Funding roads like public utilities — through user fees

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Jeff Cranson: Hello, this is the Talking Michigan Transportation podcast. I'm your host, Jeff Cranson. 

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Cranson: So, just about anyone listening to this podcast knows the fuel tax has long been the preferred method of funding road building and repair. That's been the case in Michigan for a century, with fees for registering vehicles also contributing to the funding pool. As a recent study on mileage-based user fees observes, the gas tax was a benefits tax based on the user's pay, user's benefit principal. Meaning, the tax is paid in proportion to the benefits received. Someone who drives a lot receives more benefit from the roads than someone who drives less frequently. People who drive more also put more stress on the pavement. The study, completed by the Reason Foundation and the Michigan-based Mackinac Center, provides an outline for how to rethink road funding and lighted diminishing returns from fuel taxes as fuel economy improves and major automakers shift to building more electric vehicles. Today, I’ll be speaking with a couple people who have researched this for a long time. First, Baruch Feigenbaum, senior managing director of transportation policy at the Reason Foundation, makes a repeat appearance on the podcast. He was on previously to talk about the study on tolling. Later, I'll talk with Aarne Frobom, a senior policy analyst at MDOT, who has also studied these issues for quite some time. So, once again, my first guest is Baruch Feigenbaum, who is the senior managing director of transportation policy at the Reason Foundation. Thank you for taking time to be here, and talk again about road funding, one of my favorite topics. 

 Baruch Feigenbaum: Well thank you, and it's great to be on. And yeah, we get really long titles at non-profits to make us feel better.

 Cranson: [laughing] Yeah, I get it. So, let's start with what you're seeing in terms of receptiveness to this, after lots of discussion over the years in Michigan and other states about more sustainable funding models, knowing that what we're doing just isn't going to keep covering things forever.

 Feigenbaum: Yeah, so I would say we are seeing what I would describe as a surprisingly positive reaction. I think most folks have been through the discussion; we've had the gas tax for 100 years, we have more electric vehicles, we have more hybrids, conventional vehicles are getting better fuel efficiency, and of course with today's gas prices, nobody's exactly rushing out to buy a low fuel efficiency vehicle. So, we need to do something that's a little bit different. And so, we've talked a little bit about tolling, but these mileage-based user fees is, really we think sort of the gold standard of the user pay, user benefit model. And in some talks we've had with officials in Michigan, we've gotten a pretty positive reaction so far.

 Cranson: So, one of the things I get—I think the misconception is that electric vehicles might do less damage to the roads. Because people think that they're lighter, when for the most part, in fact, they're not. At least when you're talking about passenger vehicles. And so, the thinking goes, sure they're not paying the gas taxes, but they're not doing as much damage. So, how do you talk about that?

 Feigenbaum: Yeah, and the electric vehicles is a great question. And it's challenging. But basically what we found, and what we try to convey is that all light duty vehicles—non-tractor trailers so to speak—do about the same amount of damage, wear and tear on the road. So there's really no difference between an electric vehicle and a combustion engine powered vehicle. There's really no difference between an automobile and a truck—a Ford F-150, say. And so, we explained that basically electric vehicles need to pay what we like to call their fair share. If they're using the road, they should pay for it. And the challenge is, some states have implemented an electric vehicle fee. Be it seventy-five dollars, a hundred dollars, a hundred fifty dollars, the problem is that has no relationship to how much an individual driver uses the road. One electric vehicle driver may drive 5,000 miles per year. Another may drive 20,000 miles, but they're paying the same fee. And so, one of the things that we think a mileage-based user fee does is really provides a fair method for all drivers of all vehicles, electric powered and combustion engine powered, to pay what is their fair share and road usage fees.

 Cranson: Yeah, Michigan is a good example of that. When the 2015 funding package came through, that raised the fuel tax a little, raised registration fees a little, and tacked on a surcharge for electric vehicles. It was very arbitrary, and it was basically done just as a nod to people who were opposed to otherwise voting for it unless they thought that there was some surcharge on electric vehicles. But it really wasn't based on anything, as you point out. So, what you would propose in your ideal world, in your study, you would see a situation where this would be subject to periodic increases when justified by increased operating and capital costs like a public process, similar to the rate making process for utilities. Which is something I've often wondered, why we didn't always fund roads like we do public utilities, and not ask the legislature to keep the lights on. And Michigan has a Public Service Commission—every state has some version of that that sets utility rates. So, what do you think about that? 

 Feigenbaum: Yeah, I think there's a couple of different models. As you point out, it's ironic that we don't fund roads the way we fund other public utilities, because roads really are a public utility. And somehow, we've convinced ourselves they're not. It's very interesting. So, some type of commission going in and making periodic adjustments is certainly one model. Another model I know that folks are looking at is having it adjusted to some type of inflation metric, which most years is about two percent. This year, it would be so, so great. But there would be some type of indexing metric involved.

