CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

CBO

Alternative 

Approaches to 

Funding 

Highways

MARCH 2011

© Shutterstock LLC
Pub. No. 4090
The Congress of the United States O Congressional Budget Office

A

STUDY

CBO

Alternative Approaches to 

Funding Highways

March 2011
CBO

Notes

Unless otherwise indicated, all years are calendar years.

Numbers in the text and tables may not add up to totals because of rounding.

On the cover: Photo of high-occupancy toll lanes courtesy of the Washington State 

Department of Transportation.
Preface

CBO

The federal government collects revenues from taxes paid by highway users, mostly 

from those levied on gasoline and diesel fuel, and credits them to the Highway Trust Fund. 

Those revenues and others are subsequently used for federal spending on highways and transit 

and for some other purposes. In fiscal year 2010, the trust fund’s revenues totaled about 

$35 billion. Some policymakers and transportation analysts have expressed interest in developing new sources of funding, for two main reasons. One is that, over fiscal years 2008 to 

2010, federal spending on highways exceeded the revenues available in the trust fund, and the 

government supplemented the fund with about $30 billion from the Treasury’s general revenues. As scheduled increases in federal standards for average vehicle fuel efficiency take effect, 

dedicated revenues may fall further below spending. The other main reason is that the current 

taxes do not give highway users an incentive to consider all of the costs their use of roads 

imposes on others; as a consequence, road use exceeds the efficient amount, and the quality of 

service that users receive from the highway network is lower than it would be otherwise.

This Congressional Budget Office (CBO) study, prepared at the request of the Chairman of 

the Senate Budget Committee, analyzes the effects of alternative approaches to funding highways. In particular, it compares the effects of current fuel taxes and of possible new taxes 

on the number of miles highway users drive. Some costs of highway use, such as those associated with emissions of greenhouse gases and the nation’s dependence on foreign oil, are 

directly related to fuel consumption. But the larger share of costs—for pavement damage, 

congestion, accidents, and noise—is more directly tied to the number of miles traveled. 

Therefore, having users pay the actual cost of their highway use would involve imposing a 

combination of fuel taxes and per-mile charges. Although such an approach would lead to 

more efficient use of highways, it would distribute the burden of highway funding somewhat 

differently than would fuel taxes alone. In keeping with CBO’s mandate to provide objective, 

impartial analysis, this study does not make any recommendations.

The study was prepared by Perry Beider of CBO’s Microeconomic Studies Division, under 

the direction of Joseph Kile and David Moore and with support from Grant Driessen, 

Jacob Kuipers (formerly of CBO), Brian Prest, and Sarah Puro. CBO staff members 

Lindsay Coleman, T.J. McGrath, Shannon Mok, Nathan Musick, Frank Sammartino, 

Robert Shackleton Jr., Chad Shirley, and Alan van der Hilst provided valuable input. 

Helpful comments came from Douglas B. Lee Jr. of the Department of Transportation, 

Craig Lentzsch of Bulkley Capital, Ian W.H. Parry of the International Monetary Fund, 

John R. Svadlenak of the Oregon Department of Transportation, and Clifford Winston of the 

Brookings Institution. (The assistance of external reviewers implies no responsibility for the 

final product, which rests solely with CBO.) 
CBO

IV PREFACE

Kate Kelly edited the manuscript, Loretta Lettner proofread it, and Jeanine Rees prepared the 

study for publication. Maureen Costantino designed the cover. Monte Ruffin produced the 

printed copies, and Linda Schimmel coordinated the print distribution. An electronic version 

is available from CBO’s Web site (www.cbo.gov).

Douglas W. Elmendorf

Director

March 2011
Contents

CBO

Summary vii

Introduction 1

Charging for the Costs of Highway Use 3

Comparing Marginal Costs with Construction and Maintenance Costs 4

Estimates of Marginal Costs 5

Fuel Taxes: The Current Approach 9

Equity 9

Efficiency 10

Potential Taxes on Vehicle-Miles Traveled 14

Equity 15

Efficiency 15

Privacy 19

Potential Goals and Their Implications 20

Appendix: Selected Approaches to Highway Funding 23
VI ALTERNATIVE APPROACHES TO FUNDING HIGHWAYS

CBO

Tables

S-1. Implications of Fuel Taxes and VMT Taxes ix

1. Estimated Relative Pavement Costs for Tractor-Semitrailers, by Two Factors 10

2. Implications of Fuel Taxes and VMT Taxes 11

3. Average Effective Gasoline Tax Rates by Household Income Group, 2004 14

4. Estimated Fuel Taxes Needed to Maximize Efficiency of Highway Use 

Under Various Policy Scenarios 15

A-1. Implications of Alternative Sources of Highway Funding 24

Figures

1. Tax Receipts Credited to the Highway Trust Fund, Fiscal Year 2010 2

2. Estimated Costs per Mile of Highway Use, 2000 6

3. Estimated Mileage-Related Costs and Vehicle-Miles Traveled in Various Years 8

4. Estimated Fuel-Related Costs and Fuel Consumed in Various Years 9

Boxes

1. Uncertainty in the Estimates of the Marginal Costs of Highway Use 12

2. Pilot Tests for Mileage-Based User Fees 16
CBO

Summary

About 25 percent of the nation’s highways, which 

carry about 85 percent of all road traffic, are paid for in 

part by the federal government; the remaining funding 

for highways comes from state and local governments.1

Federal spending on highways is funded primarily 

by taxes on gasoline and diesel fuel, but those and other 

taxes paid by highway users do not yield enough revenue 

to support either current federal spending on highways or 

the higher levels of spending that have been proposed by 

some observers. Although raising those taxes would bring 

in a larger amount of revenue, a more fundamental issue 

would remain: By themselves, fuel taxes cannot provide a 

strong incentive for people to avoid overusing highways—that is, to forgo trips for which the costs to themselves and others exceed the benefits. This study examines 

broad alternatives for federal funding of highways, focusing on fuel taxes and on taxes that could be assessed on 

the basis of the number of miles that vehicles travel.2

Approaches to funding highways can be evaluated in 

terms of equity and economic efficiency. Equity, or fairness, is subjective and can be assessed in several ways. 

Observers of highway funding often gauge fairness by 

considering the share of funding that is obtained from 

taxes paid by highway users rather than from general 

taxpayer funds, from people in households that fall into 

various income categories, or from people in rural versus 

urban households.

The economic efficiency of a funding approach depends 

partly on its effects on users’ travel behavior and partly 

on what it costs to implement. Charging users for the 

costs their travel imposes on society would create 

incentives for people to limit highway use to trips for 

which the benefits exceed the costs, thus reducing or 

eliminating overuse of highways and helping identify the 

economic value of investments in highways. However, 

the costs of collecting and enforcing such user charges 

also must be considered in evaluating their net effect on 

efficiency.

Charging for the Costs of Highway Use

The cost of users’ travel is different from the cost of 

highway construction and maintenance, although those 

costs overlap. Some construction and maintenance costs 

are tied to use. For example, the cost of some maintenance depends on the extent of pavement damage caused 

by heavy vehicles. In contrast, other maintenance costs—

such as those to repair damage caused by aging and 

weathering—are fixed and would accrue regardless of 

how much a road is used.

Any given driver’s highway use also imposes costs on 

other users, on nearby nonusers, on the environment, 

and on the economy in the form of congestion, risk of 

accidents, noise, emissions of greenhouse gases and pollutants that affect local air quality, and dependence on 

foreign oil.

Different types of vehicles traveling in different locations 

contribute differently to the social costs of highway use. 

Passenger vehicles log more than 90 percent of all miles 

traveled on U.S. highways, and they are responsible for 

the largest share of the total costs of highway travel. In 

particular, urban travel by passenger vehicles constitutes 

about two-thirds of all vehicle-miles traveled, and it is the 

primary source of congestion, the largest category of 

social costs. Heavy trucks travel less than 10 percent of all 

vehicle miles, but their costs per mile are far higher than 

are those for passenger vehicles, and they are responsible 

for most pavement damage.

1. This study follows the practice of the Federal Highway 

Administration of using “highway” and “road” synonymously.

2. Related questions are discussed in Congressional Budget Office, 

Spending and Funding for Highways, Issue Brief, January 2011.
VIII ALTERNATIVE APPROACHES TO FUNDING HIGHWAYS

CBO

Estimates from several sources indicate that most highway users currently pay much less than the full cost of 

their travel. Given current fuel efficiency, federal and state 

fuel taxes combined produce revenue of roughly 2 cents 

per mile for automobiles. In contrast, the Federal Highway Administration estimates that the national average 

cost for congestion caused by automobile travel is about 

10 cents per mile—much higher in large metropolitan 

areas and much lower in rural communities. Total costs, 

including those for accident risk and noise, are higher 

still.

Judging from estimates of the costs of highway use, a system that charged for all such costs would have most if not 

all motorists paying substantially more than they do 

now—perhaps several times more. Such a system would 

maximize the efficiency of highway use by discouraging 

trips for which costs exceed benefits. Alternatively, taxes 

that were set below the full costs of use but were structured to reflect those costs more closely than current taxes 

do could yield a portion of the efficiency gains by discouraging some high-cost trips.

Most of the costs of using a highway, including pavement 

damage, congestion, accidents, and noise, are tied more 

closely to the number of miles traveled than to the 

amount of fuel consumed. (Because of the way passenger 

vehicles are regulated, their emissions of local air pollutants, such as particulate matter and sulfur dioxide, also 

are more closely related to miles traveled. The cost of 

local air pollution from trucks, which is regulated differently, is fuel related.) Fuel consumption depends not only 

on the number of miles traveled but also on fuel efficiency, which can differ from one vehicle to another and 

can change with driving conditions; therefore, charging 

highway users for the full costs of their use, or in proportion to the full costs, could not be accomplished solely 

through fuel taxes. Accomplishing those goals would 

require a combination of fuel taxes and per-mile charges, 

sometimes called vehicle-miles traveled (VMT) taxes.

Fuel Taxes

Viewed according to different conceptions of equity, fuel 

taxes offer a mix of positive and negative characteristics. 

They satisfy a “user-pays” criterion, but they also can 

impose a larger burden, relative to income, on people 

who live in low-income or rural households (see Summary Table 1). Even for households that do not own passenger vehicles, the taxes impose an indirect burden 

because they raise the transportation costs that are 

reflected in the prices of purchased goods.

Fuel taxes have two desirable characteristics for efficiency: 

They cost relatively little to implement (the government 

collects taxes from fuel distributors, and users pay the 

taxes when they purchase fuel), and they offer users some 

incentive to curtail fuel use, thus reducing some of the 

social costs of travel. At best, however, the strength of that 

incentive can be right only as a rough average, discouraging some travel too much and other travel too little, 

because it does not reflect the large differences in cost for 

use of crowded roads compared with uncrowded roads or 

for travel by trucks that have similar fuel efficiency but 

cause different amounts of pavement damage. Moreover, 

for a given tax rate on fuels, the incentive to reduce 

mileage-related costs diminishes over time as more driving is done in fuel-efficient vehicles.

Potential Taxes on Vehicle-Miles 

Traveled

VMT taxes are qualitatively similar to fuel taxes in their 

implications for equity. Like fuel taxes, they satisfy the 

user-pays principle, but they impose larger burdens 

relative to income on people in low-income or rural 

households. However, to the extent that members of such 

households tend to drive vehicles that are less fuel efficient, such as pickup trucks or older automobiles, those 

highway users would pay a smaller share of VMT taxes 

than of fuel taxes.

VMT taxes that are aligned with the costs imposed by 

users would provide a better incentive for efficient highway use than fuel taxes do because the majority of those 

costs are related to miles driven. However, VMT taxes’ 

effect on overall efficiency also would depend on how 

much it costs to put the taxes in place and to collect the 

money. Estimates of what it would cost to establish and 

operate a nationwide program are rough. One source of 

uncertainty is the cost to install metering equipment in 

all of the nation’s cars and trucks. Having the devices 

installed as original equipment under a mandate to vehicle manufacturers would be relatively inexpensive but 

could lead to a long transition; requiring vehicles to be 

retrofitted with the devices could be faster but much 

more costly, and the equipment could be more susceptible to tampering than factory-installed equipment might 

be. Despite the various uncertainties and impediments, 

some transportation experts have identified VMT taxes as 

a preferred option.
SUMMARY ALTERNATIVE APPROACHES TO FUNDING HIGHWAYS IX

CBO

Summary Table 1.

Implications of Fuel Taxes and VMT Taxes

Source: Congressional Budget Office.

Note: VMT = vehicle-miles traveled.

a. Some low-income people do not own motor vehicles; however, they pay fuel taxes indirectly because the prices of goods they buy reflect 

the goods’ transportation costs.

b. Fuel-related costs include greenhouse gas emissions, dependence on foreign oil, and local air pollution from trucks.

c. Mileage-related costs include road wear, congestion, accidents, local air pollution from passenger vehicles, and noise.

d. Fuel taxes would have proportionately less effect on miles driven than on fuel use and provide minimal incentive for users to avoid 

congestion or increase the number of axles on trucks they purchase.

e. VMT taxes would have a proportionately equal effect on fuel use and mileage but provide no incentive for users to increase fuel efficiency.

