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Friday, July 02, 2010

Funding For Public Transit In Alabama: Alternatives To The Gas Tax

Funding For Public Transit In Alabama: Alternatives To The Gas Tax

By Sumeet Singh

Issues related to oil and gas have bred a great deal of dissent at all levels – domestically, nationally, and internationally. Unfortunately, lost in the vast sea of extensive studies and exhaustive discourse about the issue of gas is the vital link fuel currently has to infrastructure. Although it may ostensibly seem that concerns about fuel’s price, its environmental impact, and relations with its foreign suppliers are most pressing, these fears have no place if America’s infrastructure – particularly the infrastructure within many of her states – continues to deteriorate.

Just like any other commodity, the consumption of gas is taxed. In most states, the revenue from taxing gas is used to maintain and develop infrastructure – roads, bridges, and transit systems. However, the methodology of gas tax strays from the common understanding of tax in that rather than having an ad valorem tax – that is, a tax on every dollar spent for fuel (i.e. a sales tax) – the gas tax is most often assessed on a per-gallon basis. For example, if someone buys 10 gallons of gas for $30, she is taxed for the 10 gallons, not the $30. This is dangerous for several reasons. Most fundamentally, the current scheme ignores a modern trend: people are buying less and less gas. Martin Wachs, in his testimony presented before the Los Angeles Field Hearing of the National Surface Transportation Policy and Revenue Study Commission, explains why the gas tax is entirely unreliable:

Federal and state fuel taxes, though still the greatest source of revenue for transportation, are rising much more slowly than either traffic volumes or transportation system costs. Because fuel taxes are generally levied per gallon, and not per dollar spent on fuel or per mile of driving, inflation and improved fuel efficiency combine to erode the buying power of the motor-fuel tax. To keep pace with rising costs and increasing travel, the per-gallon fuel tax levy needs to be hiked regularly – a significant political liability 1 .

The empirics also overwhelmingly show the inefficiency of the gas tax. In May 2008, the Department of Transportation’s Federal Highway Administration announced that since March 2007, Americans had driven 11 billion fewer miles – the single biggest drop since records started being kept more than a half century ago in 1942 2 .  What makes this number so poignant is that this national driving drop-off occurred before the 2008-2009 recession, meaning that Americans chose to drive less not because they couldn’t afford it, but because they didn’t want to drive.

Critics may contend that Americans drove less because of the historically high gas prices, but research from as recent as September 2009 shows that even though current gas prices are low, gas consumption is down 5% from September 2008 3 .  This egregious drop in demand is both alarming and precarious because it shows that government revenue from gas taxation will continue to drop rapidly and with it, the quality and safety of our roads, highways, and bridges.

Though this issue with gas tax is a comprehensive problem encountered in the majority of states, narrowing our range would provide a more useful and nuanced look into the topic. Hence, our focus will be the efficacy – or rather, the inefficacy – of the gas tax system in the state of Alabama and the politically viable alternatives that can be developed within the state.

Outside of the basic problem in the methodology of taxing gas per gallon instead of per dollar, Alabama has its share of additional issues. Of these, the most concerning is the use of gas tax revenue. A shortfall occurs because state law limits the use of gas tax revenue to the maintenance and development of roads and highways 8, leaving no money for developing a functioning transit system. Also, special interest groups play a large role in state politics.

Alabama legislators like State Representative Patricia Todd agree that groups like the Alabama Road Builders Association’s insistence on using funds exclusively for road and bridge projects is detrimental to the whole state because it increases urban sprawl, prevents the creation of a quality transit system, and hampers economic development 4 .  Though the state of Alabama has a population of 4.5 million and has several cities like Birmingham and Mobile with very significant identities and populations, nowhere in the state is there an expansive transit system that supports the needs of Alabamians. The lack of any strong transit system has several negative impacts that data from an American Public Transit Association (APTA) study highlights. First, great potential for economic development remains untapped without a transit system. The study found that cities without rail had a downtown vacancy rate of nearly 13 percent whereas cities with rail boasted a rate of only 8 percent 5. Also in the findings were specific examples of surging economic growth around transit stations. In Dallas, there has been more than $3.3 billion in new property development and redevelopment in areas near light rail stations while the metro area of St. Louis has generated more than $1 billion from real estate investment and redevelopment near light rail stations.Lastly, transit systems are boons to established area businesses and also tremendously increase property value as well as revenue from state and local taxes 5. In light of these figures and examples, the necessity and benevolent potential of a transit system is undeniable.

