Winners and Losers: Distributional Impacts of Highway User Fees Principal Investigators: B. Starr McMullen, Ph.D Lei Zhang, Ph.D. Research Assistants: Kyle Nakahara Divya Valluri Smita Biswas Oregon State University

Case Study: Oregon Proposed change in highway user charges: From a Gasoline Tax to Vehicle mile fee Purpose of Tax: To Collect Road User Fees (We will not consider congestion fees here) Intent: Revenue Neutral Fee VMT tax set at $.012/mile to replace $.24/gallon gasoline tax ($.012 = $.24/20 mpg)

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

Who Gains and Loses From This Change ? Distribution of Costs: Between Income Groups Between regions (urban/rural) Identification important for decisions regarding revenue distribution

Regressive, Progressive, and Proportional or Neutral Tax/Fee Structures A regressive fee takes a greater percentage of income from lower income groups and higher income groups pay a smaller percentage of income A progressive fee means that higher income groups pay a progressively higher percent of their income in fees In a proportional or neutral fee structure all income groups pay the same percent of their income in fees

Average Oregon Household Expenditures With Oregon Gasoline Tax of $ Average Oregon Household Expenditures With Oregon Gasoline Tax of $.24 (2001, with average Oregon gasoline price of $1.46/gallon) Income group Number of Households Average HH expenditure with gas tax $.24/gallon Average HH expenditure as % of income Average tax revenue with gas tax of $.24/gallon Tax as % of income under $.24/gallon gas tax 1 39 658 6.63% 108 1.09% 2 75 918 4.09% 151 .67% 3 65 1174 3.17% 193 .52% 4 62 1595 3.06% 262 .50% 5 40 1859 2.75% 3066 .45% 6 67 1993 1.81% 328 .30% Average HH income 9935 22433 37038 52096 67500 109962

Average Household taxes under Gasoline tax of $ Average Household taxes under Gasoline tax of $.29/gallon (Using 2001 Average Oregon price of $1.46/gallon) Income group Number of households Average tax revenue with gas tax of $.29/gallon Tax as % of income under $.29/gallon gas tax Average change in Tax revenue for $.05 increase in tax/gallon ($) (as %of income) 1 39 131 1.32% 23 (+.23%) 2 75 182 .81% 31 (+.14%) 3 65 233 .63% 40 (+.11%) 4 62 317 .61% 55 (+.11%) 5 40 369 .55% 64 (+.10%) 6 67 396 .36% 68 (+.06%)

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

Average Oregon Household Gasoline Expenditures as a Percent of Income With Oregon Gasoline Tax of $.24 Income group Number of Households With an Average gas price of $1.46/gallon (2001) With an Average gas price of $2.64 Change in incidence 1 39 6.63% 11.99% +5.36% 2 75 4.09% 7.40% +3.31% 3 65 3.17% 5.73% +2.56% 4 62 3.06% 5.54% +2.48% 5 40 2.75% 4.98% +2.23% 6 67 1.81% 3.28% +1.47% Average HH income 9935 22433 37038 52096 67500 109962

The change from a Gas Tax to a VMT will result in an increase in the cost per mile of driving to some; a reduction in the price of driving to others Price Increase: Vehicles with MPG >20 Price Decrease: Vehicles with MPG< 20 No Change: Vehicles with MPG =20

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

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

Average HH Expenditures including $.24/gallon tax Static Analysis: Impact of a Change from a $24/gallon gasoline tax to a $.012/mile VMT (2001) Income Group Number of Households Average HH Expenditures including $.24/gallon tax Average HH Expenditures including $.012/mile VMT Change in Expenditure (as % of income) 1 39 658.90 666.72 7.81 (+.07%) 2 75 917.84 923.03 5.19 (+.02%) 3 65 1169.61 -4.40(-.01%) 1595.10 1595.33 0.23(<0.01%) 5 40 1858.85 1833.51 -25.34 (-.04%) 6 67 1992.60 1986.60 -6.00(<.01%) 1174.01 62 4

Static Analysis: Impact of a Change from a $24/gallon gasoline tax to a $.012/mile VMT (2001) cont.