One step in developing per-mile charges would be to 

determine the goals of VMT taxation; different goals 

would require different charges. For example, if VMT 

taxes were intended to maximize the efficiency of highway use, they would need to vary greatly by vehicle type 

and by time and place of travel. Pavement damage 

increases sharply with vehicle weight but decreases with 

the number of axles on a vehicle, so the portion of VMT 

taxes assessed to maintain pavement would need to be 

small or nonexistent for passenger vehicles but substantial 

for heavy-duty trucks, particularly those with high weight 

per axle. Similarly, every vehicle would be assessed more 

to travel on crowded urban roads during peak hours than 

in off-peak hours or to travel on less congested roads at 

any time. The rates charged for peak-hour travel would 

be set in keeping with specific local or regional conditions, including the duration and severity of daily congestion, rather than on the basis of national averages. If the 

VMT taxes were intended to achieve some other goal, the 

structure of the taxes might be different.

The idea of imposing VMT taxes that vary by time and 

place has raised concerns about privacy because the 

process of assessing such taxes could give the government 

access to specific information about how individual vehicles are used. Various approaches have been suggested to 

allay those concerns, including restricting the amount of 

information about a vehicle’s travel that is used in billing 

or restricting the kind of information that is conveyed to 

the government; making devices appealing to the public 

by allowing businesses to use them to provide other services, such as real-time traffic reports or electronic payment for parking; and allowing users to opt out of paying 

per-mile charges and instead pay higher fuel taxes. (The 

optional fuel taxes would be set at rates high enough to 

appeal only to users with the greatest privacy concerns.)

A system of VMT taxes need not apply to all vehicles on 

every road. Indeed, there are already less comprehensive 

systems of direct charges for road use: Toll roads, lanes, 

and bridges are common in the United States, and several 

states and foreign countries levy weight-and-distance 

charges on trucks. Expansion of existing systems could 

focus on highly congested roads or on entry points into 

congested areas; that targeted approach could cost less to 

implement if it required relatively simple in-vehicle 

equipment. (The E-ZPass transponder is one example. 

E-ZPass is an electronic collection system that allows 

prepayment of tolls in 14 states, from Maine in the 

northeast, to Virginia in the south, to Illinois in the 

west.) Alternatively, the focus could be on specific vehicle 

types, such as trucks. Although less than 4 percent of the 

nation’s fleet is made up of trucks (excluding light-duty 

trucks), they account for roughly 25 percent of all costs 

highway users impose on others, including almost all of 

the costs associated with pavement damage.

Efficiency

Equity

Address FuelRelated Costsb

Address 

MileageRelated 

Costsc

Collection 

Costs

User 

Pays

Larger 

Relative Burden on 

Low-Income Peoplea

Larger Relative 

Burden on People in 

Rural Areas

Privacy

Issues

Fuel Taxes Yes Generally, yes Yes Yes Somewhatd Low No 

VMT Taxes Yes Generally, yes, but perhaps 

less than fuel taxes

Yes, but less 

than fuel taxes

Significantlye Yes High Yes

CBO

Alternative Approaches to Funding Highways

Introduction

Highways are a crucial component of the nation’s 

infrastructure. According to the Federal Highway Administration (FHWA), the United States has about 4 million 

miles of public highways. In 2007, users traveled about 

3 trillion vehicle-miles and 5 trillion passenger-miles 

on those roads, accounting for almost 90 percent of all 

passenger-miles by surface and air. (This study follows 

the FHWA’s practice of using “highway” and “road” as 

synonyms.) People benefit from the nation’s highways not 

only as direct users but also as consumers of shipped 

goods. In 2007, 1.3 trillion ton-miles of freight—about 

30 percent of the total—traveled on U.S. highways; only 

railroads carried a larger share.1

 Particularly important are 

the roads in the National Highway System, which 

includes the Interstate highways. Although that group of 

roads accounts for only 4 percent of highway-miles and 

7 percent of highway lane-miles in the United States, it 

carries about 45 percent of all vehicle-miles traveled 

(VMT).2

Spending on highways is a significant item in federal, 

state, and local governments’ budgets. In fiscal year 2007, 

combined public spending was about $146 billion for 

highway construction, operations, maintenance, administration, and safety. About one-fourth of the funding came 

from the federal government; state and local governments 

provided the rest.3

 Almost all federal spending on highways occurs through grants to state and local governments; federal agencies own just 3 percent of the nation’s 

miles of highway.4

 Federal grant money can be spent on 

roads in the National Highway System and on other 

highways classified as “arterials,” “urban collectors,” and 

“rural major collectors.” In 2006, those “federal-aid highways” constituted 984,000 miles of road or about 25 percent of the U.S. total, and they accounted for 85 percent 

of all vehicle-miles traveled.5

 The local and rural minor 

collector roads that are not eligible for federal aid nonetheless benefit indirectly: Federal grant money allows 

states to reallocate funds they would have spent on 

federal-aid highways either to spending on other roads or 

to spending for other purposes. Because of such reallocations, total spending on federal-aid highways does not 

increase dollar for dollar with the federal grants.

Federal spending on highways is generally financed 

through the Highway Trust Fund (HTF), which was 

created as an accounting mechanism within the federal 

budget and is credited with revenues from taxes on

1. See Department of Transportation, Federal Highway 

Administration, Highway Statistics 2008 (December 2009), Table 

VM-1, www.fhwa.dot.gov/policyinformation/statistics/2008/

vm1.cfm; and Bureau of Transportation Statistics, Pocket Guide to 

Transportation, 2010 (January 2010), pp. 19–20, www.bts.gov/

publications/pocket_guide_to_transportation/2010/pdf/

entire.pdf.

2. See Department of Transportation, Federal Highway 

Administration and Federal Transit Administration, 2008 Status of 

the Nation’s Highways, Bridges, and Transit: Conditions and 

Performance (January 2010), p. 2-13, www.fhwa.dot.gov/policy/

2008cpr/pdfs.htm. 

3. Converted to 2009 dollars, highway spending in 2007 was 

$155 billion: $88 billion for construction and $67 billion for 

other categories; see Congressional Budget Office, Public Spending 

on Transportation and Water Infrastructure (November 2010), p. 7.

Complete data on state and local spending are not yet available for 

fiscal year 2008. 

4. Those roads are in federal parks and forests and on reservations; 

see Department of Transportation, Highway Statistics 2008, Table 

HM-16, www.fhwa.dot.gov/policyinformation/statistics/2008/

hm16.cfm. For a discussion of federal and state roles in highway 

spending, see Congressional Budget Office, Spending and Funding 

for Highways, Issue Brief (January 2011).

5. Department of Transportation, Highway Statistics 2008,

Table HM-16, www.fhwa.dot.gov/policyinformation/statistics/

2008/hm16.cfm; and Table VM-203, www.fhwa.dot.gov/

policyinformation/statistics/2008/vm203.cfm.
2 ALTERNATIVE APPROACHES TO FUNDING HIGHWAYS

CBO

Figure 1.

Tax Receipts Credited to the Highway 

Trust Fund, Fiscal Year 2010

(Billions of dollars)

Source: Congressional Budget Office based on Department of 

Transportation, Federal Highway Administration, Highway 

Statistics 2009 (November 2010), Table FE-10, 

www.fhwa.dot.gov/policyinformation/statistics/2009/

fe10_2009.cfm.

gasoline, diesel fuel, and certain trucks and truck tires. 

The HTF is divided into two accounts, one that primarily funds highways and highway safety programs and one 

that funds transit programs. The fuel taxes are excise taxes 

set at a fixed rate of 18.4 cents per gallon for gasoline or 

gasohol (a mixture of gasoline and ethanol) and 24.4 

cents per gallon for diesel fuel; they yield about 90 percent of the revenues going into the fund. In both cases, 

most of the tax revenue is credited to the highway 

account, but the transit account receives 2.86 cents per 

gallon, and 0.1 cents per gallon goes to the separate Leaking Underground Storage Tank Trust Fund.6

 The remainder of the fund’s revenues comes from three other taxes: a 

sales tax on trucks and tractors with a gross vehicle weight 

of more than 33,000 pounds and on trailers heavier than 

26,000 pounds; an excise tax on tires with a maximum 

load capacity above 3,500 pounds; and an annual tax on 

ownership of trucks that weigh 55,000 pounds or more. 

In fiscal year 2010, the revenues credited to the trust fund 

totaled $35.0 billion: $24.1 billion from gasoline, 

$8.1 billion from diesel fuel, $1.6 billion from truck and 

trailer sales, $0.9 billion from truck ownership, and 

$0.3 billion from truck tires (see Figure 1).

Current spending from the HTF exceeds the amount of 

its revenues, and since fiscal year 2008, the portion of the 

trust fund devoted to highway projects has received 

almost $30 billion in transfers from the general fund to 

allow the Department of Transportation to continue to 

meet obligations in a timely manner.7

 In part, the difference between spending and revenues reflects a deliberate 

policy choice: The spending authorizations in the Safe, 

Accountable, Flexible, Efficient Transportation Equity 

Act a Legacy for Users (Public Law 109-59) were set to 

bring the balance in the highway account, which had 

reached $23 billion in 2000, close to zero by the end of 

fiscal year 2009; that target was essentially reached a year 

early. Under current law, revenues credited to the HTF 

are unlikely to rise enough to eliminate the need for additional transfers from the general fund if the current rate 

of spending is maintained in real (inflation-adjusted) 

terms or perhaps even in nominal (current-dollar) terms. 

The fuel taxes that provide most of the revenues are fixed 

in nominal terms, and although they tend to yield more 

nominal revenue over time as driving increases, revenue 

per mile of travel falls as average fuel efficiency increases.

The difference between the HTF’s revenues and federal 

spending on highways would grow even larger under 

various scenarios or proposals to significantly increase 

highway spending, unless state and local governments 

provided enough additional funding. For example, the 

FHWA estimates, on the basis of 2006 data, that from 

2007 to 2026, total federal, state, and local capital spending would need to average $126 billion per year (in 2009 

Gasoline

Diesel

Truck and

trailer sales

Annual truck

ownership tax Tires

($24.1 billion)

($8.1 billion)

($1.6 billion)

($0.9 billion) ($0.3 billion)

6. See John W. Fischer, Surface Transportation Program 

Reauthorization Issues for the 111th Congress (Congressional 

Research Service, February 2, 2010), p. 4; and Congressional 

Budget Office, Issues and Options in Infrastructure Investment

(May 2008), Appendix B.

7. The HTF is prohibited by law from incurring negative balances. If 

its resources become exhausted, spending can continue more 

slowly as fuel and other user taxes are collected. If the fund faced 

an imminent shortfall, the Department of Transportation would 

maintain a positive balance by rationing reimbursements to the 

states.
ALTERNATIVE APPROACHES TO FUNDING HIGHWAYS 3

CBO

dollars) to maintain the highway system’s current “performance,” which is defined in terms of average user costs 

for travel time, operations, and accidents. By contrast, 

actual capital spending in fiscal year 2008 was $91 billion.8

 The estimate reflects the effects of pavement age 

and economic and population growth and accounts for 

signs that the road network is under strain today. According to the FHWA, in 2006, 47 percent of the miles traveled by all vehicles on roads eligible for federal funding 

occurred on pavement that, on the basis of a measure of 

surface roughness, was considered to be in good condition; 39 percent of travel occurred on pavement classified 

as acceptable but not good; and 14 percent occurred on 

pavement that was rated less than acceptable. Measures of 

congestion in urban areas developed for the FHWA show 

that congestion resulted in 4.8 billion hours of traveler 

delays and consumption of an additional 3.9 billion gallons of fuel in 2009 (34 hours in delays and 28 gallons of 

additional fuel per traveler).9

 Shortcomings of the road 

network affect people not only directly as highway users 

but also as consumers who must pay more for the goods 

they buy because of higher shipping costs.

Some approaches to highway funding involve greater use 

of loans from federal or state infrastructure banks, proceeds from bond sales, or payments from public–private 

partnerships in exchange for the right to collect tolls.10

Such methods, however, cannot solve the underlying 

problem of highway funding: Up-front money must be 

repaid and, ultimately, all funding for construction and 

maintenance of public highways must come from user 

charges or from other federal, state, or local government 

revenues. (The small exception is voluntary contributions, such as the in-kind donations made through 

“Adopt A Highway” programs.)

This study by the Congressional Budget Office (CBO) 

analyzes the implications of various methods of raising 

funds from users, from taxpayers in general, or from both 

groups, with a focus on current fuel taxes and some new 

taxes that might be levied on the basis of vehicle-miles 

traveled. The analysis considers the incentives such methods could provide for the efficient use of highways as well 

as other implications for efficiency and equity. 

Charging for the Costs of Highway Use

Two questions that policymakers face in determining 

how to fund highways concern how much to spend and 

how much to collect from users. The answers need not be 

the same. On one hand, spending can exceed revenues 

that come from users; indeed, much of the funding that 

state and local governments raise for highways comes 

from other sources, such as general sales taxes, property 

taxes, and development impact fees, rather than from the 

taxes that highway users pay. In recent years, the federal 

government has funded some of its highway spending 

from general revenues.11 On the other hand, money collected from highway users and credited to the HTF is 

used to support other projects, such as mass transit, walkways, bike paths, and scenic trails. Nonetheless, policy 

discussions often frame the problem of funding highways 

in terms of how to raise money from users.

One reason for the connection between spending plans 

and user charges is that charges equal to spending would 

be consistent with one concept of distributional equity, 

which holds that it is appropriate for those who benefit 

from public spending to pay for it. Under other conceptions of equity, however, a user fee might not be considered fair if, for example, it placed a proportionately 

greater burden on low-income households or on residents 

of rural areas. And under a view of equity that focuses 

primarily on how closely each state’s share of federal 

grants matches its share of contributions to federal revenues, the key issue is not the charges themselves but how 

funding is allocated.

