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How electric cars could pull the plug on U.S. highway funding

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The U.S. Dept. of Transportation has a faulty business model to fund highways, and the problem will only get worse as efficient electric cars proliferate. Here's why.

The U.S. Department of Transportation has a faulty business model when it comes to funding highways. And the problem will only get worse as electric cars start hitting the road in 2011 and more efficient automobiles proliferate.

Assuming cars like the Chevrolet Volt and Nissan Leaf---not to mention a bevy of electric vehicles coming after those two automobiles---become successful the Highway Trust Fund is going to have big problems.

The Highway Trust Fund is the source of funding for most of the U.S. government's surface transportation programs. The fund itself gets its money from gas taxes: every time you go to the pump, you pay a federal and state tax. These taxes fund highway maintenance and repair on the federal and state levels.

But here's the problem: fuel taxes have been falling in recent years, and the U.S. has been compensating for the drop by funding the Highway Trust Fund with money from the general coffers.

Why are fuel tax revenue rates falling? For starters, the recession and ensuing economic malaise means folks travel and drive less. The other issue is that cars are just more efficient. If you drive a Toyota Prius, you use less fuel and therefore deliver less tax revenue to the Highway Trust Fund and states. Meanwhile, you drive just as much as you used to.

In the world of Highway Trust Fund revenue, you want everyone driving gas-guzzling SUVs and trucks. There is more revenue in the big fill-ups.

Add it up and the gas tax revenue takes a hit -- meanwhile, you still use the highways a lot.

Now let's carry this forward. Let's assume that most of the population opts for an electric vehicle in five years. Gas tax revenue will tank. Highways need a new revenue source. If you think about it, the U.S. government actually take a double whammy: it subsidizes electric vehicles, then takes another hit in revenues for the Highway Trust Fund.

The highway funding and mileage tax issues surfaced more than a year ago, but quickly went to the back burner. But the issue could resurface as cars like the Leaf and Volt begin to hit the market in 2010 and 2011. If anything, mass production electric cars will accelerate the highway funding problems.

Do we need a mileage tax?

Foreseeing a potential highway funding crunch, a bi-partisan panel recommended last year that the U.S. transition to a mileage tax system by 2020. The idea, pitched in a Feb. 29, 2009 report, was dismissed.

The National Surface Transportation Infrastructure Financing Commission (NTPP) concluded:

The current surface transportation funding approach, with its heavy reliance on motor fuel taxes, raises insufficient revenue, is unsustainable at current rates in the long run, and is inconsistent with important national policy goals. The NTPP echoes the Financing Commission’s call for Congress to begin taking immediate steps to develop a more sustainable national revenue mechanism based on the user-pay principle.

Because of the complexity inherent in transitioning to a new revenue system and the urgency of the need, the Commission recommends that Congress embark immediately on an aggressive research, development, and demonstration (RD&D) program. This would identify and address critical policy questions such as privacy, administrative methods and costs, and the interplay with climate change and other national policy goals, in order to inform Congress as it moves forward. This will require investment in research and technology, including a variety of demonstration programs of mileage-based user fee systems. A research agenda of the nature envisioned would be best overseen by a body within the U.S. Department of Transportation that combines technology, policy, tax administration, and systems expertise.

Here's a graphic from the Congressional Budget Office that tells the tale. And it doesn't seem to include any assumptions for electric vehicles.

This topic emerged after a conversation with Parker Williams, vice president of ACS Transportation Solutions, which is now a part of Xerox. Like IBM and other public sector IT powers, there's a big effort in developing smarter transportation systems -- but there's an unavoidable collision with policy in some areas. Williams and I discussed transportation technologies for everything from accident prevention systems and toll collection to taxes and funding; Williams noted that GPS is considered a key technology to help transition away from the existing U.S. fuel tax system with a usage-based model.

Now there's nothing on the drawing board in the U.S. beyond pilots and studies, but there's a band of academics and researchers studying the mileage tax issue. In April, a powwow of researchers addressed the issue at the University Transportation Center for Mobility at Texas A&M University's Texas Transportation Institute.

And that's a good thing, since it's certain that the government will have to find a new way to fund highways if we all go green.

For ACS' part, Williams said the company is competing to implement projects in the Netherlands and Poland to move to a more usage-based system. In a nutshell: a GPS device in your car would track your mileage and tax you accordingly. It's likely that the government will tax less for low-emission vehicles and more for gas guzzlers.

In a recent presentation, Netherlands officials walked through the lessons learned from its road pricing efforts. Marian Jongman, strategy director for the Road Pricing Project at the Dutch Ministry of Transport, Public Works and Water Management in The Netherlands, said there were political hurdles as well as a lot of experimentation.

The Netherlands has been trying road pricing since 1988. The system is summarized like this:

After I scoffed a bit at the idea of paying taxes per mileage, Williams noted that ACS just was looking at the technology solutions not being an advocate. You can almost picture the battle over a usage-based transportation tax system now. If you thought Net Neutrality raised a furor, just imagine what a road tax system for driving will do.

Nevertheless, a usage tax is worth further investigation. On paper, a mileage tax makes sense. Why should someone who drives 500 miles per quarter pay as much for highway repairs as the guy who drives 3,000 miles in the same time frame?

Of course, then you think about the unintended consequences. What about the trucks that keep commerce humming? What about the behaviors the government is trying to change? What about the sub-par mass transit systems that are expected to get more usage if people cut back on driving to avoid taxes?

Once you start fiddling with the mileage tax, things get complicated quickly.

The challenges

Simply put, the mileage tax concept is an issue we all should investigate. Ferrol O. Robinson, a research fellow at the Humphrey Institute of Public Affairs at the University of Minnesota, noted in a presentation that there are a bevy of transition issues to ponder as the U.S. eventually moves from a gas tax to a mileage levy.

Let's roll the slides:

Other transition items to ponder:

  • Alternative fuel vehicles would only pay taxes by mileage at first since they aren't paying anything to highway upkeep.
  • New vehicles would be equipped with on-board units for a phase-in approach.
  • You would distinguish between autos, light trucks and heavy trucks.
  • What incentives would be needed to get people into the system? The mileage tax would be mandatory when fuel taxes were phased out.
  • How would charges be handed out? You could go with a flat fee or a varied per-mile fee by fuel efficiency, vehicle class, time of day and urban vs. rural driving.

In addition, Robinson flagged a bunch of implementation issues:

Clearly, there's a lot here to think about, even though you're unlikely to hear much about a mileage tax in an election year.

Here's a reading list to ponder the green vs. highway revenue conundrum:

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Larry Dignan

Editor-in-Chief

Editor-in-Chief Larry Dignan is editor-in-chief of SmartPlanet and ZDNet. He is also editorial director of TechRepublic. Previously, he was an editor at eWeek, Baseline and CNET News. He has written for WallStreetWeek.com, Inter@ctive Week, New York Times and Financial Planning. He holds degrees from the Columbia University Graduate School of Journalism and the University of Delaware. He is based in New York but resides in Pennsylvania. Follow him on Twitter. Disclosure