The way roads are currently funded is for the most part hidden from users and unrelated to travel. A better way to fund roads would be through new tax policies based on travel and road use, say two University researchers in Road Finance Alternatives: An Analysis of Metro-Area Road Taxes. This recently published report by Barry Ryan and Thomas Stinson of the Department of Applied Economics is the ninth in a series of the Transportation and Regional Growth (TRG) Study.

The report describes how the current tax system uses both fixed fee mechanisms, like the vehicle registration tax, and taxes that vary with system use, like the motor fuels tax, to fund state and local roads. Other important sources of road revenues—property taxes, income, and sales taxes—are hidden from the traveler's perspective. Of all the revenue sources, 71 percent are from fixed or hidden taxes and are unrelated to travel behavior.

The way roads are paid for affects household budgets and creates location incentives, say the authors. To illustrate, they model the budget impacts for a set of representative households, identifying the tax cost from an increasingly longer work commute by moving the households further and further from the central cities. They also explore two alternative road tax policies.

Current tax policy tends to penalize households that travel less and households with lower incomes. Alternatives that are more reliant on variable pricing mechanisms could actually save some households money while encouraging better fuel economy, less pollution, and alternative modes of travel, Ryan and Stinson say.

In addition, while many factors influence housing location decisions, road tax policy can affect development at the urban/rural fringe. Under the proper conditions, more reliance on variable pricing tax policy may slow conversion of the region's farmland to non-farm use.

Giving road users more feedback about incremental travel costs would improve the use of state and local roads. Because variable tax mechanisms send road users a clearer price signal about the true cost of their travel, alternative road taxes, like a vehicle mileage tax or congestion fee, could lead to better travel decisions by factoring weight, distance, or time into the tax price. The authors caution that concerns for improving system efficiency, however, must be balanced with tax fairness and administrative ease.

Ryan and Stinson maintain that policy reforms are needed if road tax revenues are to keep pace over the next 25 years with the rising cost of building and maintaining roads. Between now and 2025, without changing current law, vehicle registration taxes and motor fuel taxes will grow more slowly than the costs of road construction. Motor vehicle sales taxes, on the other hand, will grow much more quickly. A revenue shortfall in these three taxes would lead to additional pressure to pay for roads with property taxes and the state general fund, they say.

As a result of their research, Ryan and Stinson recommend broad public discussion of tax policy choices and their potential economic and social consequences, which could improve understanding of and support for tax reform.

To read or download a copy of the full report, visit the TRG Publications Page or call CTS at 612-626-1077.