 Cranson: Talk a little bit about what's in it for the driver. How many old systems could we get rid of, and how soon?

 Feigenbaum: Sure. So I think there's a lot of things in it for the driver in terms of fairness. And there's always this sort of, is someone in the Upper Peninsula getting a better deal? Is someone who's a more urban driver getting a better deal? And I think this brings an element of fairness to it. One thing I like to mention is that in pilot programs in other states—and I do want to get to pilot programs in a minute—the rural folks have tended to pay less than they have in gas taxes. And that is because they tend to drive more trucks, more fuel inefficient vehicles. And so they actually tended to be the biggest winners. There's a misconception that more rural drivers would be losers because they tend to drive further. And that is not what we've seen at all; in fact, we've seen the opposite. So, I don't think we're going to be implementing mileage-based user fees on a total scheme across the state for, let's say, the next 10 years. And the reason is, we have to test it, we have to get folks more familiar with it, honestly, from both a political and a technical perspective, and we have to reduce collection costs a little bit, fine-tune some things. But that gives Michigan an excellent opportunity to conduct a pilot. And there is federal funding available to conduct estate pilots. It requires only a 20-state match, and Michigan can look at a variety of different topics. If they wanted to look at different geographic issues in terms of differences in rural and urban areas, if they wanted to look at certain technology issues, they wanted to look at privacy issues. So the first step really is a pilot, and then that would transition to a more permanent program that was probably open to some drivers but not required, to eventually a permanent system that was for all drivers. Although, there would be some different methods of collecting and reporting the data.

 Cranson: I guess, going to that what's in it for me question; as you know, a lot of the pushback to anything that involves paying more for transportation is the sense among fiscal conservatives that you're raising taxes, you're raising fees, whatever. You're asking people to pay more for government. And you come from a non-profit that is a free-market advocacy organization. And it seems to me like you guys would have credibility with them if you're saying, look, this is not about raising taxes or contributing to government waste, this is just about getting the purest form possible for people who use the roads to pay for the roads. Why do you think that's so difficult to get through? 

 Feigenbaum: Well, I think any type of new revenue mechanism is scary. And I think there's been past instances of when there was a new revenue mechanism introduced that turned out to be a little bit more of a money grab than a change in policy. And so, that's why I think it's really important that this goes in as a revenue neutral proposal that's similar to what Michigan residents are paying right now in the gas tax. Now, I will say that depending on how this is implemented, in our report, we talked about implementing it as a tolling system on interstates and other freeways in the state. And because interstates and other freeways cost more to maintain than signalized roads or local streets, folks would pay a little bit more there. In that case, that would actually free up some gas tax revenue for local streets. So, you would not only be paying about the same amount, but you would actually have better quality pavement, better quality highways, and Michigan roads are pretty rough in terms of their pavement condition. So, I think in addition to a more future looking technology, sort of a slow transition to make sure that we're doing this right. There's also going to be improved roadways out there, and I don't know of anyone who doesn't want to see some improved pavement quality. 

Cranson: Absolutely. So, kind of following up on that, something we've talked about earlier, without a Frank Luntz modeled focus group, to talk about words and words that work. Do you find that people are more receptive to a term like mileage-based user fee, which just comes right out and says what it is—user fee, as opposed to vehicle miles traveled or gas tax or registration fee?

 Feigenbaum: I think so because what we found—so a couple different ways to look at it. What we found, first of all, is people are pretty good at sorting through “spin”, shall we call it. And so, calling it exactly what it is, “mileage-based user fees”, people are like, okay, I know what that is, that seems reasonable to me. Because we found most taxpayers really are reasonable. They want—maybe want is not the right word, but they're willing to pay what is needed in order to maintain roadways and build new ones where feasible. It's when they feel like they're being short changed that they get upset. We like the term mileage-based user fees compared to vehicle miles traveled because many people believe vehicle miles taxed is what VMT stands for. And taxes have a negative connotation, and they're also not really accurate in this case. Because a tax is something that you pay that can be spent everywhere on basically anything, whereas a mileage-based user fee, the fee means that it's actually going to be spent on a specific roadway for a specific purpose. And so, in addition to it sounding better, it also is more accurate. One last thing, I will say that some of the western states have been calling it road usage charges, RUCs. I personally like mileage-based user fees, but I think both terms are equally accurate and appeal to folks, just a difference of opinion.

 Cranson: It sounds like you're confident, if not bullish, on the timing for this, and that maybe a non-politicized rate making process, something like mileage-based user fee, could be sold. I mean, is that kind of what you're saying?

