Funding source: Caltrans

Contract number: 65A0674

Funding amount: $120,348

Performance period: 8/15/2021 to 8/14/2022

California is currently investigating the potential to use a Road Use Charge (RUC) as an alternative tax instrument to replace gas (or fuel) tax. In the past two decades, the fuel economy of traditional vehicles has substantially increased, and the planned electrification transition of the vehicle fleet will further reduce gasoline consumption. As a result, revenues from gas taxes have been declining (Caltrans, 2021). The reduction in gas tax and other fuel tax revenues can be problematic because they represent the major funding sources to keep State roadways in good conditions and support other modes of transportation. Failing to do so can result in additional costs, not only to the government, but also to the consumers (or the road users themselves). If roadway maintenance and repairs are not done on schedule, easy repairs can often become more serious and more costly damages as time passes. As for the consumers, the average annual car operating and repair costs to California drivers due to deteriorated road conditions are estimated to be about $843 (TRIP, 2018). Therefore, it is important to maintain sustained revenue sources to cover the costs of maintenance and repair of the surface transportation system.

RUC is different from a gas tax in that it is a pay-by-mile system, which is not necessarily linked to fuel consumption. In the U.S., the RUC is currently a legislative mandate only in Oregon. However, RUC program studies have been completed in several other states including Texas, Colorado, Minnesota, Iowa, New York, Pennsylvania, Maryland, and Delaware. Active formal study for possible implementation of the system is taking place in California, Washington, Nevada, and Indiana. Moreover, many other states are either interested members of the WRUCC (Western Road Usage Charge Consortium), having legislative or governmental interest, or beginning inquiry of this tax revenue mechanism. With respect to the freight sector, Oregon, Kentucky, New York, and New Mexico collect weight and distance-based fees from heavy trucks. On an international level, New Zealand represents the most outstanding example of RUC implementation, as the country started charging RUC from diesel vehicles since 1977. Finally, many European countries are implementing a variation of the RUC system, based on time rather than distance (IBTTA. 2020).

A 9-month RUC Pilot program was conducted in California between July 2016 and March 2017, with more than 5000 volunteers participating. This Pilot Program was designed to test whether a state-wide RUC program could be successful and to provide data on various factors needed to be considered in planning and executing the policy on a large scale. The pilot program utilized 4 third party vendors to collect mileage data and to issue simulated invoices, demonstrated 6 reporting and recording methods, and included heavy commercial vehicles. Over the whole duration of this simulation, the vehicles reported more than 37 million miles traveled, showing that Californians move over great distances during relatively short periods of times, and proving that the development of a sustainable system to collect adequate funding for required road maintenance within the state is essential (CalSTA, 2017).

There are both benefits and potential issues associated with the RUC system. The first benefit is to impose charges or fees to all types of vehicles, including high fuel-economy and electric vehicles, based on the actual costs the vehicles impose on the roadway infrastructure. Second, since RUC is considered a sustainable revenue stream for roadway maintenance and repairs, it provides the flexibility to incorporate other factors into the design of the pricing system, including for example, weight of the vehicle, level of road congestion, and type of road used (Sorensen et al., 2010). Consideration of these additional factors help internalize the externalities and increase societal welfare (Atkinson, 2019).

One major concern of the RUC system, which has been already highlighted during RUC experimental trials, would be privacy of the drivers, as many RUC pilot programs used vehicles' GPS to calculate miles traveled and payments due. To address this issue, some states allow odometer-only options or manual reporting as alternative options during the feasibility study. The second concern is that if the RUC system applies to all vehicles, the tax advantage (avoided gasoline fuel taxes) for EVs is reduced, which then would reduce the incentive to adopt green and environmental-friendly technologies in transportation. One solution to this issue would be to implement some payment exemptions for electric vehicles, so that they will not lose their ecological value and appeal to the general public (Atkinson, 2019). Another would be to offer other incentives, such as reduced car registration fees.

Another important consideration is the fairness or distributional equity implications of the RUC system. A number of studies have focused on investigating this issue for passenger vehicles. If all households drive cars with similar gas mileage, shifting from a gas tax to an RUC system may not result in increased distributional inequality. However, all households do not drive cars with similar gas mileage. Lower-income households tend to drive less fuel-efficient vehicles, and some studies indicate that switching to RUC, especially income-based VMT fees, may help reduce the cost burden of the lower-income groups (Weatherford, 2011; Larsen, 2012; Rodriguez and Pulugurtha, 2020). In addition, zero and near zero emission vehicles are more likely owned by higher income households (Farkas, Shin and Nickkar, 2018). Switching to RUC would also increase the cost burden for higher income households.

On the other hand, little has been studied on the distributional impacts of the commercial vehicle RUC system. Although a system can be designed to achieve revenue neutrality for the charges and fees imposed on trucks, some segments of the industry may shoulder a higher proportion of the cost compared to the others due to type of service provided or attributes of the vehicles. Some representatives of the freight industry indicate that it is difficult to pass increased costs to downstream customers in the short run due to the economic structure of shipping markets. Trucking firms have less economic power than wholesalers or retailers. In the long run it is more likely that the costs will be eventually passed through to consumers in the form of increased prices of goods.

In this project, we will conduct an economic and distributional impact analysis of RUC on heavy duty vehicles (HDVs). Key research questions to be addressed include: How would various rate levels of a California RUC affect the costs of the HDV industry? Will a road charge on commercial freight vehicles be passed onto consumers? Are there industry segments that are less likely to be able to pass on any additional costs? If the costs are passed to the consumers, what are the impacts on the prices of different types of goods and services? Are there certain price inelastic goods critical to disadvantaged communities that are likely to face a large price increase?