1997 Federal Highway Summary Report

Alternative Investment Scenarios

For illustrative purposes, four alternative investment scenarios were formulated to evaluate how changes in obligations for different types of improvements might affect equity ratios. If Federal funds were obligated differently, cost responsibilities and equity ratios of different vehicle classes could be affected. Table 18 shows distributions of Federal obligations by improvement type for the 2000 base case and for four alternative investment scenarios. Scenario 1 assumes obligations for system preservation based upon estimated investment requirements in the 1995 C&P Report to maintain system conditions. The same overall investment level is assumed as for the base case. In this scenario, increases in obligations for system preservation are offset by reductions in obligations for new capacity and enhancements. In all scenarios, obligations from the MTA are assumed to be equal to revenues to the account, and obligations for FHWA administration, Federal lands improvements, and other related obligations are assumed to be at the same level as in the base case.

Table 18. Distributions of Obligations Under Alternative 2000 Investment Scenarios (percent)
Improvement Category	Base Case	Scenario 1	Scenario 2	Scenario 3	Scenario 4
New Capacity	21.0	11.4	11.4	43.0	20.5
Pavement Preservation	26.7	38.9	39.1	16.5	25.99
Bridge Preservation	15.6	20.1	19.9	9.7	15.1
Safety/TSM	9.4	5.0	5.0	5.8	9.1
Environmental	1.9	1.1	1.1	1.2	1.9
Other	4.1	2.2	2.2	2.5	4.0
MTA	12.4	12.4	12.4	12.4	12.4
Federal Lands, NHTSA, FHWA Administration, Other	8.9	8.9	8.9	8.9	11.0
Total	100	100	100	100	100

Scenario 2 is similar to Scenario 1 except that obligations are focused on the Interstate System, the NHS, and other principal arterial highways. Obligations on lower order systems are reduced by 50 percent. Scenario 3 assumes greater obligations for new capacity, with related decreases in obligations for system preservation and enhancement. The distribution of obligations by highway functional class is the same as in the base case. Scenario 4 is based on the Administration's National Economic Crossroads Transportation Efficiency Act proposal, and specifically includes $600 million going for AMTRAK.

Table 19 shows estimated 2000 equity ratios under these alternative investment scenarios. The two scenarios in which obligations for system preservation increase both result in equity ratios for combination trucks falling from 0.9 to 0.8. In Scenario 1 where the distribution of obligations by highway class remains the same as in the 2000 base case, equity ratios for single unit trucks also drop to 0.8, but in Scenario 2 where increases in obligations for system preservation are assumed to be concentrated on higher order systems, the equity ratios for single unit trucks remain at 0.9. The reason is that combination truck travel is concentrated on higher order systems whereas more single unit travel is on lower order systems where less Federal money would be expended. Clearly equity ratios of different vehicle classes are affected by how and where Federal funds are spent.

In Scenario 3 which assumes increases in obligations for new capacity, equity ratios are the same as for the base case. Equity ratios for Scenario 4 also are the same as for the base case.

Table 19. 2000 Equity Ratios Under Alternative Investment Scenarios
Vehicle Class	Base Case	Scenario 1	Scenario 2	Scenario 3	Scenario 4
Automobiles	1.0	1.1	1.1	1.0	1.0
Pickups/Vans	1.4	1.5	1.5	1.4	1.4
Buses	0.1	0.1	0.1	0.1	0.1
Single Units	0.9	0.8	0.9	0.9	0.9
Combinations	0.9	0.8	0.8	0.9	0.9

Potential User Fee Changes To Improve Equity

For illustrative purposes, six general user fee options designed to improve Federal user fee equity were analyzed in this study. Four options involving changes to existing user fees and two options that would require imposing new fees are summarized in this section. Options involving existing user fees include raising the diesel differential by 1 cent per gallon, raising the diesel differential by 6 cents per gallon, eliminating the cap on the HVUT, and adjusting the rate schedule on the HVUT along with lifting the cap. New user fee options include imposition of a WDT and an axle-WDT. Table 20 shows estimated equity ratios for different vehicle classes under the current user fee structure and under the six user fee options.

Adding 1 cent per gallon to the diesel differential (Alternative 1) would reduce the underpayment of heavy trucks, but as shown in Table 20, the effects would not be sufficient to raise equity ratios for the broad classes of vehicles included in that table. Adding 6 cents per gallon to the diesel differential (Alternative 2), however, would improve equity ratios for all major vehicle classes, although some lighter trucks would overpay more than they currently do. An incremental change to allow the HVUT to rise above the present ceiling of $550 for all vehicles over 75,000 pounds (Alternative 3) would reduce underpayment by the heaviest vehicles more than increasing the diesel differential by 1 cent per gallon, but would do nothing to improve the equity of vehicles registered at weights less than 75,000 pounds.