 Feigenbaum: I think so. I mean, I don't want to be too unrealistic with the timeline. I definitely don't think it's going to happen tomorrow. I think it's going to take a roll out. But I do think getting a pilot program up and going is something that can happen. And I think once you get the pilot program going, people see how it works, most people like the results. Then it makes it much easier over time to implement a replacement for the gas tax.

 Cranson: So, would you see what Oregon and some other states have done with pilots for VMT as a bit of a model for how you would do mileage-based user fees as a pilot in Michigan? How do you see that working? 

 Feigenbaum: I do. I tend to think Oregon is actually the best example. There's a couple other states, Utah and Virginia, that have mileage-based user fees for electric vehicles, but not for vehicles as a whole. But I think in terms of some of the privacy, in terms of some of the technology, in terms of some of the options that Oregon gives folks for reporting their mileage, that they are the best option. Obviously, Oregon’s a little bit different than Michigan in terms of demographics and location, percentage of roads that are state roads, etc. But yeah. I think a wise decision would be looking to what Oregon has done, particularly in the last few years.

 Cranson: Now that's interesting; that's good to know. Well, thank you, Baruch. Is there anything else you'd want to add to what we discussed for further conversation?

 Feigenbaum: Yeah, I guess the main thing that I would add is I think this is really an exciting time and an exciting opportunity. And if folks are interested, I always encourage them to, of course, go to our website, reason.org, find out more information, and just do some of their own reading at mileage-based user fees. I know at first it might sound like kind of an out there idea, but I think the more familiar people are with them, the better they are. We found that in states that have conducted pilots, initially a lot of folks were apprehensive, and at the end of the pilots, mileage-based user fees were overwhelmingly the most popular funding mechanism.

 Cranson: Well, I will include some of those links and things in the show notes. So, I appreciate it, and after this message, I'll be back to talk with Aarne Frobom, a senior policy analyst at the Michigan Department of Transportation, about all this. Thanks again, Baruch.

 Feigenbaum: Okay, sounds great. Thank you. 

 Cranson: We'll be right back. Stay tuned.

 [Cars honking]

 Narrator: Know before you go. Head on over to Mi Drive to check out the latest on road construction and possible delays along your route. For a detailed map, head over to michigan.gov/drive.

 [Cars driving past]

 Cranson: So, for the second segment, as I mentioned, I’m here with Aarne Frobom, who is a senior policy analyst at MDOT, and he has been studying road funding—the good, the bad, the depressing, for quite a while now. And he's especially shown interest over the years in various user fee models, which is really what the gas tax was originally, and it worked pretty well for many decades. But, as we know, it's a diminishing return now. So Aarne, Baruch Feigenbaum of the Reason Foundation, with whom you're familiar, sounded sort of confident that we might finally be at a turning point to look at something like mileage-based user fees. What do you think about that?

 Aarne Frobom: Well, a lot of people think so. It's gotten increasing attention and from the highway research establishment over about the last 10 or maybe even 15 years. And the interest has been picking up steadily over that time. The really big turning point always seems to be just around the corner. What's happening is some increasingly large-scale pilot studies being conducted in quite a few states now. I've lost count of the number of states that are actually trying this. But there's a consortium out west, the three west coast states. There's Iowa and Minnesota. There's another assembly of states on the east coast that's conducting an experiment. But none of the states have made it, what I would call, a working part of their road finance system, yet. It could happen, but what we're seeing is an increasing number of these, what you might call educational efforts for the leadership in all these states.

 Cranson: What does your gut tell you about whether—I mean, given that we've got bills in, and that State Representative VanSingel, who is from the west side of the state near Grant, Michigan, and Newaygo County is interested in this. You know, he's a Republican and a fiscal conservative, and he sees the benefits of going to a user fee. I mean, a true user fee, something that actually has user fee in the name. Does that spell any momentum as far as you're concerned?

 Frobom: Yeah, I think you could call it a minor turning point in the process. This department has paid attention to this idea, really, from the start. I guess it's close to 20 years ago now that we participated with seven other states and the Universities of Minnesota and Iowa in the first comprehensive study of using GPS location receivers for road user charging. That was about a year and a half project; it was conducted by an economist at Iowa and some public policy researchers at the University of Minnesota. And it found that, once the GPS satellite system that we're all used to using now, once that became available, it could really revolutionize road user charging or tolling. And ever since then, the interest has just been picking up. When word got out that this department was involved in the multi-state study, there was actually a small legislative rebellion against it. Since then, attitudes are changing very much so nationwide, and now in Michigan. So, even though it's only in one budget bill so far, I suspect that we'll see additional legislative interest in this in Michigan.