8. Department of Transportation, Highway Statistics 2008, “Total 

Disbursements for Highways, by Function, 1945–2008,” 

www.fhwa.dot.gov/policyinformation/statistics/2008/disb.cfm.

9. David Schrank and Tim Lomax, Urban Mobility Report 2010 

(College Station: Texas Transportation Institute, December 

2010), p.1, http://tti.tamu.edu/documents/

mobility_report_2010.pdf.

10. See Congressional Budget Office and Joint Committee on 

Taxation, Subsidizing Infrastructure Investment with Tax-Preferred 

Bonds (October 2009); and Congressional Budget Office

Issues and Options in Infrastructure Investment (May 2008), and 

Innovative Financing of Highways: An Analysis of Proposals

(January 1998).

11. Some observers assert that the amount transferred from the 

general fund to the Highway Trust Fund in recent years 

corresponds to interest or other revenues that should have accrued 

to it. Until 1998, the trust fund was credited with interest on its 

balances; the Transportation Equity Act for the 21st Century 

(P.L. 105-178) ended that practice and transferred $8 billion in 

accumulated interest earnings to the general fund.
4 ALTERNATIVE APPROACHES TO FUNDING HIGHWAYS

CBO

A separate rationale for charging users rests on the goal of 

economic efficiency, which is to allocate resources to produce the greatest satisfaction of wants within the constraints of available technology. More efficient methods 

of funding highways produce higher net benefits, taking 

into account their collection costs, their effects on road 

use and on other decisions users or taxpayers make, and 

any effects they have on decisions governments make 

about where and how to spend the money collected. 

Maximum efficiency is achieved if the following conditions hold:

 Existing highway capacity is used most efficiently—

that is, if users make all of the trips, and only those 

trips, whose value exceeds the costs to users themselves 

and to others, in turn reducing the need for investment in additional highways or highway lanes;

 The money to be spent on highways is raised most 

efficiently—that is, if the total costs associated with 

generating revenues are minimized, taking into 

account the direct costs of collection and the indirect 

costs of any resulting distortions of people’s decisions, 

such as decisions about how much to work or save or 

whether and what type of new vehicle to buy; and

 Highways are built and maintained in the most efficient manner—that is, if governments undertake all of 

the projects, and only those projects, for which the 

benefits exceed the costs, including the direct and 

indirect costs of raising funds.12

The extent to which any highway user fee achieves those 

goals depends in large part on how closely the amount 

paid by each user corresponds to the costs associated with 

his or her highway use. For any good or service, charging 

consumers prices equal to their marginal costs—that 

is, equal to the incremental costs for their individual 

additional uses—gives consumers the incentive to buy 

only to the extent that the benefits they would receive 

equal or exceed the costs associated with their consumption.13 As discussed below, applying the concept of full 

marginal-cost pricing to highway users would involve 

charging them a combination of taxes because a vehicle’s 

consumption of fuel and its presence on roadways both 

contribute, in different ways, to total costs.

Comparing Marginal Costs with Construction and 

Maintenance Costs 

For some goods and services, the sum of users’ marginal 

costs equals or approximates the production costs of the 

good or service. In the case of highways, however, users’ 

total marginal costs do not equal the total costs of production (road construction and maintenance), for two 

reasons.

First, like other infrastructure networks, such as water 

and telecommunications systems, highways have significant fixed costs that are associated with making the 

network available for use at all, not with the number or 

type of individual uses (in this case, trips). In particular, 

the deterioration of a highway’s pavement that occurs 

simply because of aging and exposure to the elements, 

which would occur even if the highway was never used, is 

a fixed cost. In that sense, the cost of removing snow 

from a highway also is fixed: Plowing a given amount of 

snow from a given road surface costs the same regardless 

of the number of vehicles that use the road afterward.

Second, marginal costs of travel include not only the construction and maintenance costs associated with road 

wear but also costs that are imposed on other users, 

nearby households and businesses, and the environment. 

Those costs—which economists call externalities—

include delays and uncertainty caused by congestion, 

emissions of greenhouse gases and local air pollutants, 

accidents, noise, and dependence on foreign oil. Analysts 

often identify two effects of greater dependence on foreign oil: the cost that oil users impose on one another by 

driving up demand (and, consequently, the price of oil) 

and the cost to the economy as a whole associated with 

12. For simplicity, in discussing efficiency, this study ignores the 

possibility of interactions among possible trips or projects. If some 

trips are substitutes for one another or if some projects are more 

valuable if done in conjunction with other projects, then 

efficiency is achieved when the benefits of each action exceed its 

costs and net benefits are maximized.

13. The text covers the case in which all of the benefits accrue to the 

purchaser. In the more general case, external benefits—benefits to 

others that are not considered by the purchaser—are treated in the 

same manner as external costs: The efficient price is the marginal 

cost of production, plus the marginal value of external costs, 

minus the marginal value of external benefits. If external benefits 

exceed external costs, then maximizing efficiency requires 

subsidizing the good or service because the efficient price is below 

the marginal cost of production. In the case of highways, the 

mobility of police officers is an external benefit in that it helps to 

deter crime.
ALTERNATIVE APPROACHES TO FUNDING HIGHWAYS 5

CBO

greater risk of recession in the event of an oil price 

shock.14

Because highways have significant fixed costs and external 

costs of use, there is no direct relationship between the 

sum of marginal costs of highway use for all users and 

the cost of construction and maintenance. If a road’s 

fixed costs are greater than the sum (over all users and 

over time) of the external costs attributable to the use of 

that road, then the road cannot be fully paid for under 

marginal-cost pricing. Total revenues under marginalcost pricing (which would correspond to the aggregate 

costs of road wear plus aggregate external costs) would be 

insufficient to cover the costs of construction and maintenance (aggregate road wear costs plus fixed costs). A road 

that cannot pay for itself through marginal-cost pricing 

can still be efficient—that is, building or maintaining it 

may be economically worthwhile. In particular, such 

pricing does not involve charging users according to the 

benefit they receive, and the value of a highway’s total 

benefit to all users could exceed its construction, maintenance, and external costs even if the sum of all its marginal costs does not.15 Funding such roads requires tapping other sources of revenue, whether they are derived 

from roads that generate surplus funds, from charges that 

are above users’ marginal cost, from other user fees, or 

from taxpayers generally.

Alternatively, if the aggregate external costs that result 

from the use of a particular highway are larger than its 

fixed costs, then setting prices equal to the marginal cost 

would yield surplus revenue. That money could be used 

to help fund other roads, other modes of transportation 

(including mass transit), or other government programs; 

it could be used to compensate people who are adversely 

affected by the charges or who are harmed by externalities; or it could be used to reduce deficits or offset a 

reduction in taxes.

Estimates of Marginal Costs 

The marginal costs of highway use cannot be calculated 

precisely, and even the best available estimates are accompanied by significant uncertainty. Nonetheless, the 

estimates can be used to illustrate several points.

One point is that the costs imposed by highway users can 

be divided into two categories: those more directly related 

to miles driven and those more closely related to the 

amount of fuel consumed. Mileage-related costs, which 

include the costs associated with pavement damage, congestion, accidents, noise, and emissions of local air pollutants by passenger vehicles, in fact account for the majority of total costs. (The costs associated with local air 

pollution from passenger vehicles are considered mileage 

related because those emissions, unlike emissions from 

trucks, are regulated on a per-mile basis.)16 Fuel-related 

costs include the costs of local air pollution from trucks, 

climate change, and dependence on foreign oil. To compare costs on a consistent basis, the costs of fuel use can 

be expressed in cents per mile by dividing the cents-pergallon costs by average fuel efficiency in miles per gallon. 

When the two types of costs are expressed in the same 

terms, the costs related to vehicle miles are significantly 

larger than those related to fuel use—several times larger 

for passenger vehicles and for trucks traveling in urban 

14. See, for example, Ian W.H. Parry, “How Much Should Highway 

Fuels Be Taxed?” in Gilbert E. Metcalf, ed., U.S. Energy Tax Policy

(Cambridge, U.K.: Cambridge University Press, 2011), pp. 269–

296.

15. If all trips whose benefits exceeded their costs could be priced just 

slightly below the benefits’ value, efficient use of highways could 

be promoted and all efficient highway projects could be funded 

with enough revenue left over to compensate those who bear the 

external costs. Thus, when benefits exceed costs, any price 

between the two amounts provides the proper incentive for 

efficient use. However, acquiring the additional information 

needed to set prices on the basis of the benefit each person receives 

(which is more than is required to estimate aggregate benefits in a 

benefit–cost analysis) and then charging users different amounts 

will not generally be feasible. Then, charging a price above the 

marginal cost might lead some users to forgo using the highway, in 

turn leading to underused capacity and reduced efficiency. 

16. Emissions standards for trucks are specified in “grams per brake 

horsepower-hour,” a measure of engine power use that is roughly 

proportional to fuel use. In contrast, passenger vehicles’ emissions 

are capped on a per-mile basis so vehicles that use more fuel per 

mile must compensate with superior emissions control systems. 

Although fuel combustion is the source of air pollution (including 

particulate matter, sulfur dioxide, nitrogen oxides, and carbon 

monoxide), giving owners of different kinds of passenger vehicles 

efficient incentives requires charging everyone the same emissions 

fee per mile. See Ian W.H. Parry, “How Much Should Highway 

Fuels Be Taxed?” and Ian W.H. Parry, Margaret Walls, and 

Winston Harrington, “Automobile Externalities and Policies,” 

Journal of Economic Literature, vol. 45, no. 2 (June 2007), 

pp. 373–399. The Environmental Protection Agency has 

announced regulations on greenhouse gas emissions defined on a 

per-mile basis. However, with the exception of reductions in 

leakage of air-conditioning refrigerants, most reductions are likely 

to come from increased fuel efficiency. Thus, greenhouse gas 

emissions are classified as fuel related.
6 ALTERNATIVE APPROACHES TO FUNDING HIGHWAYS

CBO

Figure 2.

Estimated Costs per Mile of 

Highway Use, 2000

(2009 cents per mile)

Sources: Congressional Budget Office based on Department of 

Transportation, Federal Highway Administration, Highway 

Statistics 2008 (December 2009), Table VM-1, 

www.fhwa.dot.gov/policyinformation/statistics/2008/

vm1.cfm; 1997 Federal Highway Cost Allocation Study: 

Final Report (1997), Tables V-22 (noise), V-23 (congestion), V-24 (accidents), and V-26 (pavement damage), 

www.fhwa.dot.gov/policy/hcas/final/index.htm; 

Addendum to the 1997 Federal Highway Cost Allocation 

Study Final Report (May 2000), Table 13, 

www.fhwa.dot.gov/policy/hcas/addendum.htm; and Ian 

W.H. Parry, “How Should Heavy-Duty Trucks Be Taxed?” 

Journal of Urban Economics, vol. 63 (2008), p. 660.

Notes: Passenger vehicles have two axles and four tires and include 

automobiles and light trucks (pickup trucks, minivans, and 

sport-utility vehicles).

Local air pollution costs are classified as mileage related for 

passenger vehicles and fuel related for trucks.

Fuel-related costs were converted to cents per mile using 

estimates of fuel efficiency in miles per gallon based on data 

for travel in all areas. Fuel efficiency was assumed to be 

30 percent higher on rural highways than on urban highways 

for passenger vehicles and trucks without trailers or semitrailers; for trucks with at least one trailer or semitrailer 

(which do a smaller share of their urban travel during 

congested hours), the difference was assumed to be 

25 percent.

areas (see Figure 2).17 Because highway use involves both 

types of costs, the most efficient set of user charges would 

include a mix of fuel taxes and mileage taxes. Users might 

pay the two separately or as a single charge—for example, 

as a VMT tax with a component that varies according to 

the amount of fuel consumed.

A second point is that the estimates shown in Figure 2

imply that user charges that fully reflected marginal 

costs—charges that equal the incremental contribution to 

external costs of each mile driven and each gallon of fuel 

consumed—would be much higher, on average, than are 

the taxes that currently fund highways and transit. In January 2011, combined federal and state fuel taxes were 

about 48 cents per gallon for gasoline and 53 cents per 

gallon for diesel fuel, on average.18 If converted, those tax 

rates work out to about 2 cents per mile for average passenger vehicles and less than 10 cents per mile for 

trucks—in either case, well below the sum of estimated 

mileage-related and fuel-related costs shown in Figure 2. 

(Including the relatively small nonfuel federal taxes paid 

by truck users would not affect that conclusion.) Judging 

from those estimates, raising and restructuring user 

charges to maximize the efficiency of road use through 

full marginal-cost pricing would yield more than enough 

revenue to support an efficient amount of spending on 

highways, and there would be money left over to spend 

on other projects or programs, to reduce taxes, or to lower 

the federal budget deficit. User charges that do not 

achieve full marginal-cost pricing but are set to meet particular revenue targets also could yield some efficiency 

gains if they more closely reflected costs imposed by 

users.

Rural

Passenger

Vehicles

Urban

Passenger

Vehicles

Rural

Trucks

Urban

Trucks

0

10

20

30

40

50

60

70

80

Mileage-Related Costs

Fuel-Related Costs

Converted to Cents per Mile

17. To estimate fuel efficiency in rural and urban areas, CBO used 

data on fuel use nationwide and data on rural and urban mileage 

by vehicle type. CBO adopted the assumption that efficiency is 

30 percent greater in rural areas than in urban areas for most 

vehicles. The same assumption was proposed by Ian W.H. Parry 

in “How Should Heavy-Duty Trucks Be Taxed?” Journal of Urban 

Economics, vol. 63, no 2 (March 2008), pp. 651–668. For the 

largest trucks, which do a larger share of their urban travel during 

uncongested hours, CBO assumed that the difference in fuel 

efficiency was 25 percent. 