Changes to the underlying HVUT rate structure (Alternative 4), including creation of a two-tier structure for single unit and combination trucks, and more progressive rates for the heaviest trucks, could reduce both vertical and horizontal inequities in the user fee structure. The HVUT, however, is a flat annual charge that does not vary with annual mileage. It captures differences in cost responsibility associated with weight among vehicles but it does not capture differences associated with differences in annual mileage.

The two WDT options capture differences in both weight and annual mileage that affect the cost responsibilities of different vehicles. The WDT (Alternative 5) and the axle-WDT (Alternative 6) produce improved equity ratios as shown in Table 20. Table 21 shows the overall Federal user fee tax structure assumed in each of the alternatives examined in this study.

Tables 22 and 23 show weight-distance and axle-WDT rates assumed for Alternatives 5 and 6. These rates are illustrative of the order of magnitude of WDT rates

that might be charged to improve user fee equity. While some effort was taken to get equity ratios for the most significant vehicle classes close to one, several factors would have to be considered in setting WDT rates in practice including the overall level of user fees desired and the existing taxes that might be replaced by a new WDT. Assumptions in this analysis are that the WDTs would replace the HVUT, vehicle excise tax, tire tax, and the 6 cent per gallon diesel differential.

Figures 15 and 16 highlight relationships at different weights between agency cost responsibility and revenues under current and alternative tax rates for a 3-axle single unit truck and a 5-axle tractor-semitrailer. In general, the weight distance options (Alternatives 5 and 6) match the cost responsibility curves better than other user fee alternatives. A Federal WDT would not account for every factor that affects heavy vehicle cost responsibility, but it could account for the major influences -- vehicle weight and distance traveled. In its 1994 study, Highway User Fees: Updated Data Needed to Determine Whether All Users Pay Their Fair Share, the General Accounting Office recommended, "If the results of FHWA's (highway cost allocation) study indicate that certain highway users underpay their share of highway costs, the Congress should consider examining policy options, including a national weight-distance user fee, that would increase equity and promote a more efficient use of the Nation's highways."

Federal WDTs were not extensively analyzed in the 1982 Federal HCAS, but they were evaluated in the Department's 1984 report to Congress, Alternatives to Tax on Use of Heavy Trucks and in the 1988 report, The Feasibility of a National Weight-Distance Tax. The latter study concluded that "...administrative and compliance costs for a national WDT would not be prohibitive, nor would there be significant adverse impacts on interstate commerce or on other industries." Administrative and compliance costs would depend on exactly how the WDT was administered and how many vehicles were subject to the tax.

Table 22. Illustrative Weight Distance Tax Rate Structure (cents per mile)
Registered Weight	Single Unit Trucks	Combination Trucks
30	0.50	0
35	1.75	0
40	1.75	0
45	1.75	0
50	1.75	1.00
55	4.00	1.25
60	9.75	1.50
65	16.75	2.00
70	20.25	4.00
75	20.25	4.00
80	20.75	5.00
85	22.00	9.00
90	23.25	10.25
95	24.25	11.00
100	25.75	11.50
105		12.25
110		13.00
115		13.75
120		13.50
125		13.75
130		14.00
135		14.25
140		15.00
145		16.75
150		18.00

