Paying by the Mile and Ending the Gas Tax

04/15/2021 12:00am

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See commentary on original website

Moving away from a gas tax as we move to electric cars is a common sense measure that can have large environmental benefits. It is just a matter of adjusting to technology. If we had relied on a tax on hay to fund road maintenance in the days of horse-drawn carriages, we obviously would need to make a change as we moved to gas-powered cars. It is the same now as we move away from gas to electric vehicles. 

Applying this logic, reports in the media say the Biden administration is considering replacing the federal gas tax with a per mile charge. It would also look to push states in the same direction. (Roughly 60 percent of the gas tax is at the state level.)  

The logic of this shift is simple. If we continue to allow gas taxes to fund road repairs and improvements, we will see large shortfalls in revenue as people shift to electric cars.

Since electric cars do just as much damage to roads as gas-powered cars, we will still need to spend just as much on maintaining our roads in a world with electric cars as we do today. Also, as long as most of the electricity is still coming from fossil fuels, we should want the tax to discourage driving in general, regardless of whether people have gas or electric cars.

The arithmetic of a per mile tax is straightforward. If we have state and local taxes averaging 50 cents a gallon, and cars get on average 20 miles a gallon, then we would want the tax to be 2.5 cents a mile to get the same amount of revenue as we did with the gas tax. Of course, we may want to have a higher tax if the goal is to raise more revenue or have a stronger disincentive to drive, but the logic is straightforward.

We can also structure the tax to discourage people from driving less fuel efficient cars. For example, we can make the tax 4 cents a mile on a big SUV that gets just 15 miles a gallon, while making it 2 cents a gallon for cars that get over 40 miles to a gallon.

The administration of this tax also should not be a major problem. Drivers can be required to have their odometers checked at regular intervals. For example, the annual car inspection required in many states can include an odometer reading that is the basis for tax payment.

An advantage of going to a pay-by-the-mile fee is that we could also look to structure other payments along the same lines. The most obvious would be car registration fees. Currently, most states charge a fixed fee that is independent of how much people drive. But if we changed the registration fee to a per mile charge it would more closely reflect the damage that a driver is doing to the road system and also help to discourage driving.

If a state charges a $200 fee and the average number of miles driven was 10,000 a year, this would translate into a 2 cents per mile charge. For a car that gets 20 miles to a gallon, this would provide the same disincentive to drive as a 40 cents a gallon gas tax.

We could also look to structure car insurance payments on a per mile basis. While some insurers do charge drivers on a per mile basis, the vast majority of policies are still sold on a fixed fee basis. A driver will pay the same amount whether they drive 200 miles in a year or 20,000 miles.

If an average insurance policy costs $1,000 a year this would translate to a fee of 10 cents per mile. For a car that gets 20 miles to the gallon, this would be equivalent to a $2 a gallon gas tax, which would strongly discourage driving.

Replacing the gas tax with a per mile fee is a policy that makes a lot of sense as we move away from gas powered cares. The Biden administration would be smart to move forward with it.

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