Support it or oppose it, the federal excise tax on gasoline, more commonly referred to as the gas tax, isn’t getting it done.
The U.S. government hasn’t raised the federal tax rate of 18.4 cents per gallon since 1993, and since 2008, policymakers have been drawing from nontransportation funds like the general fund to pay for transportation infrastructure because the gas tax simply isn’t bringing in enough money. Just last week, the Highway Trust Fund, which supports road construction and mass transit, ran out of money, saved only by a 30-day extension of funding.
For the Biden administration, the answer could be in a vehicle miles traveled (VMT) tax. The administration’s $1 trillion infrastructure package proposes allocating a total of $125 million over five years to test pilot programs for a road usage fee under which drivers are taxed by miles traveled. But while a VMT tax program might help the nation’s faltering transportation infrastructure, it could have some negative implications for the ride-share industry.
Since 2000, fuel tax revenues have declined significantly due to a confluence of factors. For one, people are driving less, and when they do drive, they’re more efficient than ever – fuel economy reached a record high in 2020 at 25.7 miles per gallon. The adoption of electric vehicles and other alternative fuel vehicles, which has been called for by Biden himself, has also limited use of the pumps. And because the gas tax hasn’t been sufficient to cover the costs of transportation infrastructure for at least the past decade, everyone is paying for our roads, even those who don’t drive on them.
The Biden administration’s proposed VMT tax pilot project would be the first federally backed initiative of its kind. The infrastructure bill doesn’t specify exactly what the projects would look like, but that could allow the government to experiment with a variety of VMT tax models.
What we know about the VMT tax
While a tax on miles driven may sound foreign to many, the U.S. is already doing it. In 2007, Oregon debuted a pilot project that kicked off a small wave of states experimenting with VMT taxes.
The project, which followed 299 volunteer motorists in 285 vehicles over the course of 12 months, found that 91% of participants would agree to pay a VMT tax instead of a gas tax. It also discovered that the VMT tax could be paid at a gas pump, just like the normal gas tax, and that the program could be phased in, with a VMT tax for vehicles equipped with mileage-tracking technology and a gas tax for unequipped vehicles.
By 2015, Oregon had launched OReGO, a voluntary program that had enrolled over 1,300 vehicles as of 2017. Volunteers self-install a mileage reporting device in their vehicles and are charged for each mile they drive, currently at a rate of 1.8 cents per mile. In January 2020, Utah rolled out its own voluntary road usage charge program, and as of June 2021, the program had accumulated over 3,700 members.
Other states have experimented with VMT tax programs but have yet to adopt them. In conjunction with the I-95 Corridor Commission, fleet management software provider Azuga ran a four-month pilot program to test mileage-based fees in Pennsylvania, Delaware and Maryland. States considering such a program include California, Delaware and about a dozen others.
Some models propose adding the VMT tax on top of the existing gas tax, while others say it should fully replace it. There are also differing opinions regarding how drivers should be charged, with some advocating for a flat fee while others propose a variable fee that accounts for things like travel time, congestion, type of road, vehicle emission levels and ability to pay.
The impact on ride-share
A VMT tax could potentially alleviate the problem of funding roads and transportation infrastructure, but it may also create a new set of problems that negatively affect the ride-share industry. And according to Nate Bryer, executive vice president of road-usage charging (RUC) at Azuga, a VMT tax is most certainly coming.
“Eventually all states will employ a VMT/RUC in some form or fashion and they will all be interconnected and have data-sharing capabilities so that all VMT/RUC for miles driven in a state goes to that state’s road funding,” he said in an email to Modern Shipper.
The first concern, and perhaps the largest, is privacy. Most VMT tax proposals call for GPS technology to be installed in cars in order to track mileage, but that would mean sending personal data to a government entity. This is an unpopular policy, and the government would need to convince drivers that their data is safe. Among Department of Transportation officials in all 50 states and the District of Columbia, 45 said that privacy concerns would pose a great challenge to developing a VMT tax in their state.
If government officials aren’t able to convince drivers that their data is protected, the results could be disastrous for ride-share companies. A perceived violation of privacy would incentivize drivers to drive less, which would in turn cause revenue to take a hit. Moreover, the effort could face legal hurdles. In 2012, the Supreme Court ruled unanimously in United States v. Jones that the placement of a GPS tracker in a car by a police officer was a violation of the Fourth Amendment.
According to Bryer, a standardized system could help assuage those fears.
“We need states to agree on a standard for the systems that need to be put in place to support a VMT,” he explained. “The systems don’t necessarily need to be identical, but enough alike that data can be shared so that funds for mileage driven in a state get sent to that state.”
Another issue stems from accessibility. Most mileage-tracking technologies that have been proposed are reliant on an OBD-II port, a feature that wasn’t standard in vehicles until 1996 (and in diesel vehicles until 2006). The tech also experiences problems when paired with electric, hybrid and alternative fuel vehicles. For drivers of older models or vehicles with alternate fuel sources, that means a VMT tax isn’t feasible — their cars simply won’t fit into the system. And ride-share companies are unlikely to expect their drivers, who on average are paid below the minimum wage, to buy new cars.
If they want to keep their drivers in the wake of a VMT tax, that puts companies like Uber (NYSE: UBER) and Lyft (NASDAQ: LYFT) in a bit of a pickle. They would need to find a way to finance vehicles for drivers with outdated or alternative fuel models, but the companies have shown an unwillingness in the past to subsidize a similar switch to EVs. If ride-share companies follow that same logic with the switch to VMT tax-enabled vehicles, then they risk losing part of their fleet.
There are also worries that a VMT tax could disproportionately impact low-income drivers, who make up much of the rideshare workforce. While some proposals call for the VMT tax to replace the gas tax, others, like California’s, stack it on top of the existing fees. That would hit low-income drivers the hardest.
According to research from OReGO, Americans typically spend 13% of their income on transportation, while the lowest-income fifth of the population spends around 30%. At the same time, ride-share drivers are routinely paid less than minimum wage, meaning they would be further impacted disproportionately. In addition, for ride-share drivers, the tax would come directly out of their income since the money they make is tied directly to the mileage they drive.
For the ride-share industry to survive a VMT tax, the model requires some major tweaks by policymakers. They’ll have to assure drivers that their information is private, provide an alternative to GPS tracking that doesn’t require an OBD-II port and enact variable pricing that takes into account things like a person’s income or job status. That may not happen right away.
“There will be some states that fully embrace the concept and realize that the gas tax is unsustainable and will move forward with a VMT/RUC as quickly as their state legislators can write the bills and pass them into law,” said Bryer. “Some states will lag behind while waiting for other states to work out all the kinks and then jump in when VMT is more established.”
But the hope from the Biden administration is that VMT tax pilot programs can help the government figure out a way to make it work.