How to Pay for Highways

The Vehicle Miles Traveled system charges drivers directly for the miles they travel and the resulting wear and tear on the roads.

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traffic jam on the highway

Eileen Norcross is a Senior Research Fellow at the Mercatus Center at George Mason University. She blogs on state and local economic policy at Neighborhood Effects.

Virginia Gov. Bob McDonnell recently touched off a national debate over how to fund America's roads. His transportation plan includes a proposal to eliminate Virginia's 17.5 cents per gallon gas tax and replace it with an increase in the state's sales tax.

The governor is right to note that the gas tax suffers from multiple problems as a revenue source. As cars become more fuel-efficient and motorists choose to drive alternative fuel vehicles, the gas tax doesn't go the same distance it once did. Also, Virginia hasn't indexed the gas tax to inflation since 1986; otherwise the tax would be 36 cents per gallon by now.

However, switching from a user-based tax to a broader source of revenue for roads violates the principles of user-pays and transparency in taxation. The merit of the gas tax is that drivers pay for road improvements—at least in theory. In reality, the gas tax is a second-best option as a user-based source. Drivers don't pay directly for their individual road use, as is the case with a toll-based system.

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Going to a sales tax, unfortunately, moves Virginia's taxation system further away from the user-pays principle and highlights the larger problem of how America's roads are financed. Just as switching to a state sales tax from a state fuel tax weakens the link between those who use the roads and those who pay for the improvements, so too does applying federal funds for improving state and local infrastructure.

The federal government's 18.4 cents per gallon tax on fuel brought in $83 billion to the Highway Trust Fund last year, which was then redistributed via formula to the states. In addition to federal fuel taxes, a 2011 Government Accountability Office study notes that between 2008 and 2010, Congress tacked on a further $29.7 billion in general revenues for state highway spending, "further complicating the link between highway taxes and highway funding".

That points to the problem of federal funding for state and local road work. Not only has the federal gas tax lost its purchasing power, but the federal-state highway financing system also creates inefficiency and further blurs the link between who is taxed and where the money is spent, making it easier for funds to be misused and diverted.

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The effort to apply the user-pays principle to road improvements—coupled with the search for more stable revenue sources—has led to calls for a Vehicle Miles Traveled approach. The biggest merit of Vehicle Miles Traveled is that it brings us much closer to a user-pays system, by charging drivers directly for the miles they travel and the resulting wear and tear on the roads. It also gets around the declining revenue value of the gas tax and could potentially eliminate the federal government as a middleman for road financing.

A few concerns remain. If the government can track your miles via GPS, can it also track your movements? That all depends on what kind of data is collected and how it's used. Oregon is experimenting with Vehicle Miles Traveled , and states could use a non-GPS collection system with the data processed by a private company.

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Privacy concerns aside, a more fundamental policy problem is one that comes with the public financing of road improvements—are they funds well spent? 

As the prevalence of pork in federal highway bills attests, it's a perennial problem. Vehicle Miles Traveled could go one of two ways. It could reduce the number of governments involved in levying taxes for state and local roads, leading to greater transparency, efficiency, and accountability. But as with all types of taxation, revenue from Vehicle Miles Traveled could prove to be a source of temptation for policymakers at all levels.

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