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Pay By the Mile?

But efforts to shift to pay-as-you-drive model slow to catch on.

by on Aug.12, 2011

Might you someday pay by the mile?

It took Carol Hinka some time to get used to paying tolls when she moved to Central New Jersey two years ago, first on the Garden State Parkway, then the NJ Turnpike on her daily commute to her office just west of New York City.

But when she learned her insurance company was experimenting with the idea of charging by the mile – much the way the toll roads base their fees – she began to wonder why she couldn’t pay by the mile for all of her automotive expenses, rather than the current hodgepodge that includes fixed state and federal fuel taxes.

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Hinka isn’t alone.  A number of regulators and planners think the idea of charging by the mile is a great idea – something that could gain even more traction if electric propulsion grows in popularity.  Since hybrids use less fuel than comparable conventionally-powered vehicles and battery-electric vehicles use no fuel at all, there’s the potential for government coffers to lose billions of dollars a year in annual revenues used for road maintenance and other projects.

To replace those revenues, several states – along with a number of European countries – are exploring the idea of establishing per-mile fees that would use GPS navigation systems to track how much a vehicle is driven.  There could be a fixed rate charge or the fee might be adjusted to reflect the fuel-efficiency of a vehicle, perhaps even when and where it was driven.

A proposal introduced in the Oregon legislature, for example, proposed a charge of about 0.85 cents per mile through 2015, with the figure jumping to 1.85 cents per mile by 2018.  The typical American motorist getting a combined 25 mpg today pays just under 2 cents a mile in fuel excise taxes – which vary widely by state.  So, the initial figure would not be out of line with the portion Oregon itself currently charges – though the 2018 fee would likely amount to a fuel tax increase for most drivers.

The Oregon measure has been stalled in debate, and similar proposals in Texas, Minnesota and other parts of the country haven’t caught on yet, either.

In Europe, with its crowded roads and a growing sensitivity to environmentally related issues, the issue of per-mile road charges has been widely discussed and was the subject of an extensive test in the Netherlands, where traffic problems are considered to be among the most severe on the Continent.

That was supposed to lead to the institution of a national per-mile system in 2012, but despite the seeming success of the test project, it was shelved after a new government took office last year.

A report in the International Herald Tribune says the project wasn’t popular – but did prove effective, many participants, after watching a taxi-like meter on the dashboard count off the added charges, deciding to reduce their driving of even switch to mass transit.

The Dutch system would have not only charged by the mile but adjusted the fee depending on the fuel efficiency of the vehicle being driven.  Driving in rush hour would’ve been more expensive, as would taking more congested highways.

“The trials work well, but it’s first a psychological issue and second a political choice,” Eric-Mark Huitema, a specialist with IBM, which developed the system, told the newspaper.

For American motorists, the idea seems to be running into resistance among those who fear Big Brother will know too much about their comings and goings – though advocates insist the system won’t actually track specifically where a vehicle is driven.

Few experts anticipate the issue to go away.  It’s unlikely electric vehicles will gain more than a small share of the market for at least the next decade, according to a recent study by J.D. Power and Associates, which expects hybrids, plug-ins and battery-electric vehicles combined to achieve no more than a 7% share of the U.S. market by 2020.  But even conventional vehicles will be using significantly less fuel in the years ahead, sharply reducing government revenues.

By 2025, the federal Corporate Average Fuel Economy standard will reach 54.5 mpg, about twice as much as when the Obama Administration took office.  With Americans actually driving less as fuel prices soar, there seem few options to recover lost highway revenues other than raising excise taxes or adopting an alternative system, acknowledges Mary D. Nichols, Chairman of the, California Air Resources Board.

“It is an issue we will have to deal with,” Nichols told earlier this year, though it is not one the environmental bureaucracy is happy to deal with.

That’s especially the case when it comes to electric power.  Advocates like to promote the fact that it costs the owner of a battery car like the Nissan Leaf around 2 cents a mile for the electricity it uses – compared to 10 cents or more for a comparable gas-powered vehicle.  So, adding just a penny or two in new fees could mean a significant percentage increase in driving costs – and reduce the savings on fuel needed to offset the higher price for a battery vehicle.

But with the increasing strain on government revenues, few expect the idea of a pay-as-you-drive system to go away.  Oregon advocates plan to keep pressing for a per-mile tax bill, and in Europe, Belgium will launch a small test program starting in September.  If the tiny country adopts the idea across the board, bigger nation’s like Germany are expected to follow.

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7 Responses to “Pay By the Mile?”

  1. TomKelley says:

    The wildest dreams of the folks making the hardware don’t include alt-fuel (hybrid, battery, etc) vehicles being as much as a rounding error in fuel tax revenues for the next decade, so on the surface, pay-per-mile (PPM) is a solution in search of a problem.

    In 50 years or so, this might start being a problem, but I think we can agree that there are much bigger issues to deal with in the near term.

    As for dollars collected vs. dollars available for road construction/maintenance, most highway managers outside the People’s Republic of Oregon find the current fuel and excise tax system to be the most efficient, effective and fraud-resistant way to collect user fees. Tolls, PPM, and ton-mile taxes cost more to collect than the existing fuel and excise taxes.