Table 23. Illustrative Axle Weight Distance Tax Rate Structure (cents per mile)
RW (000)
	Single Units			Combination Trucks
2-axles	3-axles	4+ axles	3- & 4-axles	5-axles	6-axles	7-axles	9-axles
5	0.00	0.00	0.00	0.00	0.01	0.00	0.01	0.00
10	0.00	0.00	0.00	0.00	0.75	0.15	1.25	0.25
15	0.00	0.00	0.00	0.00	0.75	0.15	1.25	0.25
20	0.00	0.00	0.00	0.00	0.75	0.15	1.25	0.25
20	0.00	0.00	0.00	0.00	0.75	0.15	1.25	0.25
25	0.50	0.00	0.00	0.25	0.75	0.15	1.25	0.25
30	1.00	0.00	0.00	0.50	0.75	0.15	1.25	0.25
35	2.50	0.00	0.00	0.75	0.75	0.15	1.25	0.25
40	6.50	0.50	0.00	1.00	0.75	0.15	1.25	0.25
45	13.00	1.50	1.00	1.58	0.75	0.15	1.25	0.25
50	21.25	2.75	3.50	1.75	1.00	0.15	1.25	0.25
55	26.75	5.00	6.25	2.00	1.25	0.50	1.25	0.25
60	29.50	10.75	9.50	2.25	1.50	1.00	1.25	0.50
65	29.75	17.75	12.50	2.50	2.50	1.50	1.25	0.75
70	47.00	23.25	16.00	2.75	3.50	2.50	2.00	1.75
75		27.25	18.75	3.00	4.50	3.75	3.00	1.75
80		29.75	19.75	3.00	5.00	4.75	4.50	2.75
85			21.75	3.25	9.00	7.25	5.75	3.75
90			23.25	3.50	10.50	10.25	6.50	4.50
95			24.50		11.25	12.75	7.25	5.25
100			24.50		12.00	15.25	7.75	5.75
105						18.50	8.50	6.50
110						21.25	9.25	7.25
115						23.25	10.75	8.50
120						25.50	12.75	10.00
125							15.25	11.25
130							16.75	11.75
135							20.00	13.25
140								15.00
145								16.75

The study concluded that acceptable levels of compliance could be achieved if a proof-of-payment system similar to the existing system for the HVUT were implemented, and noted that mileage records that most carriers already maintain should be adequate to comply with a WDT. While WDTs have been very controversial at the State level and only six States currently impose such taxes, there is no reason to believe that the basic conclusions about the administrative feasibility of a Federal WDT have changed since the 1988 report was completed.

A Federal WDT would have to be considered within the context of major revisions to the Federal highway user fee structure. The 1988 study assumed that existing Federal truck taxes would be eliminated if a WDT were imposed, and the illustrative tax rates developed for this study were based on the same assumption. The current budgetary environment is not conducive to user fee increases, but revenue-neutral changes in Federal user fees could be developed that would improve overall equity, but this would necessitate reducing Federal fuel tax rates. The rationale and benefits of efficient pricing were emphasized in the 1982 study along with the difficulties and uncertainties in designing economically efficient user charges at the Federal level. These same difficulties and uncertainties remain, particularly under the current Federal user fee structure. Improving the economic efficiency of the Federal user fee structure using existing fees is difficult because those fees simply cannot reflect the temporal and geographic factors that so strongly influence many marginal costs. Operations for some vehicles in some areas could be made more efficient if "typical" marginal costs were charged, but operations for other vehicles would become less efficient, and policy makers could not be sure that pricing policies were truly increasing overall economic efficiency. In fact the recently released TRB report, Paying Our Way: Estimating Marginal Social Costs of Freight Transportation points out, "Simplistic approaches to attempting to recover external costs by increasing freight carriers' fuel taxes or registration fees so as to generate revenue equal to an estimate of external costs almost certainly would harm efficiency." That report continues, "...all pricing schemes are to some extent approximate, trading off practicality of administration against the benefits of tailoring prices to costs. However, a poorly targeted tax may discourage more beneficial uses of the transportation system than harmful ones and so reduce economic welfare rather than increase it. Once again, understanding the market response to pricing is necessary to design a successful policy."

Thus, there are questions about whether adjusting Federal fuel taxes or other existing Federal user fees to reflect marginal social costs of highway transportation could improve economic efficiency and there is a distinct possibility that it could actually reduce overall economic efficiency. Certain social costs could be reduced through Federal user fee increases, but such fee increases also could have adverse impacts on the economy that would more than offset gains in efficiency resulting from decreasing certain social costs. Congestion, most types of air pollution, and other social costs that vary geographically or temporally are best addressed through fees at the State and local level that can be targeted at travel that contributes the most to social costs without unfairly and inefficiently increasing charges on traffic that causes few if any social costs.

The Federal Government has a significant role to play in reducing social costs of highway transportation and increasing economic efficiency, but that role is fulfilled primarily through such activities as (1) providing funds to State and local governments to help finance transportation system improvements that help reduce social costs and improve transportation efficiency; (2) providing technical assistance to public and private sector organizations on ways to reduce costs and increase the net benefits associated with transportation systems; and (3) continuing to implement safety, environmental, and other regulatory programs that clearly result in net benefits to society in terms of lives saved, injuries and illnesses avoided, and economic costs of transportation programs reduced.