There is one brief observation before moving on – because of the political nature of this issue, we must keep in mind that the intent of this report is not to specifically support rewriting laws and statutes. Rather, the aim is identifying options the state can use to create sufficient funding for a transit program. Some alternatives will exist independently from gas tax while others will augment it.

Returning to the issue at hand, the obvious question in trying to identify viable sources for funding a transit system is how much would such a system cost? Although there are many avenues for approaching public transit, it is best to go with a plan that has been sufficiently developed and is relatively concrete. Hence, look to the In-Town Transit Partnership Project. This project is focused on creating an innovative transit system that would be concentrated in downtown Birmingham. In a Capital Cost Estimates report released in July 2009, the ITP projected yearly cost to be $65 million dollars 6. Thus, we can use this figure as a basis for evaluating the functionality of alternatives to gas tax.

It often appears that the stream of revenue for the government is in constant threat of being depleted, yet there are numerous untapped resources that can turn that stream into a revenue river.

A prime example of this is the license plate fee or vehicle registration fee. Currently, the fee for registering a standard passenger vehicle in Alabama is $23 7. In comparison, the same fee is higher in other areas: North Carolina - $28, Ohio - $34.50, Oregon - $27, Washington, D.C. - $72, Nevada - $33, Florida - $46.15. Amidst the higher prices of these other areas, a new source of revenue becomes apparent. Raising the vehicle registration fee for the more than 4.5 million vehicles in Alabama from $23 to $25 would create about $9 million in new revenue, while raising the fee to $30 would expand revenue to $31.5 million in new revenue. At this rate, nearly half of the IPT’s expected costs would be covered. Moreover, such an increase could be politically viable because constituents would not be angry over a $2-$7 fee increase on a fee they only pay once every year.

Another example of an untapped resource is the vehicle inspection fee. Alabama is only one of 16 states without a form of vehicle inspection. The state even lags behind its neighbors – Mississippi, Tennessee, and Georgia all receive significant revenue, among other benefits, from vehicle inspection. The vehicle inspection fee, just like the vehicle registration fee, is another simple yet practical resource. Consider the states that currently mandate it. In Maine, the state has licensed 2,400 stations and 8,000 mechanics to conduct inspections – entities that are all private. This has a dual benefit. First, the state does not have to spend any money in creating official stations and training official workers. Second, and more importantly, given recent economic behavior, mandating vehicle inspections would increase business and growth domestically. The total fee in Maine is $12.50, out of which $10 go to the station or mechanic and $2.50 go to the state. The office assigned to vehicle inspection is streamlined and exists to audit inspection stations and mechanics and deal with any complaints. There are eight civilian inspectors and two staff members, all of whom exist in the police chain-of-command. Also, the incurred costs of running this unit total $1 million, and the price of the registration stickers is $120,000. A similar set up in Alabama would yield new revenue of nearly $10 million, but Alabama’s model could be configured to produce millions more.

Another vehicle inspection fee configuration that can be evaluated is Mississippi’s. There, the total cost of inspection is $5. $3 goes to the inspection station and $2 goes to a general government fund. The most important development here is that vehicle inspections can be as inexpensive as $5 and still reap benefits. A possible model in Alabama could be a $13 vehicle inspection fee with $7.50 going to the inspection station and the remaining $5.50 going to the state. This configuration would create at least $24.5 million new dollars for the state. And, as previously mentioned, the tangibility of such a fee is extremely high because there would likely be little constituent distress and little political backlash.

Moreover, initiating a vehicle inspection fee would have other far-reaching benefits. Windfalls would include increased road safety and less damaging emissions from vehicles. The benefit of increased road safety is especially significant because Alabama has the dubious distinction of ranking in the top 10 as one of the deadliest states to drive in. In fact, in 2003, 22 people out of every 100,000 died while driving on Alabama’s roads and highways 8. A succinct indicator of the effect vehicle inspections have on safety is this figure: out of the 16 states that do not have any type of vehicle inspection, 13 rank in the top half of most deadly states to drive in. Thus, because the inspection fee would fulfill its role as a revenue generator and save lives at the same time, it is clearly a viable policy option.

Though the two preceding alternatives are viable politically, there are some alternatives that would be sufficient in solving revenue shortages but less politically feasible.