18. The American Petroleum Institute publishes average fuel taxes 

each calendar quarter; see www.api.org/statistics/fueltaxes/upload/

Gasoline_Diesel_Summary.pdf, for the latest figures. Some taxes 

shown in that report, such as oil inspection fees and underground 

storage tank fees, do not yield revenues for transportation. 
ALTERNATIVE APPROACHES TO FUNDING HIGHWAYS 7

CBO

A third point is that different classes of vehicles contribute to the costs of highway use in different ways and to 

varying degrees. Passenger vehicles constitute the largest 

group of vehicles in use, and they also account for the 

majority of the costs of highway use even though their 

costs per mile and per gallon are much lower than are 

those for trucks. In 2008, passenger vehicles accounted 

for more than 90 percent of vehicle-miles traveled (combining the 63 percent attributable to passenger vehicles 

traveling in urban areas and 29 percent traveling in rural 

areas, see Figure 3) and for almost 80 percent of fuel use 

(using 58 percent of the total in urban areas and 21 percent in rural areas, see Figure 4). Travel by passenger vehicles in urban areas is the predominant source of congestion, and congestion is the largest single category of costs 

of highway use. Nationally, passenger vehicles account for 

almost all of the costs associated with accidents. Trucks 

are responsible for almost all of the costs of pavement 

damage. Because pavement damage is a function of 

weight per axle, moreover, heavier trucks with fewer axles 

cause more damage than other trucks do.19 According to 

one set of estimates, a combination truck with a tractor 

and one semitrailer that weighs 105,000 pounds does 

13 times more pavement damage per mile than a similar 

vehicle that weighs 55,000 pounds (see Table 1 on 

page 10).20 Conversely, the damage done by a tractorsemitrailer combination with six axles is about one-fourth 

that done by a truck with the same total weight on four 

axles. Costs per mile for congestion and noise also are 

higher for trucks than they are for cars because trucks are 

larger, less maneuverable, and louder. Trucks have larger 

fuel-related costs than cars, but the contrast reflects the 

different classifications of air pollution costs rather than 

actual differences in costs of highway use. If the cost of 

local air pollution was considered fuel related rather than 

mileage related for cars, as it is for trucks, then fuelrelated costs would be roughly the same for both.

A fourth point is that the costs that highway users impose 

on others, and the corresponding efficient user charges, 

vary greatly by time and place. Congestion costs in particular differ considerably from one area to another, 

among different parts of a road network in a given area, 

and by time of day and day of week in a given part of the 

network. For example, the estimated national average 

congestion cost for passenger vehicles is roughly 10 cents 

per mile; by contrast, one estimate of the congestion cost 

of peak-period driving in the Washington, D.C., metropolitan area in 2002 was about 34 cents per mile (in 2009 

dollars).21 The costs per mile associated with pavement 

damage, noise, and local air pollution also are higher in 

urban areas because of higher road repair costs and 

greater traffic volume and population density (see 

Figure 3). Accident costs per mile are higher in rural 

areas, where higher average travel speeds contribute to a 

higher rate of fatal crashes. Overall, total mileage-related 

costs of highway use are about 25 percent greater in 

urban areas than in rural areas for passenger vehicles and 

roughly three times greater in urban areas for heavy-duty 

trucks (see Figure 2).

Again, the reason for focusing on the qualitative implications of estimated marginal costs of highway use rather 

than their specific numerical values is that the estimates 

are accompanied by significant uncertainty. Those marginal costs cannot be observed directly but must be calculated from relationships among other factors, and those 

relationships in turn often are based on interpretations or 

applications of data that are outdated or obtained from 

studies on other topics. For example, estimating the marginal cost of traffic congestion requires first quantifying 

the relationship between traffic volume and delays, the 

value of drivers’ time, how strongly drivers dislike the risk 

of being late, and the cost of additional inventory held by 

businesses as a hedge against delivery delays. In addition, 

some estimates—notably those associated with the costs 

of emissions of greenhouse gases and dependence on 

19. The cost of pavement damage shown in Figure 3 is the 

incremental cost of road repair and maintenance; it does not 

include the cost of additional wear on vehicles that occurs during 

travel on worn pavement.

20. See Kenneth A. Small, Clifford Winston, and Carol A. Evans, 

Road Work (Washington, D.C.: Brookings Institution), 1989, 

Table 3-4.

21. Ian W.H. Parry and Kenneth A. Small, “Should Urban Transit 

Subsidies Be Reduced?” American Economic Review, vol. 99, no. 3 

(2009), pp. 700–724, Table 2. A full analysis of efficient 

congestion charges would consider any effects of such charges on 

land use. If some drivers responded in part by moving closer to the 

center of a metropolitan area, the net benefits of congestion 

charges to society could be greater. See Ashley Langer and Clifford 

Winston, “Toward a Comprehensive Assessment of Road Pricing 

Accounting for Land Use,” in Gary Burtless and Janet Rothenberg 

Pack, eds., Brookings–Wharton Papers on Urban Affairs, 2008

(Washington, D.C.: Brookings Institution), pp. 127–174.
8 ALTERNATIVE APPROACHES TO FUNDING HIGHWAYS

CBO

Figure 3.

Estimated Mileage-Related Costs and Vehicle-Miles Traveled in Various Years

(2009 cents per mile)

Sources: Congressional Budget Office based on Department of Transportation, Federal Highway Administration, 1997 Federal Highway Cost 

Allocation Study Final Report (1997), Tables V-22 (noise), V-23 (congestion), V-24 (accidents), and V-26 (pavement damage), 

www.fhwa.dot.gov/policy/hcas/final/index.htm; Addendum to the 1997 Federal Highway Cost Allocation Study Final Report 

(May 2000), Table 13, www.fhwa.dot.gov/policy/hcas/addendum.htm; and Highway Statistics 2008 (December 2009), Table VM-1, 

www.fhwa.dot.gov/policyinformation/statistics/2008/vm1.cfm.

Notes: Passenger vehicles have two axles and four tires and include automobiles and light trucks (pickup trucks, minivans, and sport-utility 

vehicles).

Mileage shares exclude motorcycles and buses.

Local air pollution costs are classified as mileage related for passenger vehicles and fuel related for trucks.

* = less than 0.5 cents per mile; n.a. = not applicable.

Pavement Damage Congestion Accidents Noise Local Air Pollution

0

5

10

15

20

25

30

35

40

45

Urban

Passenger

Vehicles

 (63%)

Rural

Passenger

Vehicles

 (29%)

Rural

Trucks

 (4%)

Urban

Trucks

 (4%)

* * n.a. n.a.

Cost per Mile, 2000 Share of Vehicle-Miles Traveled, 2008

Rural Trucks

Urban Trucks

Rural Passenger Vehicles

Urban Passenger Vehicles
ALTERNATIVE APPROACHES TO FUNDING HIGHWAYS 9

CBO

Figure 4.

Estimated Fuel-Related Costs and Fuel Consumed in Various Years

Sources: Congressional Budget Office based on Ian W.H. Parry, “How Should Heavy-Duty Trucks Be Taxed?” Journal of Urban Economics, 

vol. 63 (2008), p. 660; and Department of Transportation, Federal Highway Administration, Highway Statistics 2008 (December 

2009), Table VM-1, www.fhwa.dot.gov/policyinformation/statistics/2008/vm1.cfm.

Notes: Passenger vehicles have two axles and four tires and include automobiles and light trucks (pickup trucks, minivans, and sport-utility 

vehicles).

Fuel use shares exclude motorcycles and buses.

Local air pollution costs are classified as mileage related for passenger vehicles and fuel related for trucks.

foreign oil—rest on speculation about contingencies in 

the future. In many cases, the estimates lie within ranges 

with plausible upper bounds that are 5 to 10 times larger 

than the lower bounds (see Box 1 on page 12).

Fuel Taxes: The Current Approach

Most of the advantages and disadvantages of funding 

highways through fuel taxes and VMT taxes can be analyzed in terms of equity and efficiency (see Table 2 on 

page 11). The same framework can be applied to other 

current taxes on highway users, to new fees that could 

be imposed on users, and to general revenues (see the 

appendix).

Equity

The equity implications of fuel taxes, the primary current 

source of HTF revenues, are mixed: Fuel taxes satisfy the 

user-pays criterion, but they tend to be regressive; that is, 

they impose a larger relative burden on low-income than 

on high-income households. An analysis of 2004 data on 

effective tax rates (taxes paid divided by income) that 

divided all households into five groups of equal size by 

income showed that people whose households were in the 

second-lowest and middle quintiles paid somewhat larger 

shares of their income in gasoline taxes than did people in 

the lowest quintile or in the top two quintiles (see Table 3 

on page 14).22 Fuel taxes are less directly burdensome for 

households in the bottom group of earners, in part 

because people in some of those households do not own 

automobiles. However, the diesel fuel tax also imposes an

Rural

Passenger

Vehicles

Urban

Passenger

Vehicles

Rural

Trucks

Urban

Trucks

0

10

20

30

40

50

60

70

80

Cost per Gallon, 2000

(2009 Cents)

Urban

Passenger

Vehicles

 (58%)

Rural

Passenger

Vehicles

 (21%)

Urban

Trucks

 (12%)

Rural

Trucks

 (10%)

Share of Fuel Consumed, 2008

22. See Andrew Chamberlain and Gerald Prante, Who Pays Taxes and 

Who Receives Government Spending? An Analysis of Federal, State, 

and Local Tax and Spending Distributions, 1991–2004, Working 

Paper 1 (Washington, D.C.: Tax Foundation, March 2007), p. 42.
10 ALTERNATIVE APPROACHES TO FUNDING HIGHWAYS

CBO

Table 1.

Estimated Relative Pavement Costs for 

Tractor-Semitrailers, by Two Factors

(Index, 1 = 55,000 pounds and 4 axles)

Source: Congressional Budget Office based on Kenneth A. Small, 

Clifford Winston, and Carol A. Evans, Road Work

(Washington, D.C.: Brookings Institution, 1989), 

Table 3-4. 

indirect burden (which is not reflected in the table) 

through the effect on the prices of shipped goods. 

Because lower-income households consume larger shares 

of their income, that indirect effect would add to the 

overall regressivity of the fuel taxes considered together. 

Some observers find another equity concern in the fact 

that fuel taxes disproportionately affect people who live 

in rural areas. According to data from the Department of 

Transportation’s National Household Travel Survey, people in rural households spend more, on average, on gasoline or diesel fuel because their vehicles (including lightduty trucks and older cars) tend to be less fuel efficient 

than are the vehicles of their urban counterparts and 

because people in rural areas tend to drive more. The survey data indicate that rural households at all income levels spend more on gasoline and diesel fuel than is spent 

by comparable urban or suburban households. For example, rural households with income below $25,000 spent 

30 percent more than did their urban counterparts, in 

part because they drove 13 percent more miles. Relative 

differences in spending on fuel between rural and urban 

households were even greater among other income 

groups.23

Efficiency

In terms of efficiency, two aspects of fuel taxes are positive: First, the costs of collection and enforcement are 

low, in part because fuel taxes are not collected directly 

from individual service stations or from users of fuel but 

from fuel distributors, which collect them from the service stations where the money is collected from fuel purchasers. (In 2008, there were 114,000 filling stations and 

about 8,000 distributors in the United States.)24 Second, 

in combination with state and local fuel taxes, the federal 

taxes give motorists an incentive to reduce fuel consumption, thereby reducing the external costs associated with 

that consumption and, to some extent, the costs related 

to mileage.

By themselves, however, fuel taxes cannot give motorists 

incentives to use highways most efficiently. The effect on 

mileage-related costs of an increase in fuel taxes is lessened to the extent that users shift to driving vehicles that 

use less fuel. Similar logic applies to any given fuel tax: 

The higher the current fuel economy, the smaller the 

effect on mileage. (Gasoline and diesel taxes have zero 

direct effect on people who drive electric vehicles.) A further limitation of federal fuel taxes is that, at best, they 

can be based only on average national conditions, not on 

such local conditions as the extent of congestion in a particular area. Even at rates set to maximize efficiency, such 

taxes are a compromise: They are inefficiently low for 

congested roads, giving users too little incentive to avoid 

contributing to the problem, and inefficiently high for 

uncongested roads, giving users reason to forgo some 

trips for which the total benefits would exceed the costs. 

Having fuel taxes set by states can ameliorate that problem if states with more congested roads set higher taxes. 

Even then, fuel taxes do little to encourage users to drive 

during off-peak hours—they do so only to the extent that 

travel on congested roads uses more fuel—or to purchase 

trucks with more axles.

For each fuel, the total (federal plus state and local) tax 

rate that maximizes efficiency depends on other policies 

that affect highway use. For example, the efficient rate for 

23. Department of Transportation, Federal Highway Administration, 

Rising Fuel Cost—A Big Impact, NHTS Brief (June 2006), 

http://nhts.ornl.gov/briefs/Rising%20Fuel%20Costs--

A%20Big%20Impact.pdf. 

Gross Vehicle Weight (Pounds)

0.13

1.00

4.48

13.28

Axles

3 2.10

4 1.00

5 0.41

6 0.24

33,000

55,000

80,000

105,000

Relative Cost

24. For the number of service stations, see Census Bureau, Statistics of 

U.S. Businesses, “U.S., all industries,” www2.census.gov/econ/

susb/data/2008/us_6digitnaics_empl_2008.xls, cell 10668E; for 

the number of licensed payers of federal fuel taxes, see 

Department of Transportation, Federal Highway Administration, 

Office of Highway Policy Information, “Highway Information 

Seminar—Motor Fuel Session—November 16, 2004,” 

www.fhwa.dot.gov/ohim/mfhtf/mfbigpicture.htm. 
ALTERNATIVE APPROACHES TO FUNDING HIGHWAYS 11

CBO

Table 2.

