The Long and Taxing Road

For one year ending this spring, hundreds of motorists around Portland, Oregon, got used to watching their cars' odometers very closely. They had good reason...
by | June 30, 2007

For one year ending this spring, hundreds of motorists around Portland, Oregon, got used to watching their cars' odometers very closely. They had good reason to pay attention. Every time their gauge blipped up by a mile, they owed the state of Oregon a tax of exactly 1.2 cents. The trip to Eugene, a 100-mile journey on Interstate 5, would cost $1.20. And that's not counting the gas.

The mileage experiment was part of a test that is creating a big stir in transportation circles. Like all states, Oregon normally taxes drivers by the amount of gasoline they pump into their tanks -- 24 cents per gallon in Oregon's case. What the Portland pilot showed is that it's possible to tax drivers in a radically new way. Using technologies that can count how many miles cars travel and charge different rates based on where those miles are driven, states can tax motorists based on exactly how much they use the roads.

It's an important innovation because the gas tax -- the nation's main tool for financing highways -- is in a crisis. An anti-tax mood in state capitols, as well as in Washington, has made it almost impossible to raise gas taxes. That job has only gotten harder politically, thanks to the recent spikes in gasoline prices. The federal account that pays for highways is projected to slip into the red in 2009. And in nearly half the states, it's been a decade or more since the motor-fuel tax was increased. The purchasing power of the gas tax keeps eroding with inflation, making it harder and harder for states to pay for new roads or simply maintain the ones they have.

Ironically, well-meaning state efforts to reduce dependence on foreign oil and curb global warming are only making the gas-tax problem worse. Dozens of states are pushing the use of alternative fuels such as ethanol and biodiesel, and those generally are taxed differently to encourage their use. They're also offering drivers tax breaks for buying fuel-efficient hybrid cars, or in California's case, trying to improve the gas mileage of all cars sold there. For now, these efforts have made only a modest impact on gasoline consumption. But if they succeed, they'll have the inadvertent impact of undermining, gallon by gallon, the very system states use to finance roads.

How to resolve this structural financing problem is one of the hottest topics in transportation and the subject of a federal commission due to report to Congress before year's end. In the meantime, states are experimenting with alternative ways to finance roads. Indiana pioneered one path forward when it leased the Indiana Toll Road to a consortium of investors, raising $3 billion for transportation projects. Another path, popular in Texas, is to let the private sector build new roads and charge tolls on them. California is taking the bond-financing approach, selling $20 billion worth of bonds to fund transportation improvements. North Dakota is talking about shoring up its highway account by adding in some of the excise taxes that drivers pay on their cars.

What Oregon's experiment suggests is that technology may offer another way out of the gas-tax problem. It's the kind of thinking popular these days with federal officials, who are unlikely to rescue states with more highway funds anytime soon. The Bush administration has long been in favor of "user fees" that directly tax citizens for the government services they consume. And federal Transportation Secretary Mary E. Peters is a big fan of high-tech strategies for using roads more efficiently -- ideas such as the congestion-pricing scheme that New York Mayor Michael Bloomberg is proposing for Manhattan. Last fall, Peters flew out to Portland to see the mileage-fee pilot in action. "Fuel taxes have served us very well," she said during her visit. "But I believe they should not be the predominant method of funding transportation in the future."


It's fitting that Oregon would lead the discussion about what to do about the gas tax going forward. That's because Oregon essentially invented the excise tax on motor fuels back in 1919. State after state followed Oregon's example, using gas-tax revenues to pave over dirt paths in order to create the first modern roads for automobiles. Later, when President Eisenhower wanted to build a national network of Interstate highways, it was state and federal gas taxes that raised the money to pay for them.

In 2001, Oregon lawmakers began noticing the long-term structural problems with the gas tax. Eight years had passed since the last gas-tax increase, and voters had recently said no to another. The legislature asked a task force of transportation experts to sort through dozens of alternative-financing schemes. The task force recommended three ideas, including the mileage fee, to the state Department of Transportation, which handed them over to a small policy shop within its bureaucracy. The newly created Office of Innovative Partnerships and Alternative Financing was given power to bypass the usual bureaucratic hoops that normally prevent DOTs from partnering with the private sector on experimental ideas. James Whitty, the leader of this operation, has become a national leader within the transportation community, traveling across the country and even overseas to highlight Oregon's pioneering mileage-fee experiment.

