Mileage-Based User Fee Winners and Losers - RAND Corporation

This alternative is intended to create a price-based incentive for improved fuel economy
while not allowing improved fuel economy to erode revenue. This alternative, which has also been
referred to as a “green mileage fee” elsewhere in the literature, levies a high MBUF on vehicles
whose combined city/highway fuel economy rating falls below a specified threshold and levies a low
MBUF on vehicles whose fuel economy exceeds the threshold (Agrawal, Dill, and Nixon 2009). Any
threshold could be adopted and it could be adjusted each year as the average fuel economy
improves.
For this analysis, the threshold is set at the median EPA fuel economy rating so that
approximately half of all household vehicles would have a tax cut and the other half would have a
tax increase. 42 In the 2008-09 population of vehicles, the median EPA fuel economy rating is 25.1
MPG. Therefore, for alternative 7, the threshold is set at 25.1 MPG. In this alternative the rates are
intentionally extreme; the high rate is set to 2.94 cents per mile, which is the highest federal tax per
mile by any household, and the low rate is set to 0.28 cents per mile which is the least federal tax
paid per mile by any household. This rate structure is intended to have the opposite effect of the
equivalent flat rate MBUF. The distribution of vehicle fuel economy is more or less bell shaped
around the mean and the majority of households have “average” fuel efficiency. Therefore, with a
single equivalent flat rate, most households will have a very minor change in their price per mile.
With the tiered-rate MBUF, most households have either a large increase or a large decrease in their
tax rate. The alternative creates an incentive structure where no household with poor fuel efficiency
will increase VMT and no household with high fuel efficiency will reduce VMT.
The primary disadvantage of this type of fee is that it creates a “notch” at the point of the
threshold (Sallee and Slemrod 2010). There are large benefits to being on one side of this arbitrary
disjoint and large costs to being on the other. Were this type of policy to be adopted as proposed in
this illustrative alternative, similar to current fuel economy regulations, it would very likely distort the
market for vehicles (Sallee and Slemrod 2010; Sallee 2010). In addition to the mean MPG threshold
with the extreme rates, five alternatives with higher thresholds and lower rates are considered as
specified in Table 4.2. The alternatives use thresholds that are increased by 10 and 25 percent of the
median MPG, from 25.1 MPG to 27.6 MPG and 31.4 MPG. With the higher threshold, fewer
vehicles will qualify for the low rate. The extreme rates are replaced with lower notional values that
are approximately midpoints between the equivalent flat rate and the extreme rate. The lower rates
will reduce annual household taxes, relative to the high rates, for all households except those with
the most fuel efficient vehicles. With the higher threshold, the 0.5 cent per mile MBUF provides
only a small discount to the 0.59 cents, or less, those vehicles were paying with the current fuel tax. 43
Table 4.2 Alternative Rate Structures for Tiered MBUF Alternative
Threshold High Rate Low Rate
Tiered MBUF 25.1 MPG 2.94 cents per mile 0.28 cents per mile
Alternative 1 25.1 MPG 1.50 cents per mile 0.50 cents per mile
Alternative 2 27.6 MPG 2.94 cents per mile 0.28 cents per mile
Alternative 3 27.6 MPG 1.50 cents per mile 0.50 cents per mile
Alternative 4 31.4 MPG 2.94 cents per mile 0.28 cents per mile
Alternative 5 31.4 MPG 1.50 cents per mile 0.50 cents per mile
42 The EPA fuel economy rating is used instead of the EIA adjusted on-road fuel efficiency estimate so that this policy affects
households based solely on vehicle ownership and not their location and annual VMT.
43 A vehicle with a fuel economy of 31.4 MPG currently pays about 0.59 cents per mile in federal gasoline tax.
Page 47 of 131