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Winners and Losers: Distributional Impacts of Highway User Fees. B. Starr McMullen Lei Zhang Kyle Nakahara Oregon State University. Case Study: Oregon Proposed change in highway user charges: From a Gasoline Tax to Vehicle mile fee.

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Winners and losers distributional impacts of highway user fees

Winners and Losers: Distributional Impacts of Highway User Fees

B. Starr McMullen

Lei Zhang

Kyle Nakahara

Oregon State University


Case study oregon proposed change in highway user charges from a gasoline tax to vehicle mile fee
Case Study: OregonProposed change in highway user charges: From a Gasoline Tax to Vehicle mile fee

Purpose of Tax: To Collect Road User Fees (We will not consider congestion fees here)

Intent: Revenue Neutral Fee

Intent: Revenue Neutral Fee

VMT tax set at $.012/mile to replace $.24/gallon gasoline tax ($.012 = $.24/20 mpg)


Background
Background

  • Oregon legislature has realized the futility of trying to fund highways with the current 24 cent/gallon tax

  • No political support for raising the tax

  • Given trend towards more fuel efficient vehicles, fuel tax now serves as a road user fee as light vehicle road damage is more related to miles rather than fuel consumed

  • Suggestion by legislatively appointed Road User Fee Task Force (RUFTF):

    Replace gasoline tax with a Vehicle Mile Tax (VMT)


Who gains and loses from this change
Who Gains and Loses From This Change ?

  • Distribution of Costs:

    Between Income Groups

    Between regions (urban/rural)

    Identification important for decisions regarding

    revenue distribution


Regressive progressive and proportional or neutral tax fee structures
Regressive, Progressive, and Proportional or Neutral Tax/Fee Structures

  • A regressive fee takes a greater percentage of income from lower income groups and higher income groups pay a smaller percentage of income

  • A progressive fee means that higher income

    groups pay a progressively higher percent

    of their income in fees

  • In a proportional or neutral fee structure all income groups pay the same percent of their income in fees


Winners and losers distributional impacts of highway user fees
Average Oregon Household Expenditures With Oregon Gasoline Tax of $.24 (2001, with average Oregon gasoline price of $1.46/gallon)

Average HH

income

9935

22433

37038

52096

67500

109962


Winners and losers distributional impacts of highway user fees
Average Household taxes under Gasoline tax of $.29/gallon Tax of $.24 (Using 2001 Average Oregon price of $1.46/gallon)


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

  • Average 2001 gasoline price in Oregon was $1.46/gallon with a $.24/mile tax – and this was regressive

  • What has happened as gasoline prices have risen – let’s use a gasoline price of $2.64/gallon including $.24/mile gas tax


Winners and losers distributional impacts of highway user fees
Average Oregon Household Gasoline Expenditures as a Percent of Income With Oregon Gasoline Tax of $.24

Average HH

income

9935

22433

37038

52096

67500

109962


The suits index
The SUITS INDEX of Income With Oregon Gasoline Tax of $.24

  • The Suits Index, bounded between -1 and 1

  • A value of -1 implies the lowest income group bears the entire burden of the tax;

  • A value of 1 implies the highest income group bears the entire tax burden.

  • A value of 0 implies the tax is proportional.


Winners and losers distributional impacts of highway user fees

Suits Index based on Oregon static model of Income With Oregon Gasoline Tax of $.24

Suits Index= -0.17623


Winners and losers distributional impacts of highway user fees


Objections raised to change to vmt
Objections raised to change to VMT increase in the cost per mile of driving to some; a reduction in the price of driving to others

  • 1. It will be regressive: Households in lower income groups will be the “losers,” higher income households will gain or lose less

  • 2. Rural areas will lose from the change in policy

  • 3. This policy will not encourage use of high fuel efficiency vehicles


Is the proposed change in user fee structure a regressive change
Is the Proposed Change in User Fee Structure a Regressive Change?