The use of market-based mechanisms at the local level to reduce congestion, air pollution, and other social costs of highways is still in its infancy. The few local agencies considering the potential feasibility of pricing are not looking toward implementing economically efficient, system-wide pricing that would reflect true marginal costs of highway use, but rather are taking a more pragmatic approach in looking toward options such as variable tolls on one or more key freeways with the general intent of setting tolls that keep the freeways free-flowing during peak periods. Early experiments with pricing will provide a valuable baseline of information on the willingness of motorists to pay higher fees for improved traffic service during peak periods, and successes or failures should make it easier for other localities to explore their own pricing programs. Whether market-based mechanisms will evolve to the point where prices are set in accordance with true marginal costs is uncertain, but pricing certainly is a potential tool for local governments to use in addressing the most serious congestion problems and in making more efficient use of our transportation infrastructure.

Study Conclusions

Many factors that affect the equity and efficiency of the highway user fee structure have changed since the 1982 Federal HCAS. User fees have been modified several times, the composition of the highway program has changed, and the use of the highway system for personal and freight transportation has changed. In general, the overall equity of highway user fees as measured by ratios of Federal user fees paid by different vehicle classes to their shares of Federal HTF obligations has improved since 1982. While inequities remain, especially among the lightest and heaviest truck classes, there is no compelling need to adjust Federal highway user tax rates to improve user fee equity at this time. If there were changes in the composition of the highway program or in TS&W limits that increased inequities in the user charge structure, potential user fees changes to reduce those inequities should be examined.

Several conclusions can be drawn about the types of user fee changes that could have the greatest impact on equity and efficiency. First, adding an additional penny to the diesel differential could reduce the underpayment by all heavy trucks, although little change is observable in overall equity ratios. Adding 6 cents per gallon to the diesel differential, however, could improve equity ratios for all vehicle classes. Eliminating the $550 cap on the HVUT would reduce an inequity in that tax that generally benefits vehicles having the greatest cost responsibility. This option would improve user fee equity for the largest heavy truck class - tractor-semitrailers registering at 80,000 pounds -- and have a larger impact on vehicles registering above 80,000 pounds, but would only marginally improve overall equity ratios for those vehicles. Changing the HVUT rate structure, in addition to eliminating the cap, would further reduce inequities, not only for vehicles over 75,000 pounds, but also for heavy single unit trucks that as a group have some of the lowest equity ratios of any vehicle class. Large changes in a flat tax such as the HVUT, however, can adversely affect equity among vehicles that have different annual VMT, and could affect the utilization of equipment by different carriers. Unlike registered weight distributions that tend to be peaked, the distribution of annual VMT for many vehicle classes is relatively flat over a broad range of VMT. Consequently, the incidence of a flat tax such as the HVUT on a per mile basis can vary significantly among vehicles with different annual mileages while their cost responsibilities per mile might be very similar. If HVUT rates were increased substantially for the heaviest vehicles, improvements realized in equity across weight groups would be offset somewhat by increased inequities among vehicles that have different annual VMT.

Changes in existing user fees thus can improve overall equity, with changes in the HVUT rate structure generally having a greater effect than changes in the diesel tax. Preliminary analyses of WDT options show that they could reduce inequities both across and within vehicle classes more than changes to existing user fees. Perfect equity cannot be achieved with any tax because of the many different types of vehicles used to haul various commodities and differences in the operations of companies that use the same equipment. However, much of the inequity in the existing highway user fee structure could be reduced with a WDT because it could be fine-tuned to match the cost responsibility of different vehicle classes at different weights and operational characteristics.

The analysis of user fee alternatives conducted for this study was limited and was intended only to explore the relative improvements in equity that could be realized from several generic types of user fee options. Many other specific options also might potentially improve user fee equity and efficiency. The options evaluated in this study were not designed to maintain strict revenue neutrality, but revenue neutrality might be a desirable feature of any future Federal user fee changes implemented to improve equity, especially during the current period of budget limitations. One method for achieving revenue neutrality would be to reduce the gasoline tax at the same time that rates for one or more truck taxes were modified to more closely reflect truck cost responsibilities.

Decisions that could significantly affect estimates of future highway cost responsibility will shortly be made. The first is surface transportation reauthorization. This study has assumed that the distribution of 2000 program costs will be similar to the current distribution, but if major changes were made in reauthorization, these assumptions would no longer be valid and future distributions of highway cost responsibility could change significantly. The second factor that could affect decisions regarding potential Federal user fee changes to improve equity is the uncertainty regarding future TS&W policy. Before any significant changes in TS&W limits are implemented, user fee options, including the potential for significantly improving user fee equity through a national WDT or changes in the HVUT, should be evaluated. Congress, however, may wish to consider the potential benefits of a WDT or changes to existing Federal user fees that would improve equity, even in the absence of changes in TS&W policy.