Implications of Fuel Taxes and VMT Taxes

Source: Congressional Budget Office.

Note: VMT = vehicle-miles traveled.

a. Some low-income people do not own motor vehicles; however, they pay fuel taxes indirectly because the prices of goods they buy reflect 

the goods’ transportation costs.

b. Fuel-related costs include greenhouse gas emissions, dependence on foreign oil, and local air pollution from trucks.

c. Mileage-related costs include road wear, congestion, accidents, local air pollution from passenger vehicles, and noise.

d. Fuel taxes would have proportionately less effect on miles driven than on fuel use and provide minimal incentive for users to avoid 

congestion or increase the number of axles on trucks they purchase.

e. VMT taxes would have a proportionately equal effect on fuel use and mileage but provide no incentive for users to increase fuel efficiency.

a fuel tax is higher in the absence of per-mile charges 

because it reflects not only the fuel-related external costs 

but also the extent to which users respond to the tax by 

driving less—thereby reducing mileage-related costs. 

When a fuel tax is increased, driving less—typically by 

forgoing trips or using carpools or public transit—is the 

primary adjustment users can make in the short run. 

Over time, people can respond both by driving less (perhaps by moving closer to work) and by driving vehicles 

that are more fuel efficient. The share of the response in 

the long-run—after all such shifts have taken place—that 

would take the form of a change in miles driven has been 

estimated at about 50 percent for passenger vehicles and 

60 percent for trucks.25

The estimates of the external costs of fuel use (see Figure 

4 on page 9) imply that current fuel taxes would be above 

efficient levels, at least for some vehicles in some states, if 

appropriate mileage-based charges were in place. According to those estimates, the efficient tax for gasoline (used 

by passenger vehicles) would be about 35 cents per gallon 

and the efficient tax for diesel fuel (used primarily by 

trucks) would be roughly 75 cents per gallon. In contrast, 

combined federal and state fuel taxes in January 2011 

were about 48 cents per gallon for gasoline and 53 cents 

per gallon for diesel fuel, on average.26

Under other policy scenarios, the comparisons between 

existing fuel taxes and their efficient rates could be 

different—in particular, the estimates indicate that in the 

absence of VMT taxes, current taxes are below their efficient levels. That point is illustrated by a study that presents internally comparable estimates of efficient fuel 

taxes in several policy scenarios.27 The research used 

methods similar to those underlying the estimates of fuelrelated costs given above. However, those estimates of 

fuel-related costs, which constitute efficient fuel tax rates 

if appropriate VMT taxes also are charged, are somewhat 

lower (roughly $0.20 per gallon for gasoline and 

$0.60 per gallon for diesel fuel) because of differences in 

some specific numerical assumptions. (Again, all of the 

estimates of the costs of highway use discussed here lie 

within significant ranges of uncertainty.) The efficient gas 

tax without per-mile charges was estimated to be several 

times higher than a tax with efficient per-mile charges—

roughly $1.30 versus $0.20 (see Table 4 on page 15).

Efficiency

Equity

Address FuelRelated Costsb

Address 

MileageRelated 

Costsc

Collection 

Costs

User 

Pays

Larger 

Relative Burden on 

Low-Income Peoplea

Larger Relative 

Burden on People in 

Rural Areas

Privacy

Issues

Fuel Taxes Yes Generally, yes Yes Yes Somewhatd Low No 

VMT Taxes Yes Generally, yes, but perhaps 

less than fuel taxes

Yes, but less 

than fuel taxes

Significantlye Yes High Yes

25. Parry, “How Should Heavy-Duty Trucks Be Taxed?” p. 662. 

26. See American Petroleum Institute, www.api.org/statistics/

fueltaxes/upload/Gasoline_Diesel_summary.pdf. 

27. Parry, “How Much Should Highway Fuels Be Taxed?” In 

principle, how high a fuel tax would need to be to meet the test of 

efficiency depends on other policies that affect highway use and 

on how the resulting revenues are used. If revenues are used 

primarily to fund highway and transit projects, efficient taxes 

could be higher or lower than those discussed here, depending on 

the value of the projects. 
12 ALTERNATIVE APPROACHES TO FUNDING HIGHWAYS

CBO

Continued

Box 1.

Uncertainty in the Estimates of the Marginal Costs of Highway Use

In selecting estimates of the marginal costs of highway use (see Figures 2, 3, and 4 in the text), the 

Congressional Budget Office drew primarily from 

three studies—two reports from the Federal Highway 

Administration (FHWA) and one journal article.1

Information in those publications and elsewhere in 

the economics literature indicates that significant 

uncertainty surrounds those estimates.

There are large differences between the FHWA’s low, 

medium, and high estimates of the costs per mile that 

highway users impose on others in the forms of congestion, accidents, noise, and local air pollution (see 

the figure). The FHWA’s reports do not provide 

ranges for estimated costs per mile of pavement damage in part because the focus on pavement damage is 

less on the costs that users impose on each other and 

more on the total costs of federally supported highway projects, including the fixed costs of pavement 

damage that is caused simply by aging and weathering. The FHWA’s high estimates (for travel by all 

vehicles on all highways) for congestion, accidents, 

and noise are roughly three times its medium estimates, which correspond to the mileage-weighted 

averages of the costs by vehicle type on rural and 

urban roads shown in Figure 3 in the text; the low 

estimates are between about a quarter and a half of 

the medium estimates. 

The uncertainty surrounding the medium estimate 

for the cost of air pollution seems to be more concentrated on the high side; the high estimate is more 

than seven times the medium estimate. That contrast 

with the more symmetric uncertainty around the 

other categories of costs in the figure could be a product of the methods of estimation: The low, medium, 

and high estimates for congestion, accidents, and 

noise were developed as part of the FHWA’s analysis 

of highway cost allocation; the medium estimate for 

the cost of air pollution was combined with low and 

high estimates from another source.2

One source of the uncertainty in fuel-related costs 

for trucks is the imprecision in estimates of the costs 

of local air pollution. (Because of differences in 

the regulation of vehicle emissions, those costs are 

mileage related for passenger vehicles.) The remaining uncertainty in fuel-related costs comes from the 

highly imprecise estimates of the costs of greenhouse 

gas emissions and dependence on foreign oil.

The Department of Energy uses estimates of the 

global cost of additional emissions of carbon dioxide 

into the atmosphere that differ by a factor of 11, 

ranging from $5 to $55 per ton, in 2007 dollars.3

The factors that account for the variation include 1. See Department of Transportation, Federal Highway 

Administration, 1997 Federal Highway Cost Allocation Study 

Final Report (1997), www.fhwa.dot.gov/policy/hcas/final/

index.htm; Addendum to the 1997 Federal Highway Cost 

Allocation Study Final Report (May 2000), 

www.fhwa.dot.gov/policy/hcas/addendum.htm; and Ian 

W.H. Parry, “How Should Heavy-Duty Trucks Be Taxed?” 

Journal of Urban Economics, vol. 63 (2008), pp. 651–668. 

The FHWA is currently at work on a new cost allocation 

study.

2. See Department of Transportation, Addendum to the 1997 

Federal Highway Cost Allocation Study, Table 10 and Figure 8.

3. See Department of Energy, “Energy Conservation Program: 

Energy Conservation Standards for Refrigerated Bottled or 

Canned Beverage Vending Machines,” Federal Register,

vol. 74, no. 167 (August 31, 2009), p. 44948.
ALTERNATIVE APPROACHES TO FUNDING HIGHWAYS 13

CBO

Box 1. Continued

Uncertainty in the Estimates of the Marginal Costs of Highway Use

Relative Dispersion Around Best Estimates of 

Selected Marginal Costs of Highway Use

(Ratio to medium estimate)

Source: Congressional Budget Office based on Department of 

Transportation, Federal Highway Administration, 

1997 Highway Cost Allocation Study: Final Report 

(1997); and Addendum to the 1997 Federal Highway 

Cost Allocation Study Final Report (May 2000).

differences in the estimates of future damage, the discount rates used to express that damage in terms of its 

present value, and the models of the risk of sudden 

catastrophic changes in climate.4

In most analyses of the external costs of fuel use, the 

cost of dependence on foreign oil has two components: the cost that consumers of gasoline, diesel, and 

other oil products impose on each other by raising 

the world price of oil and the cost to the economy as 

a whole that is associated with vulnerability to oil 

price shocks. Estimates of those costs vary not only 

because of different assumptions about the numerical 

values of specific parameters (for example, the sensitivity of oil prices to world demand), but also because 

of different views on conceptual issues. For example, 

some economists believe that there is a flaw in the 

standard conception of the cost that consumers of oil 

products impose on one another by increasing 

demand and, consequently, raising the world price of 

oil. They argue that such a conception does not consider the role of oil exporters in determining world oil 

prices. The cost of vulnerability to price shocks, 

moreover, depends on the likelihood that any shock 

will occur and on the probabilities of different sizes of 

shocks if one does occur. All of those factors are difficult to estimate.

Although the available estimates of the costs of highway use reflect the best research so far, the uncertainty surrounding them limits their usefulness for 

policymaking. One of the FHWA reports commented about the medium cost estimates presented 

there: “The large uncertainty surrounding these estimates suggests that caution should be exercised in 

making decisions that could significantly influence 

either user costs or highway investment based upon 

these social costs.”5

 Further research could help narrow the uncertainty that accompanies the estimates 

of highway costs.

Congestion Accidents Noise Local

Air Pollution

0

1

2

3

4

5

6

7

8

9

0.3

1.0

2.9

0.6

1.0

3.1

0.3

1.0

2.6

0.7

1.0

Low 7.6

Medium

High

4. See Ian W.H. Parry, “How Much Should Highway Fuels Be 

Taxed?” in Gilbert E. Metcalf, ed., U.S. Energy Tax Policy

(Cambridge, U.K.: Cambridge University Press, January 

2011). See Congressional Budget Office, Uncertainty in 

Analyzing Climate Change: Policy Implications (January 

2005), for a broader discussion of the sources of uncertainty 

in economic analyses of climate change. Present value is a 

single number that expresses a flow of current and future 

income, or payments, in terms of an equivalent lump sum 

received or paid today.

5. Department of Transportation, Federal Highway 

Administration, Addendum to the 1997 Federal Highway Cost 

Allocation Study Final Report.
14 ALTERNATIVE APPROACHES TO FUNDING HIGHWAYS

CBO

Table 3.

Average Effective Gasoline Tax Rates by Household Income Group, 2004

(Percentage of household income)

Source: Congressional Budget Office based on Andrew Chamberlain and Gerald Prante, Who Pays Taxes and Who Receives Government 

Spending? An Analysis of Federal, State and Local Tax and Spending Distributions, 1991–2004, Working Paper 1 (Washington, D.C.: 

Tax Foundation, March 2007), p. 42.

Those estimates include about 10 cents for the external 

cost of greenhouse gas emissions, so they would be about 

10 cents lower—roughly $0.10 with efficient mileage 

charges and $1.20 with no mileage charges—if the external cost of climate change was built into the fuel price 

through some other mechanism, such as a carbon tax or a 

cap-and-trade policy that included transportation. By 

contrast, the efficient gas tax would be higher if there 

were higher standards for average fuel economy—about 

$2.10 in the absence of a VMT tax, under fuel economy 

standards that are scheduled to go into effect in 2016—

because any given decline in fuel use would yield a larger 

reduction in mileage-related costs. As with the gasoline 

tax, the efficient tax on diesel fuel would be greater without VMT charges than with them, although the estimated difference between the two ($1.20 versus $0.60) is 

not as large as it is for gasoline.

Potential Taxes on Vehicle-Miles 

Traveled 

A consensus view of many transportation experts and 

economists is that a system of taxes on vehicle-miles traveled should be viewed as the leading alternative to fuel 

taxes as a source of funding for highways.28 The implications of VMT taxes for equity and efficiency—and for 

concerns about privacy (an issue that does not fit neatly 

into the equity–effciency framework)—are different from 

those for fuel taxes. In implementing VMT taxes, policymakers would confront interrelated questions about the 

goals of the system, which vehicles and roads to include, 

and what methods and technology would be used to 

administer the system, as well as questions about how the 

system should be introduced.