  • Static Analysis: Assumes that behavior is not affected by a change in fee structure; each driver drives exactly the same amount with each vehicle as before the fee was implemented

  • Dynamic Analysis: Tries to account for the fact that consumers will change driving behavior in response to the change in the price of driving that the tax change causes


Static analysis impact of a change from a 0 24 gallon gasoline tax to a 012 mile vmt 2001
Static Analysis: Impact of a Change from a $0.24/gallon gasoline tax to a $.012/mile VMT (2001)

1174.01

62

4


Static analysis impact of a change from a 0 24 gallon gasoline tax to a 012 mile vmt 2001 cont
Static Analysis: Impact of a Change from a $0.24/gallon gasoline tax to a $.012/mile VMT (2001) cont.


Winners and losers distributional impacts of highway user fees

Suits Index based on Oregon static model gasoline tax to a $.012/mile VMT (2001) cont.

Suits Index= -0.22542


Alternative policy scenarios
Alternative Policy Scenarios: gasoline tax to a $.012/mile VMT (2001) cont.

  • Alternative Policy 1:

    • Gas Tax of $.24/gallon for vehicles with < 20 mpg;

    • VMT of $.012/mile for vehicles with mpg > 20 mpg (2001 gas prices)

  • Alternative Policy 2: Step fee:

    • a. MPG < median MPG pays 2 cents/mile;

    • b. between median MPG and 20 MPG pays 1.5 cents/mile;

    • c. MPG >20 pays 1 cent/mile


Winners and losers distributional impacts of highway user fees

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


Winners and losers distributional impacts of highway user fees

Suits Index = -0.18493 for vehicles with < 20 mpg ; VMT of $.012/mile for vehicles with mpg


Winners and losers distributional impacts of highway user fees

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


Winners and losers distributional impacts of highway user fees

Suits Index = -0.16165 cents/mile; b. between median MPG and 20 MPG pays 1.5 cents/mile; c. MPG>20 pays 1 cent/mile


Dynamic analysis
DYNAMIC ANALYSIS cents/mile; b. between median MPG and 20 MPG pays 1.5 cents/mile; c. MPG>20 pays 1 cent/mile:

Once behavior changes by the consumer are considered

(movement along the demand curve), the relevant

measure of the change in welfare for consumers is the

change in consumer surplus (CS)—not simply the

change in tax revenue (TR)

For a tax increase, consumers may end up paying less in

taxes, but they may do so by driving less—and that

involves another loss


Winners and losers distributional impacts of highway user fees

Dynamic Model 1: cents/mile; b. between median MPG and 20 MPG pays 1.5 cents/mile; c. MPG>20 pays 1 cent/mileOrdinary Least Square (OLS) Regression

To get dynamic response, we need a model that take into account the behavioral responses – which may differ by income group and by location

We first use an OLS model –

this gives an estimation of changes in vehicle use (i.e. changes in household vehicle miles traveled)


Ols model variables
OLS MODEL VARIABLES cents/mile; b. between median MPG and 20 MPG pays 1.5 cents/mile; c. MPG>20 pays 1 cent/mile

  • Our OLS model is based on the following equation

  • M = f(Pf,I,U,C,SUB,CHILD,WORKER,MALE)

  • Where M is the total annual miles driven by the household,

  • Pf is the fuel cost per mile under the gasoline tax

  • I is annual household income

  • U is a dummy variable, = 1 if urban, = 0 else

  • C is the number of vehicles the household owns.

  • SUB = 1 if the household has more than one type of vehicle, = 0 else

  • CHILD number of children

  • WORK number of workers

  • MALE = 1 if respondent male, = 0 else


Ols results dependent variable annual household miles n 339
OLS Results: cents/mile; b. between median MPG and 20 MPG pays 1.5 cents/mile; c. MPG>20 pays 1 cent/mileDependent Variable – Annual Household Miles (n=339)

Italicized variables are logarithmic


Changes in consumer surplus tax revenue and welfare by income with change to vmt 012 mi
Changes in Consumer Surplus, Tax Revenue and Welfare by Income with change to VMT = $.012/mi



