Free-Market Principles Should Guide Road-Funding Solutions

As Americans hit the road during summer driving season, one thing that’s probably not on their minds is how the maintenance of those roads gets funded.

Over the past century, when consumers stopped to fill up at gas stations, they also filled up state and federal government highway funds through excise taxes, consumption taxes (which are included in the price of goods), and motor-fuel taxes. Now, as technological advancements and changing consumer habits work hand-in-hand to reduce the volume of motor fuel purchased, government infrastructure budgets have become increasingly strained, prompting lawmakers to increase tax rates.

Instead of trying to retain the status quo by increasing taxes on declining motor-fuel sales, now is the perfect time for legislators to experiment with fairer funding ideas — using common-sense, free-market principles as a guide to road-funding success.

Step one — or, rather, step zero — is to make sure road money is actually spent on roads. Currently, 15 percent of all federal gas tax revenue — about 3 cents for every gallon of gas purchased — is diverted away from funding road construction and toward subsidizing passenger trains and other forms of government-provided transportation. That may not sound like much, but it adds up to roughly $5.6 billion in inefficient spending.

After patching the leaks in the pipeline between the taxes consumers pay and the benefits consumers receive, the next step is to simplify the pipeline itself. Taxes are payments, and the people paying should be the ones using the things that are being paid for. Unfortunately, that’s not the case when it comes to today’s government highway funding laws. Gas taxes are paid by everyone who purchases gasoline — not by everyone who uses the government roads. 

One, very direct way to uphold this user-benefit principle — a key free-market idea — is to get rid of excise taxes and replace it with a mileage-based user fee (MBUF). The number of miles an individual travels is much more directly connected to the miles of roads “consumed.”

With MBUFs, the fee can vary with the congestion rate of particular highways — just as the price of a good in a free market increases as demand spikes — without violating consumers’ privacy.

In Oregon, the state government has been test-driving such a program, alleviating potential privacy concerns by simply keeping track of how much is owed, rather than when or where people drive. Marc Scribner, a research fellow with the Competitive Enterprise Institute, argues that Oregon’s program proves privacy and user-fee funding are not mutually exclusive:

An on-board computer … assigned miles driven to various categories: public roads or private property, in-state or out-of-state roads. That mileage was then tallied and processed by a trusted third party, without ODOT [Oregon Department of Transportation] receiving any location data. Fuel tax rebates based on mileage data were then applied and charges were assessed — again, without the government obtaining individualized location data. 

Oregon provides just one model. The current patchwork of local, state, and federal gas excise taxes is so inefficient and wasteful that almost any alternative funding framework lawmakers rally around would be superior. 

The time for experimenting is now. Lawmakers should seize the opportunity by thinking outside the gas-tax box and devising more consumer-friendly and cost-effective ways to fund the government roads on which we drive.

Jesse Hathaway (jhathaway@heartland.org) is a research fellow with The Heartland Institute.