Fuel taxes are increasingly unfair — to both travelers and NC retailers. Let’s end them, and go with an access-based approach.
- February 25, 2021
- Posted by: Joe Milazzo II
- Category: Blog
A common headline for a piece that I or others might write on state highway revenue typically includes phrases like “modernizing funding”, “sustainable revenue options”, “infrastructure investment solutions”, and the like.
While there is nothing wrong with any of those focuses — and we and other partner organizations will continue to write articles along those lines — my concern is that it may not move the “saliency needle” very much for those outside the transportation area. This is particularly true during a time when the pandemic has effectively “sucked all of the air out of the (advocacy) room” for a year and counting.
However, we all recognize that equity is an increasing focus for Americans, and so is recovery.
And the reality is that fuel taxes do not get us there. In fact, they get in the way.
To that point, fuel taxes are not equitable — or at a minimum, they are increasingly unfair. In addition, their cost relative to our neighboring states hampers our retailers.
Fortunately, there is another, simpler approach — that happens to be more sustainable for NCDOT, and that would provide a boost for retailers in this state.
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The regional business community is proposing a simpler, “access” based business model as a partial or complete replacement for the increasingly unfair, “indirect user fee” fuel tax model.
To cut to the chase: this proposed “access-based” concept is that one would pay a fixed monthly (e.g.) fee for access to the entire non-toll state roadway system, regardless of usage.
We all already have familiarity with this approach: this is no different than paying a monthly fee to access a reliable mobile phone network.
In fact, North Carolina already has the basis of access fee in place for electric vehicles: they pay an additional annual fee, since they cannot pay fuel taxes. The proposed access-based concept simply applies the existing electric vehicle fee approach to all registered passenger vehicles, using fee levels commensurate with the reduction in fuel taxes.
To be clear, an “access” based business model is still a user fee approach. It’s just a simpler, fairer, more resilient one that is based on accessibility.
The rest of this piece explores the concept in more detail.
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A fuel tax is increasingly, and unavoidably, unfair to motorists in both metropolitan and rural North Carolina, while an access fee can provide more equity
The fuel tax you currently pay varies by how much you travel, which sounds reasonable. However, it also varies by how fuel efficient your vehicle is — the better gas mileage you get per gallon, the less fuel taxes you pay compared to those with less fuel efficient vehicles on a per-mile basis. While increasing fuel efficiency is laudable from both an environmental and personal financial standpoint, it’s not a fair basis or proxy for funding the state highway system.
Of course, there are other equity issues associated with the fuel tax: for example, the more affluent you are, the easier it is for you to purchase new, more fuel efficient vehicles — which effectively means that less affluent motorists with older vehicles are subsidizing the travel of other drivers. In addition, the current electric vehicle fee is only equivalent to about 2/3 of what the average North Carolina driver pays in fuel taxes each year, so drivers of other vehicles are subsidizing the travel of electric car owners.
However, with an access fee approach, we have a level playing field. It doesn’t matter what vehicle you drive, or how new or fuel efficient it is — or how far you live from your job — because you would pay the same access-based fee per vehicle. This approach would help rural residents, who tend to drive longer distances for work and other purposes, and thus consume more fuel and pay more fuel taxes.
However, is a simplified access fee, that is independent of individual travel, a fair or reasonable approach?
Remember, fuel taxes and other “indirect user fee” approaches do not always align with NCDOT’s cost of providing infrastructure. In fact, “vertical” highway construction costs (i.e., pavement depth) are primarily caused by trucks, not cars — the NCDOT FIRST Commission final report referenced a study noting that it takes more than 9,000 passenger cars to equal the impact of a single tractor semi-trailer — while “horizontal” costs (e.g., number of lanes and thus roadway width) are primarily caused by cars in congested areas. As a result, an auto driver who rarely travels in congestion might give rise to near zero incremental costs to the state, in terms of added pavement width or depth – regardless of their daily or annual travel.
The reality is that NCDOT must make the entire roadway system available, accessible, and well-maintained for everyone, regardless of the level of usage for any particular customer. The value you are paying for under this proposed approach is access to that reliable network, whenever you need it.
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The fuel tax also hampers North Carolina retailers, including restaurants and convenience stores, while an access fee can incentivize new business activity and commerce in our state
I mentioned North Carolina retailers. How are fuel taxes unfair to them?
The reality is that our state fuel taxes are higher than what our neighbors in Virginia, South Carolina, and Tennessee charge. So our fuel prices are inevitably higher. This means that travelers passing through our state also pass by our fuel stations more than they otherwise would. And that also means that they are passing by our restaurants and other retail outlets near those stations more than they otherwise would.
However, if we move to an access fee framework, we will lower the fuel taxes by the same amount. This will allow our filling stations to offer more competitive pricing, and the nearby businesses will also benefit from increasing use of gas stations located along our interchanges and the like.
