Oregon’s Per-Mile Tax Contains Glaring Flaws

On July 1, up to 5,000 Oregon residents can sign up for a program that indefinitely exempts them from the state’s gasoline tax.  Instead, these drivers will pay a flat 1.5-cent tax on each mile that they drive.

On one level, the logic behind this experiment is sound.  As electric cars and highly efficient cars become more popular, consumers need to buy less gasoline to go the same distances.  The result is less collected in per-gallon gasoline taxes, and less resources to fund maintenance and enhancements to the transportation network.  Oregon’s per-mile-tax experiment is designed to address this emerging issue.

But the plan has fundamental problems. In the short-term, this program will be a boon to the 1,500 gas guzzler owners lucky enough to score a spot in the experiment. Thirty-percent of the slots in the program can go to vehicles that get less than 17 miles per gallon, a provision intended to avoid significant revenue losses.  Toyota Prius owners, by contrast, are likely to be more hesitant to volunteer since the Oregon Department of Transportation estimates that doing so would cost them $117 in additional taxes per year.  This imbalance is a big part of the reason that just 24 percent (PDF) of people support an Oregon-style per-mile tax that does not take vehicle emissions into account.  After rewarding SUV owners and penalizing Prius owners, the net result will be a system that collects roughly the same amount of revenue overall as the current gasoline tax.

But this is not the only problematic aspect of Oregon’s pay-per-mile experiment.  Incredibly, this new tax includes the same design flaw that has plagued the state’s gasoline tax for almost a century: a stagnant, fixed tax rate that is incapable of keeping pace with inflation.

Oregon, like many other states, has recently been having trouble raising enough revenues to maintain and expand its transportation network.  Much of this trouble can be traced back to the design of the state’s gasoline tax, which cannot keep pace with the growing cost of asphalt, machinery, and other construction inputs because it is levied at a flat per-gallon rate of 30 cents per gallon.  Increasingly, states have been moving away from this “fixed-rate” model in favor of smarter, variable-rate taxes tied to inflation or other factors.

But rather than adopt this reform, Oregon lawmakers have overlooked inflation entirely and have opted to launch an experiment aimed at dealing with increasing fuel-efficiency.  The problem with this approach is that fuel-efficiency’s impact on the budget is a longer-term issue that has yet to rival inflation in terms of its practical effect.  When ITEP last examined this topic, we concluded that “construction cost growth has been 3.5 times more important than fuel-efficiency gains in eroding the purchasing power of the gas tax.”

In this light, Oregon lawmakers’ decision to launch a major pay-per-mile experiment is nothing short of bizarre.  If transportation revenue sustainability is their chief concern, indexing the gas tax rate to inflation would go much farther toward addressing this problem, and would do so much more quickly and at much less expense to taxpayers.

Once that reform is enacted, there would be a stronger case to be made that a pay-per-mile tax experiment should be conducted to prepare for the coming popularity of electric cars and highly efficient vehicles.  But even then, lawmakers will still need to be mindful of inflation.  As we explained in our 2014 report on this subject : “Lawmakers interested in adequately funding transportation on an ongoing basis should immediately index their gas tax rates to inflation, and should be aware that such indexing will also be needed under any [pay-per-mile] tax they might enact.”

As things currently stand, Oregon’s 1.5-cent-per-mile tax is exactly as vulnerable to inflation as its 30-cent-per-gallon gas tax.  Despite the hype, this experiment isn’t the leap forward in transportation funding sustainability that Oregon needs right now.