Many jurisdictions in the United States and abroad 

charge directly for some highway use, but existing charges 

apply either to specific types of vehicles or to the use of 

specific roads. Four states—Kentucky, New Mexico, 

New York, and Oregon—and several European countries 

levy weight-and-distance charges on trucks (although 

most of the European systems are limited to certain major 

roads). New Zealand has weight-and-distance charges 

for trucks and for passenger vehicles that use a fuel (usually diesel) that is not taxed at the wholesale level. Tolls 

on particular highways, highway lanes, or bridges are 

examples of direct pricing that applies to all vehicles 

on particular routes. Somewhat related are “cordonpricing” systems, such as those in London, Singapore, 

Federal Tax 0.21 0.27 0.27 0.25 0.21

0.29 0.37 0.38 0.35 0.29

____ ____ ____ ____ ____

Total 0.50 0.64 0.65 0.60 0.50

State and Local Taxes

Quintile Quintile Quintile Quintile Quintile

Bottom Second Third Fourth Top

28. See Transportation Research Board of the National Academies, 

Committee for the Study of the Long-Term Viability of Fuel 

Taxes for Transportation Finance, The Fuel Tax and Alternatives for 

Transportation Funding, Special Report 285 (Washington, D.C.: 

National Research Council, 2006), http://onlinepubs.trb.org/

onlinepubs/sr/sr285.pdf; National Surface Transportation Policy 

and Revenue Study Commission, Transportation for Tomorrow

(December 2007), http://transportationfortomorrow.com/

final_report/index.htm; and National Surface Transportation 

Infrastructure Financing Commission, Paying Our Way: A New 

Framework for Transportation Finance (February 2009),

http://financecommission.dot.gov/Documents/

NSTIF_Commission_Final_Report_Advance%20Copy

_Feb09.pdf. For additional information on VMT charging 

systems, see Paul Sorensen and others, Implementable Strategies for 

Shifting to Direct Usage-Based Charges for Transportation Funding,

Transportation Research Board of the National Academies, 

National Cooperative Highway Research Program, Web-Only 

Document 143 (Washington, D.C.: National Research Council, 

2009), http://onlinepubs.trb.org/onlinepubs/nchrp/nchrp

_w143.pdf; and System Trials to Demonstrate Mileage-Based Road 

Use Charges, Transportation Research Board of the National 

Academies, National Cooperative Highway Research Program, 

Web-Only Document 161 (Washington, D.C.: National Research 

Council, 2010), http://onlinepubs.trb.org/onlinepubs/nchrp/

nchrp_w161.pdf.
ALTERNATIVE APPROACHES TO FUNDING HIGHWAYS 15

CBO

Table 4.

Estimated Fuel Taxes Needed to Maximize Efficiency of Highway Use Under 

Various Policy Scenarios

(2009 dollars per gallon) 

Sources: Congressional Budget Office based on Ian W.H. Parry, "How Much Should Highway Fuels Be Taxed?" in Gilbert E. Metcalf, ed., 

U.S. Energy Tax Policy (Cambridge, U.K.: Cambridge University Press, 2011), pp. 269–296; and American Petroleum Institute, 

“Motor Fuel Taxes” (January 2011).

Note: Estimates are rounded to the nearest 10 cents.

n.a. = not available.

and Stockholm, which charge drivers to enter a city’s congested central area.29

No country has yet developed a comprehensive system 

for directly charging all vehicles for all use of roads. A 

proposal by the Dutch government for such a system has 

proven controversial and has not been adopted. In the 

United States, studies of VMT charging systems have 

been conducted in Portland, Oregon; the Puget Sound 

area of Washington; and Atlanta, Georgia; and researchers at the University of Iowa have examined user preferences for various methods of data collection and billing 

for VMT charges. The results of the Iowa study have not 

yet been published, but the other three reports shed light 

on the potential benefits, costs, and implementation 

issues associated with VMT taxes (see Box 2). 

Equity 

VMT taxes and fuel taxes have broadly similar implications for equity: Both satisfy the user-pays criterion and 

both impose greater relative burdens on low-income and 

rural users than on others. However, to the extent that 

people in rural or low-income households have vehicles 

that tend to be less fuel efficient, they would pay somewhat smaller shares of total VMT taxes than of total fuel 

taxes. CBO does not have data to support that hypothesis 

for low-income households, but data from the National 

Household Travel Survey suggest that the hypothesis 

holds for rural households. Specifically, people in rural 

households with income below $25,000 spend 30 percent more on fuel than do their urban counterparts even 

though they travel, on average, only about 13 percent 

more miles. The implication is that the average fuel efficiency for vehicles used by low-income rural households, 

measured in miles per gallon, is lower (coincidentally, 

13 percent lower) than it is for the corresponding group 

of urban drivers. The National Household Travel Survey’s 

report does not compare the miles traveled by drivers in 

rural and urban households in higher-income groups, but 

the differences in spending on fuel are considerable—

ranging from about 40 percent more to nearly 80 percent 

more spent by rural than urban households. It seems 

likely that the differences result partly from lower fuel 

efficiency as well as from longer distances traveled.

Efficiency

The efficiency argument for VMT taxes starts with the 

fact that, especially for passenger vehicles, most costs of 

highway use are related to miles driven. Fuel-related costs 

With Efficient Per-Mile Charges 0.20 0.60

With No Per-Mile Charges 1.30 1.20

With Cap-and-Trade Rules, No Per-Mile Charges 1.20 n.a.

With Future Fuel Economy Standards, No Per-Mile Charges 2.10 n.a.

Memorandum: 

Current Total Fuel Taxes (Federal plus state average in January 2011 dollars) 0.48 0.53

Gasoline Diesel Fuel

29. Singapore’s system charges tolls to pass gantries on some 

expressways and arterial roads and to enter the cordoned area. See 

Mark Goh, “Congestion Management and Electronic Road 

Pricing in Singapore,” Journal of Transport Geography, vol. 10, 

no. 1 (March 2002), pp. 29–38; and see the system map of the 

Singapore Land Transport Authority, http://interactivemap

.onemotoring.com.sg/mapapp/index.html?param=redirect. For a 

discussion of London’s system and cordon pricing in general, see 

Congressional Budget Office, Using Pricing to Reduce Traffic 

Congestion (March 2009).
16 ALTERNATIVE APPROACHES TO FUNDING HIGHWAYS

CBO

Box 2.

Pilot Tests for Mileage-Based User Fees

Four studies in the United States have tested 

approaches to charging drivers to use highways. 

Three—one each in Portland, Oregon; the Puget 

Sound region of Washington; and Atlanta, Georgia—

examined the effects of assessing drivers vehicle-miles 

traveled (VMT) charges. All were structured so that 

participants would not lose money: Each participant 

was given an initial cash balance based on the number of untaxed miles driven during a baseline period; 

the participant then kept any money that remained 

either at the end of a calendar quarter or at the end of 

the study, depending on the study.

The Portland research project involved 260 vehicles.1

About half of the participants were charged a flat rate 

of 1.2 cents per mile for all travel within Oregon. 

The rest (except a small control group) were charged 

10 cents per mile for peak-hour travel in an area 

around Portland and 0.43 cents per mile for travel 

outside of the peak hours or elsewhere in the state. 

The researchers reported that peak-hour pricing 

reduced participants’ travel during those hours by 

22 percent relative to flat-rate pricing. 

The Puget Sound Regional Council’s study involved 

500 vehicles in the area around Seattle, Washington.2

Participants were charged according to the time of 

day to travel on a network of major highways, up to 

50 cents per mile for travel on some roads during evening peak hours.3

 The researchers reported that study 

participants reduced by 13 percent the number 

of miles traveled on toll roads and cut the number of 

miles they traveled by 12 percent overall.

Researchers at the Georgia Institute of Technology 

and Clemson University collaborated on a multiphase study in the Atlanta area. The first stage 

involved collecting baseline travel data on 475 vehicles from 273 households. More than 100 households 

participated in the second phase, in which participants were assessed VMT charges of 5 cents to 

15 cents per mile. The researchers concluded that no 

effect could be reliably quantified.4

 Although they 

observed a 3 percent reduction in overall miles traveled, the researchers could not isolate the effects of 

road pricing from those of other factors that affect 

driving. In particular, about two-thirds of participating households had experienced some change in a key 

determinant of driving behavior, such as a change in 

vehicle ownership, a change in employment, or a 

move to a new home.

The fourth study was a nationwide survey by the 

University of Iowa for the federal Department of 

Transportation that focused on equipment for monitoring travel and methods of billing. That study 

involved about 2,700 vehicles in 12 locations. Participants were surveyed on their reactions to receiving 

two types of monthly bills: one providing aggregate 

data only and the other showing detailed information 

that included routes of travel. The study’s final report 

has not yet been released.

1. James M. Whitty, Oregon’s Mileage Fee Concept and Road User 

Fee Pilot Program: Final Report (Salem, Ore.: Oregon 

Department of Transportation, November 2007), 

www.oregon.gov/ODOT/HWY/RUFPP/docs/

RUFPP_finalreport.pdf; and Jack Svadlenak, Oregon 

Department of Transportation, personal communication 

(August 18, 2010). Study participants who faced flat-rate 

prices actually drove peak-hour miles that were about 

12 percent above the baseline (although their total in-state 

miles were about 9 percent below), perhaps because the 

baseline period included the summer months, which might 

involve more vacation travel and fewer commuting trips (see 

page 44 of the report). The control group increased its peakhour miles by 14 percent above the baseline.

2. Paul Sorensen and others, Implementable Strategies for Shifting 

to Direct Usage-Based Charges for Transportation Funding,

Transportation Research Board of the National Academies, 

National Cooperative Highway Research Program, WebOnly Document 143 (Washington, D.C.: National Research 

Council, 2009), http://onlinepubs.trb.org/onlinepubs/

nchrp/nchrp_w143.pdf, p. 105.

3. Puget Sound Regional Council, Traffic Choices Study: 

Summary Report (Seattle, Wash., April 2008), http://psrc.org/

assets/37/summaryreport.pdf.

4. Randall Guensler, Georgia Institute of Technology, July 25, 

2010, personal communication.
ALTERNATIVE APPROACHES TO FUNDING HIGHWAYS 17

CBO

for passenger vehicles traveling on rural and urban highways are roughly 1 to 2 cents per mile (see Figure 2 on 

page 6), well below estimated mileage-related costs 

(roughly 10 cents per mile).30 Fuel-related costs also are 

lower, on average, than mileage-related costs for heavy 

trucks, although the differences are not as great in relative 

terms. (There is wide variation among trucks for axle 

weight, patterns of use, and fuel efficiency, so there could 

be some classes for which fuel-related costs exceed 

mileage-related costs.) Because highway costs are more 

directly determined by miles driven than by fuel used, 

appropriately designed VMT taxes can do more to 

improve the efficiency of road use than fuel taxes can. 

Specifically, VMT taxes that account for the type and 

weight of a vehicle and the location and time of its use 

could provide appropriate incentives to reduce congestion, pavement damage, local air pollution from passenger vehicles, noise, and risk of accidents. (It is possible 

that the risk of accidents could be reduced even more efficiently, however, if drivers paid by the mile for automobile insurance because their driving records and other 

relevant data could be included in rate calculations.)31

Although VMT taxes can do more than fuel taxes to 

encourage the efficient use of highways, a combination 

of both can do better still. If there were no fuel taxes, 

the efficient VMT taxes would be somewhat higher 

than otherwise, because they would serve to reduce the 

costs that are directly associated with fuel use as well as 

those that are more directly related to miles driven. However, that would be a second-best approach. VMT 

charges would not provide the best incentive for reducing 

fuel-related costs because they cannot account for differences in fuel economy among vehicles and thus would 

not give drivers an incentive to switch to vehicles that are 

more fuel efficient.

Varying VMT Taxes by Location and Time. To account for 

location and time of use, efficient user charges would not 

be based on nationwide averages. Instead, they would 

consist of two parts: a base rate that accounted for the 

cost of miles driven under low-volume, uncongested conditions and an additional local or regional charge assessed 

and imposed as appropriate, particularly during peak 

travel hours. Such time-and-place-specific pricing would 

improve efficiency not only by reducing the delays, 

schedule uncertainty, and fuel waste associated with 

congestion but also by reducing demand for additional 

capacity. The FHWA has estimated that widespread 

congestion pricing could reduce by nearly one-third the 

investment needed to sustain the operational performance and condition of the highway system—an average 

savings of $41 billion per year (in 2009 dollars).32 In 

addition, other estimates reviewed by CBO suggest that 

the operational benefits of congestion pricing in reduced 

delays and fuel consumption could equal roughly 

$20 billion to $50 billion per year.33 Thus, the total 

annual benefits could be roughly $60 billion to 

$90 billion.

The effectiveness of road pricing in changing users’ 

behavior has been confirmed by experience. In the first 

year of London’s cordon-pricing system, the volume of 

traffic in the city center decreased by 15 percent, and 

there was a 30 percent drop in congestion delays (defined 

as the difference between actual travel time and that 

under free-flow conditions).34 Germany’s weight-anddistance taxes for trucks have produced a 15 percent 

reduction in travel by empty trucks on the Autobahn and 

contributed to a significant increase in purchases of 

trucks that meet higher environmental standards, for 

which tax rates are lower.35 The reports published after 

pilot studies of VMT charges in Portland and 

30. Future increases in fuel efficiency, resulting from higher federal 

standards or caused by consumer responses to fuel prices, would 

increase the importance of per-mile relative to per-gallon costs.

31. Pay-per-mile insurance is available in Texas and several foreign 

countries. In other places, policies are available that include 

mileage-related discounts. See Sorensen and others, System Trials 

to Demonstrate Mileage-Based Road Use Charges, pp. 114–116.

32. Department of Transportation, 2008 Status of the Nation’s 

Highways, Bridges, and Transit, p. ES-16. In the FHWA’s 

definition, operational performance and road conditions are 

sustained over the 20-year study period if two measures—average 

user costs (time, operating, and accident costs) per mile and the 

value of the backlog of economically justifiable bridge projects—

are the same in 2026 as they were in 2006. 

33. See Congressional Budget Office, Using Pricing to Reduce Traffic 

Congestion, p. 7.

