this was regressive
- What has happened as gasoline prices have risen – let’s use a gasoline price of $2.64/gallon including $.24/mile gas tax

## Average Oregon Household Gasoline Expenditures as a Percent of Income With Oregon Gasoline Tax  of $.24

| Income group | Number of Households |  | With an Average gas price of $1.46/gallon
(2001)  | With an Average gas price of $2.64 | Change in incidence 
 |
| --- | --- | --- | --- | --- | --- |
| 1 | 39 |  | 6.63% | 11.99% | +5.36% |
| 2 | 75 |  | 4.09% | 7.40% | +3.31% |
| 3 | 65 |  | 3.17% | 5.73% | +2.56% |
| 4 | 62 |  | 3.06% | 5.54% | +2.48% |
| 5 | 40 |  | 2.75% | 4.98% | +2.23% |
| 6 | 67 |  | 1.81% | 3.28% | +1.47% |

**Average HH**
**income**

**9935**

**  ****22433**

**   **
**37038**

**  ****52096**

**67500**

**109962**

## The SUITS INDEX

- The Suits Index, bounded between -1 and 1
-  A value of -1 implies the lowest income group bears the entire burden of the tax;
- A value of 1 implies the highest income group bears the entire tax burden.
- A value of 0 implies the tax is proportional.

## Suits Index based on Oregon static model

**Suits Index based on Oregon static model**

| Income group | Accumulated income (%) | Accumulated tax 
(%) |
| --- | --- | --- |
| 1 | 2.179938882 | 5.380472998 |
| 2 | 11.64535438 | 19.79382503 |
| 3 | 25.18959838 | 35.77177459 |
| 4 | 43.36117767 | 56.47871052 |
| 5 | 58.5510772 | 72.04696128 |
| 6 | 100 | 100 |

## The change from a Gas Tax to a VMT will result in an increase in the cost per mile of driving to some; a reduction in the price of driving to others

-  Price Increase: Vehicles with MPG >20
-  Price Decrease: Vehicles with MPG< 20
-  No Change: Vehicles with MPG =20

## Objections raised to change to VMT

- 1.  It will be regressive: Households in lower income groups will be the “losers,” higher income households will gain or lose less
- 2.  Rural areas will lose from the change in policy
- 3.  This policy will not encourage use of high fuel efficiency vehicles

## Is the Proposed Change in User Fee Structure a Regressive Change?

***Static Analysis***:  Assumes that behavior is not affected by a change in fee structure; each driver drives exactly the same amount with each vehicle as before the fee was implemented
***Dynamic Analysis***: Tries to account for the fact that consumers will change driving behavior in response to the change in the price of driving that the tax change causes

## Static Analysis: Impact of a Change from a $0.24/gallon gasoline tax to a $.012/mile VMT (2001)

| Income Group | Number of Households | Average  HH Expenditures including $.24/gallon tax |     Average HH Expenditures      including $.012/mile VMT | Change in Expenditure (as % of income) |
| --- | --- | --- | --- | --- |
| 1 | 39 | 658.90 |  666.72 | 
 7.81 (+.07%) |
| 2 | 75 | 917.84 |  923.03 | 
 5.19 (+.02%) |
| 3 | 65 |                     | 1169.61 | 
 -4.40(-.01%) |
|                                             |                                       | 1595.10 | 1595.33 |  
 0.23(<0.01%) |
| 5 | 40 | 1858.85 |  1833.51 |         
  -25.34 (-.04%) |
| 6 | 67 | 1992.60 | 1986.60 | 
 -6.00(<.01%) |

**     **
**    **
**     ****62**

**4**

** **
** ****1174.01**

## Static Analysis: Impact of a Change from a $0.24/gallon gasoline tax to a $.012/mile VMT (2001) cont.

## Suits Index based on Oregon static model

**Suits Index based on Oregon static model**

| Income group | Accumulated income (%) | Accumulated tax 
(%) |
| --- | --- | --- |
| 1 | 2.179938882 | 7.545591225 |
| 2 | 11.64535438 | 26.45669222 |
| 3 | 25.18959838 | 42.12619447 |
| 4 | 43.36117767 | 59.05973543 |
| 5 | 58.5510772 | 72.50101607 |
| 6 | 100 | 100 |