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

Average Expenditures Under Gas Tax   Static Model Alternate Policy 1: Gas Tax of $.24/gallon for vehicles with <20 mpg ; VMT of $.012/mile for vehicles with mpg=or>20 mpg (2001 gas prices) Income Group Average Expenditures Under Gas Tax ($) Average Mixed Policy Expenditures ($) Change in Expenditures (as % of income) 1 658.90 675.36 16.46 (+1.66%) 2 917.84 935.01 17.17 (+.08%) 3 1174.01 1191.91 17.90 (+.05%) 4 1595.10 1623.57 28.47 (+.05%) 5 1858.85 1881.25 22.40 (+.03%) 6 1992.60 2023.68 31.08 (+.03%)

Alternate Policy 2: Step fee: a. MPG< median MPG pays 2cents/mile b Alternate Policy 2: Step fee: a. MPG< median MPG pays 2cents/mile b. between median MPG to 20 pays 1.5 cents/mile c. MPG>20 pays 1 cent/mile Income group Number of Households Average HH tax revenue @24 cents/gal Average tax revenue step fee Average revenue change 1 39 108.31 123.60 15.29 (+1.54%) 2 75 150.88 176.66 25.78 (+1.15%) 3 65 192.99 223.88 30.89 (+.08%) 4 62 262.21 305.32 43.11 5 40 305.56 380.27 74.71 (+1.11%) 6 67 327.55 404.11 76.56 (+.07%)

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

Dynamic Model 1: Ordinary 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 Results: Dependent variable- Annual Household miles (n=339) Variable Name Coefficient Stand.Error T-Statistic Constant -17.72 6.25 -2.84 Fuel Cost -8.76 2.39 -3.67 Income 2.21 0.61 3.60 Fuel Cost * Income 0.72 0.24 3.05 Fuel Cost * Substitution 0.44 0.40 1.09 Urban -0.16 0.10 -1.67 #Vehicles 0.54 0.13 4.18 Vehicle Substitution 1.39 1.05 1.32 Male Head 0.17 0.09 1.94 #Worker 0.21 0.05 3.95 #Children 0.04 0.91 Italicized variables are logarithimic

Demand elasticity by Income group

Average Changes in Consumer Surplus, Tax revenue and Welfare by Income ($/Household)

Average Changes in Consumer Surplus, Tax revenue and Welfare by Income ($/Household) cont. Income Group Average Change in Consumer Surplus Average Change in Tax Revenue Average Change in Welfare 1 -7.93 5.31 -2.61 2 -6.88 6.52 -0.36 3 9.97 -4.51 5.46 4 -2.58 8.61 6.03 5 30.44 -13.81 16.63 6 13.69 -2.78 10.91

Impact of a Change from a $24/gallon gasoline tax to a $ Impact of a Change from a $24/gallon gasoline tax to a $.012/mile VMT ; Alternative Policy 1 and Alternative Policy 2 24

Dynamic Model 2: Discrete-Continuous Choice Model

Conclusions The Dynamic Model Comparison of the change in tax revenues makes the policy impact appear less regressive than the static model 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 significant

Next Steps 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 A conflict between sustainability and equity given the current vehicle ownership reality Congestion pricing based on VMT-fee technology Long-term revenue forecast with VMT fees

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

Additional Slides

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

Change in Consumer Surplus with Demand Response Price (p) Pvmt Pgas Quantity (q) Qvmt Qgas

Total Change in Revenue for an Increase in Price: B-A 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 w/ SUB Elasticity w/o SUB 1 $9,055.90 1.7577 2.2125 2 $21,983.11 1.128 1.5828 3 $36,899.07 0.7603 1.2151 4 $51,952.61 0.5174 0.9722 5 $67,394.80 0.3326 0.7874 6 $106,043.36 0.0108 0.4656