 Cranson: So, what about what I’ve long believed, and it seems to dovetail pretty nicely with the concepts being discussed in this study—that we treat roads like a public utility, because that's what they are. And in Michigan, we have a Public Service Commission, and other states have other various forms of bodies that regulate utility rates. And we don't ask the legislature to keep the lights on. So, how do we make that point that roads are a public utility?

 Frobom: Well, as to how to make the point, that's still kind of the big problem. A lot of people have been searching for the way to get that idea across, and it's really—that may be the bigger issue, more so even than the electronic road user charging system, because they really have to go together. Without a utility model for charging for road use, it really doesn't matter how the money is collected, whether it comes from the fuel tax, or from a per mile tax, or tolls. If the fee is not associated with the cost of providing the service, then eventually the enterprise goes broke. No one's willing to let the electricity, or telephone, or water, or gas utilities go broke, and we should have the same attitude toward road agencies as well.

 Cranson: Yeah, exactly. So, one of the big things people talk about, and one of the reasons why they're moving toward the terminology of mileage-based user fee instead of vehicle miles traveled is to get away from this idea that it's all about tracking you. I know you, and you're certainly a person that would be concerned about privacy. What do you say to people that cite that is their biggest concern?

 Frobom: I really don't know that it's that big a concern for that many people. When this idea first started to be studied, people imagined that there were going to be a lot of people who would think that there was somebody watching every trip they made on a tv screen somewhere. And maybe there are a few people like that. But over the last 10 or 15 years, we've all gotten used to the idea of carrying a cell phone with us that identifies us, and all our contacts, and all our preferences, and all our purchases, and all our travels. People have generally concluded that it really doesn't matter if there's some database out there that contains every place we've gone or every person we've talked to.

 Cranson: Yeah, I suspect it would be pretty boring if you looked at mine.

 Frobom: Yeah, it's really an extension of the whole cell phone system to the automotive system—that the two systems are kind of merging. And that was something that wasn't appreciated when this was first studied; everyone was focusing on the GPS satellite receivers. But now it's emerging that the cell phone system is probably going to be the means of tabulating the vehicle use and transmitting the payment.

 Cranson: Thanks, Aarne. Is there anything else you want to say about this? You want to give it your best endorsement—why this is a good idea, and why it should be taken seriously? 

 Frobom: To my way of thinking, the attractive part is it allows us to get rid of a lot of baggage that's accumulated in road funding over the last hundred years. We've seen that the fuel tax worked perfectly for many decades, but it's going to go away as cars become more efficient. In Michigan, we have a big establishment devoted to collecting a lot of money on license plate taxes, and that's something that could be abolished entirely and converted into the mileage-based user fee system. For truckers, it's especially interesting. Most people don't know that trucks pay five separate taxes, and two of those are already mileage-based: both the fuel tax and the registration taxes collected per mile on trucks. And all of that could be rolled into a single mileage-based system. 

 Cranson: The big guys, the big firms would probably have the overhead, and the investment in technology to break those things down, and the administrative wherewithal. But that's got to be tougher on people that own their own rigs or smaller firms, right? 

 Frobom: Yeah, every truck operator has to turn in two quarterly tax returns: one for the registration tax and one for the fuel use for every individual truck, recording every state that those trucks traveled in by mile. And plus, they're paying a tire tax, and a heavy vehicle use tax, and the federal fuel tax. So, if that could all be automated into a single system, the savings are really significant.

 Cranson: Yeah, of course, at the same time, there'll be concerns among those people about how much more they'd actually be paying to get the roads into the condition that we know they should be. 

 Frobom: Yeah, there may be something also to be said for separating the road user fee rate-making case from fuel price. Especially over the last few days, we've seen how the first reaction of the political system when fuel prices go up is to take money out of road funding to try to manipulate the prices by just a little bit. So maybe it's time, finally, to break that connection.

 Cranson: Yeah, that's well said. I mean, right now what we're living through, there's no better case in point. And yeah, those incremental fixes are not going to make a big difference, but it's going to put us backwards when we're already behind in terms of what we're doing with the roads. And so, separating those things, and separating the whole mindset of fuel taxes from road funding and it being the one thing that we buy that we are so cognizant of the price because we see it on every street corner, and it's in our faces all the time. Yeah, I think you make a really good point there. So thanks, Aarne. As always, I appreciate you taking time to talk about this, and we'll be talking more as the study goes forward, and we see what happens with the legislation.

 Frobom: Anytime, Jeff.

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 Cranson: So, thank you, again, for tuning into this week's edition of the Talking Michigan Transportation podcast. I want to thank my guests again, Baruch Feigenbaum of the Reason Foundation, and Aarne Frobom of the Michigan Department of Transportation. And I want to thank Randy Debler for engineering this week's podcast. To subscribe, to show notes, and more, go to Apple podcast and search for Talking Michigan Transportation.

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