Total marginal costs of highway use vary widely according to where and when trips are made. Highway user fees exceed marginal costs in many rural areas, and are much less than marginal costs in congested urban areas. If users paid the full marginal cost of their travel, they would only make trips whose benefits exceed the cost of the trip, and economic efficiency would improve. However, since Federal fees generally cannot be varied by either location or time of day, there are limited opportunities to improve economic efficiency by reflecting marginal costs in Federal highway user fees. At any given fee some users would continue to pay too much and others would continue to pay too little. Furthermore, Federal user fees represent only a portion of total user fees imposed on motorists by all levels of government.

The extent to which different highway marginal costs vary by location is not uniform. Variations are generally greatest for marginal congestion costs, with all other types of cost varying to lesser degrees except for global warming costs that do not vary by location. In general, the greater the variation by location and time of day, the less amenable a particular marginal cost is to pricing at the Federal level. A complete assessment of potential efficiency gains that might be realized from changes in Federal user fees was beyond the scope of this study, but it is questionable whether charging for most marginal costs of highway travel through increases in Federal fuel taxes or other existing Federal user fees would improve overall economic efficiency. Exceptions to this would be to more closely reflect marginal pavement costs in highway user fees since variations in pavement costs among vehicle classes are much greater than locational variations, and perhaps global warming which does not vary by location.

There are definite opportunities for improving economic efficiency through charges at the local level that reflect congestion, air pollution, and other external costs of highway use. Furthermore, there are opportunities to reduce external costs of highway transportation through highway improvement programs or regulatory actions that make highway transportation safer, reduce congestion, and contribute to reducing air pollution and other environmental impacts of highway use and operation.

More frequent cost allocation studies in the future would provide valuable information not only about user fee equity but also intermodal subsidy issues, changes in social costs of highway transportation, and other policy issues. Several States routinely update their HCASs every several years, and the same should be done for Federal cost allocation. Periodic updates would allow emerging issues to be analyzed in a timely fashion, much in the same way that the Department's C&P Report has considered emerging issues in recent years. Updating the Federal HCAS on a fixed schedule may not be necessary if factors affecting cost responsibility do not change, but the Department intends to update the cost allocation study more frequently than it has in the past, especially in connection with any proposed changes in the composition of the highway program, changes in TS&W policy, changes in highway user fees, or similar changes that could affect the equity or efficiency of the Federal highway user fee structure.

Table 24. Summary of Key Findings in the 1997 Federal HCAS

Passenger vehicles (autos, pick-ups, vans) travel 92 percent of all VMT, account for 96 percent of all vehicles and will pay about 64 percent of all Federal highway user fees in 2000. Trucks on average pay almost 10 times more Federal highway user fees per mile of travel than passenger vehicles. Overall, the Federal user fee structure is more equitable today than it was in 1982. Changes in the composition of the Federal highway program and changes in Federal user fees account for most of the difference. Passenger vehicles are expected to overpay Federal user fees by about 10 percent, while unit and combination trucks will underpay by about 10 percent in 2000. These averages, however, mask inequities among vehicles. For example, while automobiles pay their share of highway costs, pickups and vans overpay. In virtually all truck classes the lightest vehicles pay more than their share of highway costs and the heaviest vehicles pay considerably less than their share of costs. In general, the more axles under heavy vehicles, the lower their highway cost responsibility at any given weight and the more closely they come to paying their highway cost responsibility. State governments collect over two-thirds of total HURs and the equity of their user fee structures strongly affects the overall equity of user fees collected by all levels of government. Federal user fees are somewhat more equitable than average State user fees for lighter vehicles, but State user fees on average come somewhat closer to capturing the cost responsibility of the heaviest truck classes. Increasing the diesel differential or eliminating the $550 cap on the HVUT could result in incremental improvements to user fee equity. Modifications to the HVUT rate schedule or new taxes such as a WDT or axle-WDT could result in larger gains in equity. Safety, congestion, environmental, and other social costs of highway use remain large despite significant progress in reducing those costs through regulatory and highway improvement programs. Imposing charges to reduce those costs holds promise, but many social costs are highly localized and are more amenable to local pricing rather than pricing at the Federal level.

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