An access-based approach would also benefit North Carolina retailers who are not located along our Interstates. How? When our own residents travel out-of-state, they often wait until they hit the state border before filling up to save money, and then do their associated business stopovers there. With more competitive fuel pricing here in North Carolina, that equation shifts. We are now more likely to fill up in our home communities before leaving, and thus visit restaurants and convenience stores within our state.
The bottom line is that an access-based approach represents an immediate win for restaurants and other businesses — and our restaurants sure could use a win right now.
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Implementation can be simple — in fact, we already have the basics of an access fee in place
As mentioned above, our state already has an additional annual fee for electric vehicles, so there is already a revenue collection infrastructure in place.
Implementing an access-based approach more broadly would be comparatively simple. The legislature would activate an access fee — which is simply an increase in our annual vehicle registration fee — and then lower fuel taxes by an equivalent amount, so that the typical North Carolina traveler would pay the same in total transportation taxes, thus making this approach revenue neutral.
Of course, legislators could scale into this, by offering a reduced (but not eliminated) fuel tax, and thus a lower access fee increment.
The beauty of the method is that adjustments can be made to the access fee rate as need be, based on the needs and priorities of the state. In addition, our vehicle registration fees are already indexed, so that means that vehicle registration-based access fees (like North Carolina fuel taxes) have a built-in hedge against inflation.
If you are wondering, North Carolinians pay on average just under $20 in state fuel taxes per month for each vehicle owned, or just under $240 per year; that $237 amount would thus be the current annual revenue neutral access fee, if fuel taxes were completely eliminated. The current electric vehicle fee amount of $140.25 would also rise about $100 to the same $237 per year level based on the most recent numbers. These amounts would be above the current $38.75 annual vehicle registration fee. Please see this one page access fee policy brief for more information.
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An access fee would also be less volatile, and more resilient to downturns and drops in travel
If we had an access fee based approach in place now, instead of the current indirect user fee-based approach via fuel taxes, the pandemic would have had far less impact on NCDOT’s finances due the recent economic downturn, since monthly or annual access fee revenue is independent of variations in travel.
Going forward, the next time there is an economic downturn due to a pandemic etc., and travel drops, it will have far less impact on transportation revenue if we have a monthly or annual access fee method in place. While we might travel less in a downturn, we are far less likely to de-register our vehicles. Fuel taxes do not have that luxury, and neither would a vehicle miles traveled or other mileage based user fee — those revenue options would be more volatile to economic downturns and resulting drops in travel, and thus less resilient from a revenue standpoint, than an access fee would be.
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What about our out-of-state visitors, who would now be visiting our restaurants and shops more (a great thing), but no longer paying any fuel taxes, and thus not paying an annual access fee to North Carolina?
There are a few approaches to handle this. One, we could simply allocate to transportation all or part of the increase in sales tax revenue that will inevitably occur as a result of more competitive fuel pricing that induces new business at our interchanges (e.g.). Two, we could scan the license plates of our visitors as they enter our state and charge them an equivalent weekly access fee rate (less than $5) when they cross the border into our state. Three, we could reduce but not completely eliminate fuel taxes, and indeed this may be what occurs during the transition to an access fee anyway. Or we could do some combination of these.
Of course, it is also possible that our neighboring states might also adopt our access-based approach. In that case, the issue of charging out-of-state visitors won’t really matter, since our residents won’t be paying their access fees, and they won’t be paying ours. However, our retailers will still benefit, because fuel pricing will at least remain on a level playing field versus our neighbors, which is an improvement over the current disparity in fuel tax rates.
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What about other highway funding options?
Does the transition from motor fuel taxes have to be an access fee? No, it does not. While an access fee is included on the NC Chamber’s Destination 2030 website, and it is a natural extension of several of the options mentioned by the NCDOT FIRST Commission, there are clearly other options.
While RTA is elevating the potential of access fee-based approach as a potential part of a future solution package, the regional business community remains open to any solution or package of solutions that will be fair, sustainable, and acceptable.
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A final question: what about the need for more transportation funding for North Carolina?
While our organization subscribes to this view that more revenue is needed for our growing region and state, that is actually a separate question than modernizing the approach to state highway funding.
The most important, immediate item is actually to get North Carolina on a more fair footing for our motorists — and if possible, to give a needed, immediate boost to our restaurants and other retailers.
An access fee based approach can provide that — while also providing more certainty in funding for NCDOT. And that means that all of us will gain the benefit from ongoing, planned, well-placed highway investments.
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Thank you for reading this entire post, and thank you for caring about new options for funding infrastructure — the foundational backbone of commerce, and economic and community development — for our great state.
Let’s get moving,
Joe Milazzo II, PE
Executive Director, Regional Transportation Alliance
RTA is the voice of the regional business community on transportation in the Research Triangle area.
RTA represents more than 100 leading businesses and 25 member chambers of commerce in central and eastern North Carolina.