Economy Matters

The potential rewrite of tax policies to fund roads and bridges presents an opportunity to reduce tax burden inequity for low-income families, according to a research paper released by the Atlanta Fed.

The Policy Hub paper illustrates that the most equitable tax that could be enacted may be one based on the number of miles a vehicle is driven. This "road usage fee" is among the revenue models being tested nationwide under provisions of the federal infrastructure law of 2021. State pilot programs are considering equity among income groups and the different commutes of urban and rural drivers.

The paper arrives as concerns about highway funding have been heightened by growth in the use of plug-in electrical vehicles (PEVs) and plans for greater rates of adoption. Drivers of these vehicles don't pay a motor fuel tax, since the 1950s a primary funding source of money that states and the nation use to build and maintain roads and bridges. Hybrid owners pay a reduced amount. Increased vehicular fuel efficiency further complicates the current funding formula. The proposed federal fleet standard for passenger vehicles is about 58 miles per gallon in model year 2032, compared to 15 miles per gallon in 1980, with less-efficient vehicles assessed a "gas-guzzler" fee.

The paper's purpose is to raise the issue of equity into the conversation about highway funding, said Atlanta Fed research economist and senior adviser Julie L. Hotchkiss, coauthor with Kalee E. Burns of the US Census Bureau of "Electric Vehicles, Potholes, and Taxes: Who Pays the Price?"

"This could be the opportunity to shore up infrastructure spending in a way that provides the smallest burden on low-income individuals," Hotchkiss said. "The perfect storm of running out of money and the widespread adoption of EVs and hybrids provides an opportunity to restructure the way infrastructure is paid for."

The fuel excise tax has for years been insufficient at both the state and federal level to fund transportation spending. States have enacted their own measures, such as Georgia's $5 a night hotel-motel fee, to subsidize transportation spending. Congress has supplemented the federal Highway Trust Fund rather than raise the gas tax, which has been 18.4 cents a gallon since 1994.

The equity issue of current tax policy involves the regressive nature of the motor fuel excise tax. It is a flat tax on consumption of gasoline and diesel, so motorists pay the same tax rate on fuel regardless of income. This means that lower-income families pay a greater proportion of household income than higher-income families to build and maintain roadways.

The degree of regressivity imposed by the excise tax is significant. According to the paper, the loss for households from raising the gasoline tax by the amount needed to cover infrastructure costs is more than twice for households in the lowest of four income brackets than for households in the highest bracket. This is based on a measurement known as consumer surplus, or the benefit received from buying the fuel. The rates are 4.5. percent and 2.1 percent, respectively.

"The gasoline tax is not unique in that any excise tax or sales tax is regressive," Hotchkiss said. "It does fall more on low-income households, where the money spent on the tax is a greater share of their income."

The paper offers alternative tax structures that could raise the same amount of revenue as the motor fuel tax:

• A tax on miles driven, which the paper states may be the most equitable across incomes. Hotchkiss said of the measure, "If your goal is for families to share the burden equally, that's the way to do it."
• A lump-sum tax that simply divides the revenue needed equally across families, in which each family pays the same amount, would still be highly regressive, but less so than the gasoline excise tax. The paper observes, "however the burden of a lump-sum alternative to the gasoline tax is distributed, consumers will be better off than with a gasoline excise tax."
• An income-based household tax, structured to set the amount of tax paid on income, would be the least regressive. However, the chances that this policy could be enacted are "very low," the paper states. Hotchkiss said of the highway tax, "Nobody's talking about income taxes or making it a function of income."

Hotchkiss spoke of equity issues that go beyond highway funding that could become part of the dialogue on equity in electric vehicles and hybrids. Proximity to job centers and charging stations are among the factors.

Low-income workers generally face longer commutes than high-income workers to reach a job that matches their skill set. This results from rising prices for housing near job centers, prompting those with lower incomes to move farther away to find affordable housing.

Charging stations tend to be concentrated in urban areas and higher-income communities, including in the Atlanta Fed's Sixth District, which stretches across Alabama, Georgia, Florida, and parts of Louisiana, Mississippi, and Tennessee.

In metro Atlanta, for instance, charging stations are clustered north of the historic socioeconomic divide of Interstate 20, except for chargers near Atlanta's airport, according to a national map of charging stations produced by the US Department of Energy.

The authors conclude the paper with this statement: "As PEV consumption increases, not only will policy makers have to rethink their funding strategies for infrastructure spending, but they will also need to consider who is bearing the burden of those funding plans."

David Pendered

Staff writer for Economy Matters