34. Ibid., p. 8.

35. See Andreas Kossak, “Germany’s Truck Tolling: Road Pricing for 

High Performance Transportation” (presentation at the Urban 

Partnerships Workshop, Washington, D.C., January 25, 2007), 

www.hhh.umn.edu/centers/slp/transportation/congestion

_pricing/pdf/Germany_Truck_Tolls_Jan07.pdf.
18 ALTERNATIVE APPROACHES TO FUNDING HIGHWAYS

CBO

Puget Sound also noted significant effects on travel (see 

Box 2 on page 16).36

Implementation Costs. Whether charging highway users 

by the mile would improve efficiency would depend not 

only on the effects on highway use but on the costs of 

implementing the charges, including the capital costs for 

equipment and the operational costs of metering (that is, 

of determining what users owe), payment collection (preceded in most but not all system designs by billing), and 

enforcement. In the past, the efficiency costs of implementing a system of VMT charges—particularly the costs 

of users’ time for slowing and queuing at tollbooths—

would clearly have outweighed the potential benefits 

from more efficient use of highway capacity. Now, electronic metering and billing are making per-mile charges 

a practical option. Still, the operational costs of VMT 

systems are higher than are the costs associated with current fuel taxes, and they have high start-up costs as well.

Data to indicate how much more it would cost to implement a system of VMT taxes—whether comprehensive or 

targeted to particular roads or vehicles—are sparse and 

inconclusive. Costs as a percentage of revenue collected 

would depend on the rates charged. Most implementation costs, other than for enforcement, do not depend on 

the rates, so higher rates yield lower costs per dollar of 

revenue, and vice versa. One report has cited estimates 

based on preliminary FHWA research showing that 

administrative costs for a nationwide VMT system would 

include $10 billion in capital costs for a billing agency 

and operating costs of 1.7 percent of revenues, compared 

with 1.0 percent for current fuel taxes.37 Reported operating costs for existing VMT systems have been much 

higher than 1.7 percent of revenues, however, perhaps in 

part because they operate on a smaller scale. The estimates for truck VMT charges range from 4 percent for 

Switzerland’s system (which has higher rates per kilometer than other European systems) to 30 percent for the 

Czech Republic’s, and estimates for cordon-pricing systems go up to about 50 percent for London’s system.38 A 

forthcoming study administered by the Transportation 

Research Board could provide more specific estimates of 

the costs of particular configurations of VMT systems.39

Implementation costs of a VMT system would depend 

heavily on its scope and scale but also would be affected 

by some choices about specific technologies. For example, 

initial capital costs might be higher but operational costs 

might be lower if the VMT taxes were collected “at the 

pump,” the method tested in the Portland pilot study and 

already used for collecting fuel taxes, rather than through 

periodic invoicing from a central office to individual 

users, the approach tested in the Puget Sound study. If 

VMT taxes were collected at the pump, each time fuel 

was purchased, information would be sent from a device 

in the vehicle to a device at the filling station. The data 

would identify the accumulated charges themselves or 

list miles traveled (identified if necessary by times and 

locations) since the previous purchase. The appropriate 

amount of taxes would be collected as part of the fuelpurchasing transaction.

However, collecting VMT taxes in this way would be 

more complicated and more expensive than the current 

system of collecting fuel taxes. Estimated taxes paid in 

advance by distributors would need to be reconciled with 

actual amounts collected at filling stations. The amounts 

collected from fuel purchasers would depend on the state 

and local taxes in effect (including any congestion 

charges) where the fuel is consumed, rather than where it 

is sold; vehicle fuel efficiencies; and, for trucks, the 

weight per axle or some other measure of vehicle size.

36. James M. Whitty, Oregon’s Mileage Fee Concept and Road User Fee 

Pilot Program: Final Report (Salem, Ore.: Oregon Department of 

Transportation, November 2007), pp. 43–44, www.oregon.gov/

ODOT/HWY/RUFPP/docs/RUFPP_finalreport.pdf; and Puget 

Sound Regional Council, Traffic Choices Study: Summary Report

(April 2008), p. 12, www.psrc.org/assets/37/summaryreport.pdf. 

37. National Surface Transportation Infrastructure Financing 

Commission, Paying Our Way, p. 150.

38. See European Conference of Ministers of Transport, “Summary 

and Conclusions,” Conference on Road Charging Systems: 

Technology Choice and Cost Effectiveness, Paris, France, June 1, 

2006 (Paris: International Transport Forum, 2006), p. 8, 

www.internationaltransportforum.org/IntOrg/ecmt/taxes/pdf/

Paris06Conclus.pdf; and Robert Arnold and others, Reducing 

Congestion and Funding Transportation Using Road Pricing in 

Europe and Singapore, FHWA-PL-10-030 (Federal Highway 

Administration, December 2010), pp. 8–9, http://

international.fhwa.dot.gov/pubs/pl10030/pl10030.pdf. The 

studies from Portland and Puget Sound also included analyses of 

the costs of full-scale implementation but it is difficult to 

extrapolate costs from one region or state to the nation as a whole.

39. The underlying research project, “Costs of Alternative RevenueGeneration Systems” (National Cooperative Highway Research 

Program Project 19-08), is complete. For a description of the 

project, see http://144.171.11.40/cmsfeed/TRBNetProject

Display.asp?ProjectID=2513.
ALTERNATIVE APPROACHES TO FUNDING HIGHWAYS 19

CBO

Under a different approach, the government could collect 

taxes after the fact, perhaps from individual stations 

(there were 114,000 in 2008). Another possible difficulty 

with a pay-at-the-pump system would arise from the 

need to create a separate billing mechanism to collect 

VMT charges for electric-powered vehicles. 

For users, capital costs would be high if older vehicles had 

to be retrofitted with the equipment used to meter travel 

and communicate data, and the potential for technical 

problems and tampering could be high as well. Waiting 

until that equipment became standard in all new vehicles 

would reduce capital costs—particularly the incremental 

costs if equipment with similar capabilities would have 

been installed anyway—but the transition period might 

be 15 or 20 years. Between 4 percent and 7 percent of 

cars are scrapped every year, and the average age of a 

light-duty vehicle (as of October 2009) was 10.2 years.40

Privacy 

Although many policy issues can be analyzed primarily in 

terms of effects on efficiency and equity, proposals for 

VMT taxes may involve a third important category of 

effects—namely, effects on people’s ability to keep information about their driving private. The type of VMT tax 

that provides the strongest incentive for efficient highway 

use could pose the greatest concerns about protecting 

users’ privacy. Specifically, the more detailed the information a system uses—including the data on location and 

time of travel needed to discourage travel on congested 

roads—the more the information could be used to reconstruct, or even monitor in real time, a vehicle’s travel. Privacy concerns can be viewed as issues of equity, and they 

have implications for efficiency in that they could lead 

people to avoid making some trips that otherwise would 

offer net benefits. However, equity and efficiency concepts do not get to the core of the potential privacy issues, 

which are therefore better analyzed as a separate category. 

Several approaches have been suggested for preventing 

misuse of data under a VMT system.41 One method is 

simply to restrict the kind of information collected. For 

example, a vehicle’s location could be noted only at the 

borders of jurisdictions, at entrances to or exits from areas 

of high congestion, or along specific routes. Alternatively, 

vehicles’ locations could be determined with medium 

precision, perhaps by communications with nearby cellular radio towers instead of the more precise tracking that 

would be possible using Global Positioning Systems. The 

trade-off is that the systems that use less information provide weaker incentives for drivers to reduce congestion on 

particular highways or to curtail other costs that are 

related to routes and times of travel.

In a system that uses detailed travel data, some 

approaches to protecting privacy focus on limiting 

the government’s access to the data. (However, the government would have to maintain access to information 

necessary to enforce the VMT system.) Some of the proposed approaches would limit the government’s access to 

the data by using equipment inside each vehicle to calculate the charges owed, either continuously or periodically, 

perhaps by the month. Periodic recording would require 

travel data to be stored at least for the duration of the billing cycle. Storage of the information would not be 

required for continuous calculation but could be implemented anyway to give users a way to check the accuracy 

of their bills. One advantage of continuous calculation 

inside vehicles is that it could allow payment through the 

use of prepaid debit cards, as is the case in Singapore. 

There, drivers are charged as they pass through toll 

points; if vehicles lack a working debit card or the card 

has an insufficient balance, a notice is sent requesting 

payment of the toll along with an administrative penalty.42 A disadvantage of all in-vehicle billing, whether 

continuous or periodic, is that any changes in the tax 

rates would have to be communicated to all vehicles.

The government’s access to travel data also could be limited in systems in which charges were calculated outside 

of the vehicles. In one system, each vehicle periodically 

would send its travel information anonymously to an 

external calculator, which would transmit the amount of 

the charge to the vehicle; in turn, the vehicle would 

report the charge amount, but not the underlying travel 

data, to the collection authority. Or the detailed information could be sent with information identifying the 

source vehicle to a private collection service under contract to the government. Although that approach is simi40. R. L. Polk & Co., “Polk Finds More Vehicles Scrapped Than lar to direct billing by the government, users might be 

Added to Fleet” (press release, March 30, 2010), http://

usa.polk.com/news/latestnews/201003-scrappage.htm. 

41. See Sorensen and others, System Trials to Demonstrate MileageBased Road Use Charges, pp. 39–42.

42. See Singapore Government, Land Transport Authority, 

“Electronic Road Pricing: What Is ERP?” www.lta.gov.sg/

motoring_matters/index_motoring_erp.htm. 
20 ALTERNATIVE APPROACHES TO FUNDING HIGHWAYS

CBO

more willing to share their travel data with a commercial 

entity than with the government, just as many people 

now routinely share data about their purchases with 

retailers and credit card companies.

A different approach to privacy issues seeks to assuage 

concern by making the system appealing in other ways—

for example, by giving discounts on pay-as-you-drive 

insurance or by providing additional travel services, such 

as route-specific traffic updates, identification of open 

parking spaces, or automated parking payments. That 

approach could allow a VMT tax to be introduced earlier 

if it hastened the installation of the required in-vehicle 

equipment.

It is not clear how successful any approach would be in 

allaying privacy concerns because the issue is partly one of 

perception. Assurances that a device transmits specific 

limited information could simply be rejected by some 

users. If some fuel taxes remained in place when a VMT 

tax was adopted, users might be permitted to opt out and 

pay higher fuel taxes instead. The higher rate could be 

calculated to include both the per-gallon equivalent of 

average per-mile charges for the user’s vehicle and a premium to keep users from opting out of the new system 

simply because their VMT charges would be higher than 

average. (Allowing users of electric vehicles to opt out 

would require a different approach.) Allowing users with 

the strongest concerns about privacy to opt out of the 

VMT taxes would reduce the coverage of the VMT system and the associated efficiency gains but might serve as 

a safety valve to make the system more acceptable to the 

public.

The Puget Sound study shed some limited light on privacy issues, although the participants were volunteers and 

thus not necessarily representative of all highway users. 

The share that rated their concerns about privacy as moderate declined from 49 percent initially to about 35 percent by the end of the study, the share that expressed low 

concern increased from 26 percent to 31 percent, and the 

share that expressed relatively high concern rose from 

25 percent to 33 percent.43

Potential Goals and Their Implications

The goals identified for a system of VMT taxes would 

help determine basic approaches and relevant technologies and help policymakers decide whether a system 

should be comprehensive or should focus on specific 

vehicles or highways. Another set of choices would 

involve assigning responsibility for introducing the new 

charges.

One goal would be relatively simple: VMT taxes could 

provide an additional source of federal revenues to support highways. For that goal, metering users’ travel would 

involve only recording total mileage, either manually or 

automatically. Among the possible manual methods for 

tracking mileage are annual inspections and self-reporting 

with spot checks. Automatic recording could be done by 

internal devices that communicated odometer readings to 

a VMT billing system or by electronic vehicle identifiers 

read by gasoline or diesel fuel pumps. The pumps would 

estimate miles driven on the basis of fuel usage and a 

standard estimate of fuel economy for each vehicle model 

and year. It is not clear, however, that the goal of raising 

revenues would, by itself, justify the costs of developing 

and implementing a VMT system because additional revenues could be raised more easily by raising existing fuel 

taxes.

A second goal, reducing pavement damage, could focus 

on the 9 million heavy-duty trucks on U.S. roads.44

Although a small number compared with the nation’s 

roughly 240 million passenger vehicles, trucks account 

for roughly one-quarter of the mileage-related costs of 

highway use as well as about one-quarter of fuel-related 

costs. For maximum efficiency, the rates charged in a 

VMT system would consider a truck’s weight per axle, 

thus giving truck owners and operators an incentive to 

use vehicles with more axles to carry a given load. Many 

current systems for taxation on the basis of weight alone 

or weight and distance combined use the number of axles 

as a proxy for weight instead of considering weight and 

axles separately, so trucks with more axles are charged 

more.

A third goal could be to use VMT taxes to help state, 

regional, or local governments solve particular congestion 

problems, whether on major roads, at bridge or tunnel 

bottlenecks, or in central cities. Such problems could be 

addressed by charging tolls on segments of individual 

roads or at entry points to bridges, tunnels, or areas 

with high traffic. In many cases, tolls could be collected 

less expensively by means of cameras that record license 

43. Puget Sound Regional Council, Traffic Choices Study: Summary 

Report, p. 30.

44. Department of Transportation, Highway Statistics 2008, 

Table VM-1, www.fhwa.dot.gov/policyinformation/statistics/

2008/vm1.cfm.
ALTERNATIVE APPROACHES TO FUNDING HIGHWAYS 21

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plate numbers or by using readers mounted on tollbooths 

or overhead gantries than is possible with human or 

mechanical methods. Tolls are perhaps most useful 

for addressing congestion at facilities with controlled 

points of entrance and exit, such as bridges, tunnels, and 

limited-access highways, although cordon-pricing systems, such as that in London, demonstrate that other 

applications are possible.45 A national system of VMT 

charges would not be required if the goal was to manage 

congestion, but federal action to lift restrictions on 

imposing tolls on Interstate highways could be important 

because Interstates account for one-quarter of vehiclemiles traveled in urban areas.46

A fourth goal could be to move toward providing complete incentives for efficient use of the nation’s highways’ 

capacity through a comprehensive system of VMT taxes. 