The pilot ran for a year, beginning in March 2006. Some 260 motorists volunteered to have electronic devices equipped with global positioning system (GPS) receivers placed in their vehicles. Those devices counted the number of miles driven between fill-ups. Meanwhile, pumps at two Portland-area gas stations were set up with special transmitters. When drivers bought gas, the devices on board their vehicles sent a signal relaying the mileage information to the pump, which in turn sent the data to a central computer at Oregon State University. The computer calculated the tax owed and transmitted that information back to the gas pump, where the fee was added to the driver's gas bill.

Drivers have always paid their gas taxes at the pump. The main difference with the Portland pilot is that the tax was levied on the distance driven, rather than the amount of gas purchased. The technology also allowed some fairly sophisticated considerations to be built into the tax structure. For example, Whitty and his colleagues programmed the GPS to start counting miles separately when the drivers left Oregon. That way, they didn't have to pay Oregon for the privilege of using other states' roads.

The experiment also tested how states might put user fees to work at relieving traffic congestion. A subgroup of volunteers agreed to be charged on a different scale than the flat rate of 1.2 cents per mile. For these volunteers, the devices in their vehicles were programmed to count how many miles they drove on the most chronically congested roads during rush hour. For that driving, they were charged a premium price of 10 cents per mile. However, they also were cut a break for staying off the busiest roads or driving during off-hours: that driving cost only 0.43 cents per mile.

Whitty is pleased with how the experiment went. The volunteers, he says, largely embraced the concept of paying for roads by the amount they used them. And the technology, for the most part, counted miles, tracked geography and levied fees exactly as it was supposed to. A full report assessing the program is due in September. In the meantime, Whitty hopes to secure funding to further refine the technology, and perhaps even to test how an Oregon mileage-fee system might integrate with similar systems in neighboring states were California, Idaho or Washington to move in that direction. "We need more tests out there," Whitty says. "This thing is not ready for implementation."

Other states have been watching Oregon closely. Whitty recently traveled to Colorado to present the pilot to a blue-ribbon panel of transportation experts assembled by Governor Bill Ritter Jr. to look at highway financing. And in Minnesota, Governor Tim Pawlenty secured $5 million from the state legislature to run a test similar to the one Oregon has just finished. Kenneth R. Buckeye, the DOT official spearheading the project, says Minnesota hopes to give a private-sector consortium latitude to develop and experiment with technology.


Not everyone likes the idea of using technology to overhaul transportation taxes. For some critics, the idea of government tracking how far people drive sounds Big Brotherish. Others say that taxing by the mile is bad for the environment. The current system of taxing by the gallon creates a built-in incentive for people to consume less gasoline. Take that away, some environmentalists argue, and drivers will be more likely to buy gas-guzzlers that pollute more and spew more carbon-dioxide emissions.

Whitty thinks both of those problems can be overcome. On the privacy issue, he notes that many new cars already come straight from the dealership with GPS devices installed. Whether drivers use the latest navigation systems or roadside assistance services such as OnStar, they're getting used to the idea of being tracked -- and with more precision than Oregon's pilot required. (Oregon counted only miles driven, not whether drivers were going to the pharmacy or to their kid's soccer game). As for environmental concerns, Whitty says that a mileage fee could easily be augmented with extra charges for vehicles that are especially heavy or use a lot of gas.

In any case, it will likely be some time before Oregon or any other state considers ditching the gas tax for a mileage fee. The on-board devices Oregon used cost about $200 each, and there are more than 100 million cars on American roads today. Retrofitting vehicles would be prohibitively expensive for government to subsidize -- and forcing drivers to buy the devices would be politically untenable. The only feasible path to broad implementation would be for automakers to pre-install the necessary equipment on new cars. In the next phase of Oregon's experiment, Whitty's team hopes to develop specifications to pass along to the car companies. Even if Detroit goes along with that, it might take a decade or longer for the car fleet to turn over to the point that a mileage fee could work as a broad alternative.

As Whitty sees it, that's time that states will need to sell the idea. Americans may love to drive, but they rarely stop to think about how government pays for the roads they use. "The public will not accept this until the public understands what the problem is -- and they don't understand the problem yet," Whitty says. "So the real challenge is being able to communicate the dire straits of transportation financing in this country and what's going to happen with the gas tax."