## Alternative Policy Scenarios:

**Alternative Policy 1**:
- Gas Tax of $.24/gallon for vehicles with < 20 mpg;
- VMT of $.012/mile for vehicles with mpg _>_ 20 mpg (2001 gas prices)
**Alternative Policy 2: **Step fee:
- a. MPG < median MPG pays 2 cents/mile;
- b. between median MPG and 20 MPG pays 1.5 cents/mile;
- c. MPG >20 pays 1 cent/mile

##  Static Model Alternative Policy 1: Gas Tax of $.24/gallon for vehicles with < 20 mpg ; VMT of $.012/mile for vehicles with mpg > 20 mpg (2001 gas prices)

| Income Group | Average Expenditures Under Gas Tax
($) | Average Mixed Policy Expenditures ($) | Change in Expenditures (as % of income) |
| --- | --- | --- | --- |
| 1 | 658.90 | 675.36 | 16.46 (+1.66%) |
| 2 | 917.84 | 935.01 | 17.17 (+.08%) |
| 3 | 1174.01 | 1191.91 | 17.90 (+.05%) |
| 4 | 1595.10 | 1623.57 | 28.47 (+.05%) |
| 5 | 1858.85 | 1881.25 | 22.40 (+.03%) |
| 6 | 1992.60 | 2023.68 | 31.08 (+.03%) |

## Suits Index =   -0.18493

**Suits Index =   -0.18493**

## Alternative Policy 2: Step fee: a. MPG< median MPG pays 2 cents/mile; b. between median MPG and 20 MPG pays 1.5 cents/mile; c. MPG>20 pays 1 cent/mile

| 
Income group | 
Number of Households | Average HH tax revenue @24 cents/gal | Average tax revenue step fee | Average revenue change |
| --- | --- | --- | --- | --- |
| 1 | 39 | 108.31 | 123.60 | 15.29 (+1.54%) |
| 2 | 75 | 150.88 | 176.66 | 25.78 (+1.15%) |
| 3 | 65 | 192.99 | 223.88 | 30.89
 (+.08%) |
| 4 | 62 | 262.21 | 305.32 | 43.11 
(+.08%) |
| 5 | 40 | 305.56 | 380.27 | 74.71 
(+1.11%) |
| 6 | 67 | 327.55 | 404.11 | 76.56 
(+.07%) |

## Suits Index =   -0.16165

**Suits Index =   -0.16165**

## DYNAMIC ANALYSIS:  

- Once behavior changes by the consumer are considered
- (movement along the demand curve), the relevant
- measure of the change in welfare for consumers is the
- change in ***consumer surplus (CS)—***not simply the
- change in tax revenue (TR)
- For a tax increase, consumers may end up paying less in
- taxes, but they may do so by driving less—and that
- involves another loss

- We first use an OLS model –
- this gives an estimation of changes in vehicle use (i.e. changes in household vehicle miles traveled)

**Dynamic Model 1: ****Ordinary Least Square (OLS) Regression**

## OLS MODEL VARIABLES

- Our OLS model is based on the following equation
- M = f(Pf,I,U,C,SUB,CHILD,WORKER,MALE)
- Where M is the total annual miles driven by the household,
-            Pf is the fuel cost per mile under the gasoline tax
-            *I* is annual household income
-           U is a dummy variable, = 1 if urban, = 0 else
-           C is the number of vehicles the household owns.
-           SUB = 1 if the household has more than one type of 		vehicle, = 0 else
-           CHILD number of children
-           WORK number of workers
-           MALE = 1 if respondent male, = 0 else

## OLS Results: Dependent Variable – Annual Household Miles (n=339) 

| Variable Name | Coefficient | Standard Error | T-Statistic |
| --- | --- | --- | --- |
| Constant | -17.72 | 6.25 | -2.84 |
| Fuel Cost |  -8.76 | 2.39 | -3.67 |
| Income | 2.21 | 0.61 | 3.60 |
| Fuel Cost * Income | 0.72 | 0.24 | 3.05 |
| Fuel Cost * Substitution |  0.44 | 0.40 | 1.09 |
| Urban | -0.16 | 0.10 | -1.67 |
| #Vehicles | 0.54 | 0.13 | 4.18 |
| Vehicle Substitution | 1.39 | 1.05 | 1.32 |
| Male Head | 0.17 | 0.09 | 1.94 |
| #Worker | 0.21 | 0.05 | 3.95 |
| #Children | 0.04 | 0.04 | 0.91 |