    Rather than remaking the entire system for everybody, just to address a small exception (sound familiar?), let’s give the electrics a free ride until they actually amount to more than a rounding error.

    After that, hit ‘em with an excise tax at the original sale and when the batteries get replaced. Start with a low rate to prevent killing the EV market, then roll it up to a appropriate share over a decade or so.

    If that sounds too front-loaded, collect this EV excise tax annually the same way the current heavy-vehicle highway use tax is collected.

    We’re not that short of highway funding, the problem is that too much of what’s collected in user fees is spent on boondoggles unrelated to road construction and maintenance.

    If there’s a genuine need for more highway funding, then provide the justification and raise the existing fuel and excise taxes.

    Unless of course the actual goal is not about funding highways . . .

    • Paul A. Eisenstein says:

      Hi, Tom,
      While I agree that battery technology will likely come on slowly — as the story clearly noted — that’s not the only challenge to highway revenue collection. By 2025, the average vehicle will be required to get twice the mileage the CAFE standard set in 2009. That translates to roughly half the excise taxes. Now, I recognize that the older vehicle fleet won’t be replaced overnight, but every year, the average used car also gets slightly higher mileage as the oldes vehicles are scrapped.
      A larger fleet will offset some losses…and traditionally, people have drive more miles each year…but…
      More cars put more burden on the roadway infrastructure requiring exponentially more spending. At the same time, higher fuel costs have been leading to less driving per vehicle, which reduces tax revenues.
      Bottom line: even without a surge in EV demand we may soon see the need to either increase excise taxes and/or shift to alternatives such as pay-per-mile.
      Paul A. Eisenstein

  2. TomKelley says:

    Yep, we do need to spend more on building and maintaining roads.

    Bringing EVs into that discussion is just a convenient red herring. Especially when you consider that the last few times that PPM was trotted out: 15, 25 and 35 years ago, EVs were still a distant dream.

    If we are spending all of the collected user fees on road building and maintenance, then by all means adjust the current fuel and excise tax rates.

    Without checking the latest numbers, there are around 5 million commercial vehicles subject to the heavy-vehicle use tax (in addition to all the other taxes and user fees paid by four-wheelers). This is collected very efficiently with an annual tax return, and you can’t renew plates without your receipt for payment of the tax. Until EVs and other alt-fuel vehicles outnumber the commercial vehicle fleet, this same annual return system will work just fine for the EVs.

    The key points are:

    1 – We don’t need to scrap a system that works very efficiently for 99.9% of the vehicles on the road, just because 0.1% fall outside that system.

    2 – There is already an existing system and infrastructure in place to address collecting user fees from that 0.1% of vehicles.

    3 – Adding and getting the bugs out of an entirely new PPM bureaucracy will cost far more than alt-fuel vehicles are likely contribute in user fees for the next century.

    4 – In an environment where tax rates are routinely raised with little or no benefit to the taxpayer, fuel taxes collected for a known, visible benefit are not immune from being increased.


    • Paul A. Eisenstein says:

      All valid points, Tom, which is why I think the support for PPM systems will be slow to come by. But we do have to reflect on the likely need to increase highway revenues as fuel efficiency increases. And, curiously, we may see PPM catch on in other ways, ie the test programs already underway by several insurance companies, as I noted in my story. Should we see that spread — and it would do so only with consumer acceptance — it might encourage the adoption of PPM taxing, as well.
      Paul E.

  3. mdredmond says:

    Please, oh please, I hope pay-by-mileage is passed. I’m going to make a fortune on local (10 foot radius) GPS jammers. Love capitalism!

  4. mdredmond says:

    While we’re at it, why don’t we collect annual registration fees from bicyclists? Those stop sign running idiots insist on “equal rights” on the road but fail to follow basic traffic laws and pay *zero* in taxes and fees. I say we tax the hell out of them!

  5. TomKelley says:

    @ mdredmond – While you get creativity points for your GPS idea, it won’t be that easy. For a sneak preview of how this will work, check out the little gizmo that the aptly named Progressive Insurance Company has been touting.

    This tiny device plugs into your car’s OBD receptacle to record not just mileage, but average speed, peak speed, jackrabbit starts, hard braking, all extractable from data in the engine control computer. Given the size and accuracy of accelerometers found in today’s smartphones, I’d suspect that the recording device includes one of those to measure pitch and yaw as well.

    Check the fine print on this insurance bargain. I’m sure that if you do travel less miles than you estimated, you’ll get a break on your insurance premium. But, if you get into an accident, you can be assured that all of the captured data is property of the insurance company. What do you want to bet that negligent operation recorded on the device is grounds for denying a claim?

    Now consider that allowing gov’t data capture into your vehicle, “strictly for mileage purposes — wink, wink, nod, nod,” can easily afford access to similar levels of vehicle operation data.

    Even if the potential for abuse of data capture was purely theoretical, what would the response be if such a plan had been proposed five years ago?

    History tells us the answer to that question.