One such case is property tax. Specifically, in Alabama, although a small percentage increase of Class IV property tax – the classification applicable to motor vehicles – would significantly increase revenue, such a move would undoubtedly meet strong resistance. For argument’s sake, however, assume that the current Class IV tax rate of 15% was increased to 16%. Such an increase would bring an additional $200 on a $20,000 vehicle for net revenue of $3,200. Even increasing the rate from 15% to 15.1% would be significant: new revenue would total a very conservative estimate of $50 million.

Another location of untapped revenue that would be a strong revenue source but would meet political opposition lies within the methodology of gas taxation. As previously stated, the current gas tax is assessed on a per gallon basis as opposed to a per dollar basis. Consider this:

Under the current scheme, if an Alabamian consumer buys 15 gallons of gas at $2.35 and he pays the state gas tax rate of 0.16 cents per gallon, the revenue received by the government is $2.40. However, under an ad valorem method similar to the general sales tax, government revenue from this transaction would be $3.17 at a 9 percent tax rate. Though the difference seems negligible, given that there are approximately 4.5 million vehicles in Alabama and most of these would require fuel at least once in 31 days, the increase in revenue in a single month would be from $10.8 million to $14.27 million. Over a fiscal year, that difference bulges to $41.64 million. Naturally, since a switch to an ad valorem tax would increase costs to businesses and consumers, it is less politically palatable than alternatives like an increased vehicle registration fee and a vehicle inspection fee.

Before moving on to some of the more ambitious alternatives, it is important to remember that short-term change is preferable. What this means is that alternatives like the ones that have been covered in detail to this point are more efficient because they can increase revenue in the short-term or for the time period needed and then be ended without wasted resources, controversy, or any other heavy lifting. Taking on a momentous agenda that requires heavy investment is dangerous because it impossible to predict future technological advances, industrial shifts, and government policies. Hence, a wait-and-see approach using a short-term solution would bring in large amounts of revenue without any huge costs.

With that caveat in mind, there are a few intriguing alternatives to the gas tax that are very innovative but complex.

One of the most notable innovations that is receiving widespread attention is the vehicle miles traveled tax, or VMT. Under such a system, a GPS device would be fitted into vehicles that measured total distance driven. The GPS would count how many miles were driven and where they were driven. The device would then report the fee to the driver and would feed data to the areas where that person had driven. Although this would be the most egalitarian option and is receiving strong consideration by the Oregon Legislature, it has a large share of problems. To begin, the cost of such a project would be enormous. Specialized GPS units would have to be bought along with a long list of supporting technology and software, units would have to be fitted into every vehicle, and auxiliary personnel would have to be trained and hired, creating an extensive expenses column that would not be overtaken by the revenue for a long time, if ever. Also, recent studies have shown that many voters would be very opposed to the VMT because of the costs and sentiments that privacy will be violated by these apparent government tracking units in every vehicle 9.  In essence, though, while the VMT would be very fair and effective, it is almost a political impossibility.

Ultimately, two things are readily apparent: 1) capable alternatives to the gas tax must be developed and, 2) a dependable transit system must be developed with the funds from those alternatives.  The declining efficiency of the gas tax and the vast capabilities of some of the alternatives outlined in this paper paired with the great benefits of a transit system make it clear that there must be made and, fortunately, that change can breathe new life into a struggling system.


  1. Wachs, Martin.  Beyond the Gas Tax: Alternatives for a Greener World.  February 2007.
  2. As Gas Goes Up, Driving Goes Down.” CNN.  May 27, 2008 
  3. Oil prices drop $1.91 a barrel; gasoline consumption drops 5 percent.” Silobreaker. September 9, 2009. 
  4. Interview with Rep. Patricia Todd – 9/14/09.
  5. The Economic Benefits of Public Transit: Essential Support for a Strong Economy.” Transportation Riders United.
  6. “Capital Cost Estimates by Project Element.” In-Town Transit Partnership Project – July 7, 2009.
  7. Alabama Registration Fee Schedule”. ALDOT.
  8. The Per Capita Death Rate for Each American State – 2003.” DSA.
  9. Transportation agency: Obama will not pursue mileage tax.” CNN.

Made possible by the generous support of The Community Foundation of Greater Birmingham

- Sumeet Singh

Edited By:
Adam R. Snyder
Executive Director, Conservation Alabama Foundation

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