Mileage-based user fees: Lessons from state programs

Executive summary

The fuel tax remains an exceptionally efficient revenue stream, collected at the wholesale and distributor level at a range of 1% to 5% of revenue, but its base is eroding.

Average new vehicle fuel economy in the United States has increased by nearly 19% in two decades, and states are starting to feel the impact on their transportation budgets. States that have indexed their fuel tax rates to inflation or other variables have slowed but not stopped that decline. Electric vehicle adoption removes the relationship between road use and fuel tax payments entirely for a share of the fleet that grows each year, allowing electric vehicles to degrade roadways through use without paying for road maintenance, repair, and construction.

A mileage-based user fee (MBUF) restores that users-pay/users-benefit relationship by charging drivers based on the miles they actually drive. The design challenge is no longer finding a replacement; it’s making the replacement viable financially.

The Congressional Research Service estimates current mileage-based user fee programs cost anywhere from 5% to 13% of collections. None of the four permanent programs evaluated in this study have demonstrated administrative cost parity with the fuel tax, but the patterns these programs have shown can help lower the costs still. Scale lowers per-vehicle administrative cost, simpler mileage reporting options (MROs) require less back-end administration and cost less to replace, and programs that leverage existing touchpoints rather than building new infrastructure start from a lower cost base.

The next decade of operating data from Utah, Oregon, Virginia, and Hawaii will determine whether mileage-based user fees can meet the standard the fuel tax has set, or whether collection costs remain the central obstacle to making them a viable replacement.

The four permanent MBUF programs in the United States have, collectively, just over two decades of operating data. Three of the four programs have been running for five years or fewer. That is a thin base to draw definitive policy conclusions from, but the patterns that have emerged over those years of operation are consistent enough to guide states that are designing their own permanent MBUF programs or looking to evaluate best practices for reforming existing ones.

An ideal MBUF program would combine Utah’s cost discipline and annual cost-against revenue reporting, Hawaii’s use of an existing state-citizen touchpoint, Oregon’s legislated path to mandatory enrollment, and Virginia’s scale. No single program has all four. Utah comes closest, having moved from a program that ran at a loss to one whose revenue exceeds expenses, with public reporting that makes the trajectory legible to lawmakers, researchers, and citizens.

Hawaii’s use of the Periodic Motor Vehicle Inspection as the mileage-reporting touchpoint avoids the administrative overhead of building a new collection mechanism, though mainland states will not benefit as acutely as Hawaii due to its unique geography.

Oregon, despite a decade of voluntary operation that has served as a beta test for the concept, has failed to produce scale. In response, the state legislated a phased mandatory enrollment for EVs and hybrids—a prudent decision to ensure those road users are paying their fair share for road maintenance.

Virginia’s scale comes from its innovative design with the highway user fee (HUF). Other states looking to scale an MBUF program like Virginia’s Mileage Choice ought to look to the HUF to find ways to incentivize non-EV or hybrid participation. Beyond that, publishing annual or biennial reports that include collection costs as a share of revenue is wise, so that lawmakers, researchers, and the public can evaluate the program rather than infer based on trends.

States looking to start their own mileage-based user fee programs should:

• Prioritize scalability and making enrollment mandatory. A successful MBUF program’s per-vehicle administrative cost falls as enrollment grows;
• If payment caps are used, ensure they are at a relevant level to capture high-frequency use of highway infrastructure;
• Prioritize simplicity for MROs and use existing touchpoints where possible, like Hawaii’s annual safety inspection;
• Ensure commercial account managers’ contracts include per-vehicle cost provisions that decline with scale;
• Require annual public reporting of program costs and revenue in the enabling
• legislation; and
• Index any per-mile rate to inflation at enactment, before mandatory enrollment raises the political cost of adjustment.

Each program has strengths the others should learn from, and every state looking at MBUFs as a replacement for the fuel tax should examine and try to emulate those strengths where possible.

The next five years of operating data are critical. Oregon’s transition to mandatory enrollment, Utah’s projected revenue growth, and Hawaii’s first year post-HiRUC launch will tell us whether mileage-based user fees can scale into a true replacement for the fuel tax.

Full policy study — Mileage-based user fees: Lessons from state programs

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Source: https://reason.org/policy-study/mileage-based-user-fees-lessons-states/