Winners and losers distributional impacts of highway user fees
Impact of a Change from a $0.24/gallon gasoline tax to a $.012/mile VMT: Alternative Policy 1 and Alternative Policy 2


Winners and losers distributional impacts of highway user fees

Suits Index based on Oregon OLS model $.012/mile VMT: Alternative Policy 1 and Alternative Policy 2

Suits Index= -0.133 with gasoline tax

Suits Index =-0.142 with VMT = 1.2 cents/miles

Suits Index = -0.145 with Alternative Policy # 1

Suits Index = -1.111 with Alternative Policy #2


Conclusions
Conclusions $.012/mile VMT: Alternative Policy 1 and Alternative Policy 2

  • The Dynamic Model Comparison of the change in tax revenues makes the policy impact appear less regressive than the static model (See Suits Indices)

  • However, is the appropriate measure the change in tax paid or the change in consumer surplus?

  • ALL of the VMT-fee policy scenarios have a considerably smaller impact on incidence than the increase in gasoline prices in recent years caused by external forces

  • Different VMT-fee structures have different impacts on incidence or equity, but the difference is not large


Conclusions remarks cont d
CONCLUSIONS/REMARKS (cont’d.) $.012/mile VMT: Alternative Policy 1 and Alternative Policy 2

  • If we go to VMT, very small impact: likely to have little impact on driving relative to recent increases in gasoline prices

  • Policy question: If we don’t go to VMT and can’t pass higher gasoline taxes, how do we fund roads?


Alternative funding sources
Alternative funding sources? $.012/mile VMT: Alternative Policy 1 and Alternative Policy 2

  • Local options taxes : sales taxes, local gasoline taxes

  • Higher Registration fees

  • From General Funds

  • Bonding

    Do we really want greater reliance on non-user fees?

    What effect would these taxes have on regressivity relative to the VMT and gas taxes?


Other possibilities for a vmt
Other Possibilities for a VMT $.012/mile VMT: Alternative Policy 1 and Alternative Policy 2

VMT-fees may also be designed to achieve sustainability objectives, such as reducing fuel consumption, reducing greenhouse gas emissions, and encouraging the ownership of greener vehicles

Congestion pricing based on VMT-fee technology

VMT for congestion and environment in addition to gasoline tax?


Questions and comments
Questions and Comments $.012/mile VMT: Alternative Policy 1 and Alternative Policy 2

This research was funded partially by ODOT and OTREC. The author would like to thank Alan Kirk, Jim Whitty, Betsy Imholt, Becky Knudson, Brian Gregor, Jack Svadlenak, Satvinder Sandhu, and Anthony Rufolo for their assistance. The authors are solely responsible for the opinions expressed here.

Contact Information

B. Starr McMullen Lei Zhang

541-737-1480 541-737-2072

s.mcmullen@oregonstate.edu lei.zhang@oregonstate.edu


Additional slides
Additional Slides $.012/mile VMT: Alternative Policy 1 and Alternative Policy 2


Conventional wisdom
Conventional Wisdom $.012/mile VMT: Alternative Policy 1 and Alternative Policy 2

The static model will overestimate the impact of a

tax increase, underestimate the impact of a tax

decrease

Static model assumes that the change in tax

revenues paid is the only impact that a tax

change will cause – a direct transfer from

consumer to the Government


Change in consumer surplus with demand response
Change in Consumer Surplus with Demand Response $.012/mile VMT: Alternative Policy 1 and Alternative Policy 2

Price (p)

Pvmt

Pgas

Quantity (q)

Qvmt

Qgas


Total change in revenue for an increase in price b a
Total Change in Revenue for an Increase in Price: B-A $.012/mile VMT: Alternative Policy 1 and Alternative Policy 2

Price (p)

Total change in revenue to agency from

Price increase = B-A;

Price decrease = A-B

Pvmt

B

Pgas

A

Quantity (q)

Qvmt

Qgas


Elasticity by income group ols based on average income
Elasticity by Income group – OLS based on Average Income $.012/mile VMT: Alternative Policy 1 and Alternative Policy 2