*Italicized variables are logarithmic*

## Changes in Consumer Surplus, Tax Revenue and Welfare by Income with change to VMT = $.012/mi

| Income Group | Average Change in Consumer Surplus | Average Change in Tax Revenue | Average Change in Welfare |
| --- | --- | --- | --- |
| 1 | -7.93 | 5.31 | -2.61 |
| 2 | -6.88 | 6.52 | -0.36 |
| 3 | 9.97 | -4.51 | 5.46 |
| 4 | -2.58 | 8.61 | 6.03 |
| 5 | 30.44 | -13.81 | 16.63 |
| 6 | 13.69 | -2.78 | 10.91 |

## Average Changes in Consumer Surplus, Tax Revenue and Welfare by Location ($/Household)

## Impact of a Change from a $0.24/gallon gasoline tax to a $.012/mile VMT:     Alternative Policy 1 and Alternative Policy 2

**         **

** **
** **

## Suits Index based on Oregon OLS model

**Suits Index =-0.142 with VMT = 1.2 cents/miles**
**Suits Index = -0.145 with Alternative Policy # 1**
**Suits Index = -1.111 with Alternative Policy #2**

**Suits Index based on Oregon OLS model**

##  Conclusions

- The Dynamic Model Comparison of the change in tax revenues makes the policy impact appear *less regressive * than the static model (See Suits Indices)
- However, is the appropriate measure the change in tax paid or the change in consumer surplus?
- ALL of the VMT-fee policy scenarios have a considerably smaller impact on incidence than the increase in gasoline prices in recent years caused by external forces
- Different VMT-fee structures have different impacts on incidence or equity, but the difference is not large

## CONCLUSIONS/REMARKS (cont’d.)

- If we go to VMT, very small impact: likely to have little impact on driving relative to recent increases in gasoline prices
- Policy question:  If we don’t go to VMT and can’t pass higher gasoline taxes, how do we fund roads?

## Alternative funding sources?

- Local options taxes : sales taxes, local gasoline taxes
- Higher Registration fees
- From General Funds
- Bonding
- Do we really want greater reliance on non-user fees?
- What effect would these taxes have on regressivity relative to the VMT and gas taxes?

## Other Possibilities for a VMT

- VMT-fees may also be designed to achieve sustainability objectives, such as reducing fuel consumption, reducing greenhouse gas emissions, and encouraging the ownership of greener vehicles
- Congestion pricing based on VMT-fee technology
- VMT for congestion and environment in addition to gasoline tax?

## Questions and Comments  

- This research was funded partially by ODOT and OTREC. The author would like to thank Alan Kirk, Jim Whitty, Betsy Imholt, Becky Knudson, Brian Gregor, Jack Svadlenak, Satvinder Sandhu, and Anthony Rufolo for their assistance. The authors are solely responsible for the opinions expressed here.
**Contact Information**
- B. Starr McMullen 			Lei Zhang
- 541-737-1480 			541-737-2072
- s.mcmullen@oregonstate.edu     	lei.zhang@oregonstate.edu

## Additional Slides

## Conventional Wisdom

- The static model will overestimate the impact of a
- tax increase, underestimate the impact of a tax
- decrease
- Static model assumes that the change in tax
- revenues paid is the only impact that a tax
- change will cause – a direct transfer from
- consumer to the Government

## Change in Consumer Surplus with Demand Response

- Price (p)

- Pvmt

- Pgas

- Qvmt

- Qgas

- Quantity (q)

## Total Change in Revenue for an Increase in Price: B-A

- B

-  A

- Price (p)

- Pvmt

- Pgas

- Qvmt

- Qgas

- Quantity (q)

- Total change in revenue to agency from
- Price increase  = B-A;
- Price decrease = A-B

## Elasticity by Income group – OLS based on Average Income

| Income Group | Average Income | Elasticity w/ SUB | Elasticity w/o SUB |
| --- | --- | --- | --- |
| 1 | $9,055.90 | 1.7577 | 2.2125 |
| 2 | $21,983.11 | 1.128 | 1.5828 |
| 3 | $36,899.07 | 0.7603 | 1.2151 |
| 4 | $51,952.61 | 0.5174 | 0.9722 |
| 5 | $67,394.80 | 0.3326 | 0.7874 |
| 6 | $106,043.36 | 0.0108 | 0.4656 |