Such a system would be a new source of federal funds, 

and it would provide a platform for regional or local congestion charges. Some aspects of the system, such as the 

capabilities of the required in-vehicle equipment, would 

depend on the costs of congestion: If costs tended to be 

relatively uniform, involving most of the roads in an area, 

the in-vehicle meters could track location roughly (as in 

the Oregon pilot study). If some costs of congestion were 

associated with particular highways, the devices would 

need to track vehicles’ locations with high accuracy (as in 

the Puget Sound study). Congestion pricing also would 

require the ability to monitor when people travel, again 

with less precision or more depending on the policy 

goals. If it is sufficient to charge congestion prices during 

specific periods (for example, during rush hour or at 

night), then the relevant information is simply the period 

in which travel occurs. In contrast, if it is desirable to 

adjust VMT charges in real time to match conditions, the 

metering equipment needs to monitor time—or, equivalently, the real-time prices—almost continuously.

Even if policymakers were to pursue a comprehensive 

national system of VMT taxes, they would still face a procedural choice about whether the federal government 

should lead its introduction or turn that duty over to 

state governments or the private sector acting within a 

broad federal framework.47 In the state-led model, the 

federal government could provide incentives (including 

direct funding) for states to participate and technical support to ensure that systems in various places worked well 

together. Ultimately, the federal government could 

develop a national VMT system that accounted for lessons learned in the states. The approach emphasizing initial involvement by the private sector could be marked by 

development and marketing of equipment that would 

appeal to users by facilitating pay-as-you-drive insurance 

or other travel services. As in the state-led approach, 

the initial federal role could include spurring participation through financial incentives (perhaps to equipment 

vendors, states, cities, insurance companies, or even 

motorists) and setting equipment standards.

Each approach would have advantages and disadvantages. 

Direct federal leadership would facilitate planning for 

new revenues to the Highway Trust Fund. It also would 

allow for the greatest economies of scale and could be 

used to test and resolve issues that are relevant to implementation of a national system, such as any assistance 

needed from state governments to implement federal 

charges. 

Leadership by the states would offer the advantage of 

direct access to law enforcement agencies to enforce compliance. The state-led approach also might offer more 

incentives for voluntary adoption, such as the opportunity to convert annual vehicle registration fees to per-mile 

charges, and it could allow for more variety and innovation in developing VMT systems. A possible disadvantage 

of state leadership would be the development of systems 

that were incompatible from one state to another. 

Having the private sector facilitate the introduction of a 

VMT system could minimize public resistance by focusing initially on the voluntary participation of users who 

wanted to take advantage of other travel services provided 

through the in-vehicle equipment and by demonstrating 

the system’s ability to protect subscribers’ privacy. However, it is not clear how strong the demand for the equipment would be or whether users would choose to pay 

VMT fees along with paying for the other services.

45. Implementation costs for the first few years of London’s system 

and its western extension totaled about $600 million; see 

Congressional Budget Office, Using Pricing to Reduce Traffic 

Congestion, p. 15. 

46. Department of Transportation, Highway Statistics 2008,

Table VM-1, www.fhwa.dot.gov/policyinformation/statistics/

2008/vm1.cfm.

47. The three approaches are discussed in Sorensen and others, System 

Trials to Demonstrate Mileage-Based Road Use Charges, pp. 73–80.

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Appendix: 

Selected Approaches to Highway Funding

At least three sources of revenue, in addition to 

the current fuel taxes and the potential per-mile charges 

discussed in the text, are now or could be tapped to support federal spending on highways: existing taxes credited 

to the Highway Trust Fund (HTF) on truck ownership 

and sales of trucks and truck tires, new federal user 

charges other than per-mile charges, and revenues from 

the Treasury’s general fund.1

 Using any of those sources 

would offer various advantages, but they all share the 

disadvantage of failing to offer an efficient incentive for 

people to reduce the costs of their highway use (see 

Table A-1).

Existing Federal Taxes on Trucks and 

Tires

The trust fund currently is credited with revenues from 

sales taxes on trucks and tractors with a gross vehicle 

weight of more than 33,000 pounds and on trailers that 

weigh more than 26,000 pounds, from an excise tax on 

tires with a maximum load capacity above 3,500 pounds, 

and from an annual tax on ownership of trucks that 

weigh 55,000 pounds or more. Together, those taxes yield 

about 10 percent of the fund’s receipts. If truck users were 

charged directly and fully for their use of the highways 

through a combination of vehicle-miles traveled charges 

and charges for fuel use, there would be no role for other 

taxes in improving the efficiency of highway use. But 

with total (federal plus state) diesel fuel taxes currently 

below the efficient rate and few direct charges for highway use, the other taxes in place today help reduce the 

costs imposed by trucks. The tire tax provides an incentive to reduce vehicle-miles traveled, and the purchase 

and ownership taxes provide an incentive to reduce the 

number of trucks on the road. In practice, however, the 

current rates are too low to have a meaningful effect. The 

annual tax on ownership of heavy trucks, for example, 

ranges from $100 to $550, depending on gross vehicle 

weight. Those amounts are small relative to the typical 

value of a year of truck ownership and thus are likely to 

induce few owners to sell or dispose of their trucks.

Raising taxes enough to spur a substantial change might 

reduce rather than increase efficiency because the resulting incentives are not likely to be well aligned with the 

cost of pavement damage or with the external costs associated with truck use. None of the taxes provides drivers 

with enough incentive to avoid driving when roads are 

congested or to reduce fuel use by choosing vehicles with 

better fuel economy.

Each of the three taxes also has specific weaknesses. The 

responses to higher taxes on truck purchases would 

include not only a reduction in the number of trucks on 

the road but also an increase in the average age of trucks 

in use; older trucks, which tend to use more fuel and pollute more, would be kept in operation longer. A larger 

annual tax on truck ownership would not have that 

effect, but its effect on use might be less than its effect on 

the vehicle fleet, for two reasons. First, the least valuable 

trucks would be taken out of service, and they might be 

the trucks that are the least used. Second, there is no 

incentive to reduce mileage or fuel use for a truck that is 

valuable enough to warrant the annual tax. Raising the 

tax on truck tires would provide an additional incentive

1. Highway users and taxpayers generally could be taxed in many 

ways. Some are discussed here, but those and many others are 

considered in the report of the National Surface Transportation 

Infrastructure Financing Commission, Paying Our Way: A New 

Framework for Transportation Finance (February 2009), Chapter 3, 

http://financecommission.dot.gov/Documents/NSTIF

_Commission_Final_Report_Advance%20Copy_Feb09.pdf. 
24 ALTERNATIVE APPROACHES TO FUNDING HIGHWAYS

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Table A-1. 

Implications of Alternative Sources of Highway Funding

Source: Congressional Budget Office.

Note: HTF = Highway Trust Fund; n.a. = not applicable.

a. Fuel-related costs include greenhouse gas emissions, dependence on foreign oil, and local air pollution from trucks.

b. Mileage-related costs include road wear, congestion, accidents, local air pollution from passenger vehicles, and noise.

c. HTF taxes include an annual tax on truck ownership and taxes on purchases of new trucks and truck tires.

d. Possible charges include vehicle sales taxes and license and registration fees.

to reduce mileage (and, indirectly, fuel use) but also create 

a perverse incentive to use trucks with fewer axles and 

thus perhaps lead to increased pavement damage by 

increasing average total weight (vehicle plus cargo) per 

axle. 

Their effects on efficiency aside, the truck taxes also have 

implications for equity. They are likely to place a larger 

relative burden on low-income households because they 

raise the retail prices of goods that are transported by 

truck, and low-income households tend to spend greater 

shares of their income on goods in general. Whether 

the taxes also would present a greater relative burden 

for rural households is unclear: It would depend both on 

consumption patterns and on how far goods must travel 

to reach rural compared with urban purchasers. In terms 

of the user-pays conception of equity, the truck taxes can 

be beneficial if they bring the overall tax burden on truck 

operators closer to their total contribution to costs, even 

if the taxes are not based explicitly on the costs and do 

not provide incentives to reduce the costs. The estimates 

discussed in the text suggest that fuel taxes alone do not 

offset the costs of truck travel, so some additional taxation is desirable in promoting the user-pays objective. 

The question then becomes whether the other HTF 

taxes, together with any taxes paid to state and local 

governments, move total payments toward recovery of 

the full cost of use or overshoot that target. Detailed 

analysis would be needed to arrive at the answer, which 

will differ by truck type and size because of differences in 

Equity Efficiency

User 

Pays

Larger Relative 

Burden on 

Low-Income 

People

Larger Relative 

Burden on 

People in 

Rural Areas Other

Address FuelRelated Costsa

Address 

MileageRelated 

Costsb

Collection 

Costs Other

 Existing HTF 

Taxes on Trucks 

and Tiresc

Yes Indirect effect 

through prices 

of goods 

transported 

by trucks

Possible indirect 

effect through 

prices of goods 

transported

by trucks

Could bring 

total taxes on 

trucks more 

in line with 

their costs

No, except 

partial incentive 

from tire tax

No, except 

partial incentive 

from tire tax

Low If large 

enough, would 

distort vehicle 

purchase 

decisions

 New Federal 

User Chargesd

Yes Yes, unless 

assessed on a 

sliding scale

No Could 

meet with 

opposition 

from state 

or local 

governments

No No Relatively 

low

n.a.

 General 

Revenues

No No No n.a. No No Negligible Would further 

distort choices 

about labor, 

capital 

investment, 

and other 

taxed products 

and activities
APPENDIX ALTERNATIVE APPROACHES TO FUNDING HIGHWAYS 25

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costs of operation and tax rates. A study of the allocation 

of various highway costs, now under way at the Federal 

Highway Administration, could help answer the 

question.2

New Charges for Users

A variety of new federal fees could be imposed on highway users. State governments already tax sales of motor 

vehicles and charge fees for vehicle registrations and drivers’ licenses; it would cost relatively little to add on federal 

fees dedicated to the HTF. Given the broad bases of those 

potential taxes, the federal government could raise significant revenues at tax rates that were low enough not to 

cause a significant distortion of users’ choices about vehicle ownership or road use. The disadvantage, however, is 

that such fees would not be closely tied to the mileage- or 

fuel-related costs of highway use. Moreover, the states 

might object on the grounds that the additional federal 

fees could hamper their ability to raise state revenues for 

highway spending. From the standpoint of equity, licensing and registration fees have two positive characteristics: 

They meet the user-pays test, and they place an equal 

burden relative to income on urban and rural users. They 

would tend to be regressive, however, unless they were 

assessed according to household income.

General Revenues

Two arguments can be made in support of funding highways through broad-based taxes, such as income taxes: 

First, the incremental costs of collection would be negligible, and second, large amounts could be raised through 

small changes in the tax rates. The staff of the Joint Committee on Taxation has estimated that raising all tax rates 

on ordinary individual income by 1 percentage point 

would yield an average of $48 billion per year from 2012 

to 2021—more than all of the current HTF taxes combined.3

 Moreover, funding highways through broadbased taxes meets at least one standard of equity: Such 

taxes do not impose a larger burden, relative to income, 

on rural or low-income users.

In other respects, however, the use of general revenues 

poses critical disadvantages. In particular, the approach 

gives users no incentive to reduce the mileage- or fuelrelated costs of their highway use, and it does not satisfy 

the user-pays standard of equity. Moreover, even small 

increases in existing rates would hamper efficiency by 

exacerbating existing deviations from efficient prices, 

thus further distorting many individual decisions.4

 The 

distorted decisions would include reductions in work and 

saving, shifting of income from taxable to nontaxable 

forms, and shifting of spending from ordinary to taxdeductible goods and services. 2. For the predecessor of the current study, see Department of 

Transportation, Federal Highway Administration, 1997 Federal 

Highway Cost Allocation Study Final Report (1997), 

www.fhwa.dot.gov/policy/hcas/final/index.htm; and Addendum to 

the 1997 Federal Highway Cost Allocation Study Final Report

(May 2000), www.fhwa.dot.gov/policy/hcas/addendum.htm. 

That study included a comparison of the costs imposed by four 

specific classes of trucks driven on rural or urban Interstates, with 

the taxes paid for those types of trucks. The taxes paid for all four 

exceeded their costs of driving on rural Interstate highways; the 

same was true for the two lighter types of trucks on urban 

Interstates. The study’s usefulness was limited by the fact that it 

covered only the four specific types of trucks driven on Interstates 

and because of a flaw in the data. In response to a question from 

CBO, a Federal Highway Administration staff member reported 

that the estimates of taxes paid were too high because of an error 

in the attribution of revenues received from the tax on truck sales.

3. See Congressional Budget Office, Reducing the Deficit: Spending 

and Revenue Options (March 2011), p. 139. 

4. The relative increase in the loss of efficiency that results from a 

higher tax rate is roughly double the relative increase in the rate: 

Raising a tax rate from 25 percent by one percentage point is a 

relative increase of 4 percent, but it would be expected to increase 

the cost of the resulting distortions by about 8 percent. The reason 

is that the efficiency loss is roughly proportional to the square of 

the relative increase in the tax, so if the new tax rate is (1 + r) times 

the old one, then the new loss is about (1 + r)

2 times the old one, 

and the relative increase in the loss is (1 + r)

2 - 1, which is 

approximately equal to 2r. In the example, (1.04 × 1.04 - 1) is 

about 0.08, or 8 percent.