4/13/2013

UTAH VALLEY UNIVERSITY

VMT TAX A PLATFORM FOR GROWTH

ECON 2020 Section 301 | John

A Platform for Growth 1 VMT Tax A Platform for Growth Government provides the vast majority of funding for road and highway infrastructure. This infrastructure has many characteristics of Public goods which are generally not profitable for the private sector. Funding for road and highway infrastructure comes from gas taxes which are collected per gallon at a flat rate set by federal and state governments. In recent years, the revenue from the gas tax has not been adequate to cover costs, and money from the general treasury fund has been used to cover the difference (Shirley, 2011). Revenues from this tax steadily decrease as fuel efficiency of vehicles increases. Users of the roads and highways are not paying the full cost of using the highways, and therefore are being subsidized by the government. A vehicle-miles-traveled (VMT) tax charges a tax based on how many miles a vehicle travels. Because about 85 percent of the external costs of driving are associated with the number of miles traveled rather than the amount of fuel consumed, paying for highways with user charges would be most economically efficient if it involved substantial mileage based fees (Congressional Budget Office, 2011). A VMT tax solves some problems, at the same time raising concerns of privacy and increasing incentive to not drive a fuel efficient vehicle. The most viable option is some combination of flat rate fuel taxes and a VMT tax. Several European countries have already started a transition to a VMT tax system. The pros and cons of both systems have been discussed in great detail in many private and government reports which are readily available. I will not detail those aspects in this paper. The aspect of a VMT tax that I have not seen discussed is how to monetize the new technology used to impose a VMT tax. This new technology would not only be a way to receive tax revenue, but more importantly it would be the base for a new platform. The VMT tax systems under development in Europe use devices installed in the vehicle which track mileage with a combination of mobile internet and GPS. The cost of implementing a system of this type in the United States would be incredibly high. Research has shown that under the right conditions a direct investment by government in infrastructure can provide more bang-for-the-buck than a tax break of the same dollar amount. A portion of tax breaks is usually saved by tax payers, while a direct investment

A Platform for Growth 2 by government will be fully spent and multiplied through the economy, and therefore creating more output for the same amount of input. Development of a sophisticated internet/data network across the entire country would accomplish multiple objectives. This network would be necessary to impose a VMT tax nationwide, and it would extend the reach, and availability of a high-speed internet connection for a higher percentage of the U.S. population. As of December 2011 the United States ranked 27th in percent of the population using the internet (Internet World Stats, 2011). Increasing the percentage of the population would increase the availability of information, and hopefully increase the United States competitive advantage in the global economy. The government directly investing in nationwide high-speed internet would be a long term strategic decision as well as a more efficient stimulus to the economy than a tax break. The VMT systems being developed in Europe offer interesting advantages and possibilities that a simple odometer check VMT tax cant offer. The meter factors in the cost to society in the form of pollution, traffic congestion, greenhouse gas emissions and wear and tear on roads. Hooked up to the Internet wirelessly and to GPS, the system tabulates a charge for each car trip by using a mileagebased formula that also takes account of a cars fuel efficiency, the time of day and the route. (Driving on busier thoroughfares costs more than driving on less-traveled roads.) At the end of each month, the vehicles owner would receive a bill detailing times and costs of usage, not unlike a cellphone bill (Yglesias, 2011). This system alleviates some of the negatives of a VMT system, while still maintaining the benefits of an efficient system to tax based on use. This Always connected system is what allows for the evolution from a simple tax revenue meter to a new platform for commerce. One of the biggest drawbacks cited by critics of a high-tech VMT system is the issue of privacy. Many feel that governments ability to track a citizens travels violates basic privacy laws. A report from the University of Virginia states, In reality, the infringement on personal privacy need not exceed that already associated with other technological conveniences such as cell phones and credit cards (Mineta &

A Platform for Growth 3 Skinner, 2009). Some of this concern is also generational, younger generations are very familiar, and quite comfortable, with giving some amount of information to providers in exchange for services. Google, Facebook, Twitter, Spotify, Pandora, and almost every other web service collect a great deal of information in exchange for services. These services also use advertising to offset the cost of providing the service. Most web services and apps offer some sort of free version in exchange for advertising being displayed during the provided service, with the option to pay to remove advertising and get additional services. Data exchange and advertising is where the VMT platform will excel. The VMT tax would be used to cover the costs of Public goods but that same technology would be used to harness the power of the market to maximize profits. The building-block of the platform is the aspect of constantly being connected, with the ability to determine the location of a vehicle at any given time. With that platform, the opportunities for revenue and commerce are as open-ended and free as any new platform. Like any new platform the ways to monetize it will be varied and unique, the market will decide what is needed. Platform Ideas VMT Device The device used to track mileage and location could be given to the private sector to develop. There would be certain functionality required, but different companies could offer different choices, and consumers would pick the best option for them. The Apple iMile would look amazing, and be very expensive, but loyal Apple customers would buy it without question. Smartphones Smartphones could be used for much of the functionality of the VMT device, which would alleviate some of the initial cost of starting a VMT system. App developers would compete for the best VMT apps, and consumers would get the app that served their needs. Advertising General and location-based advertising could be used to offset the cost of some VMT services. For example, a local restaurant could offer specials when you are near, or CocaCola could pay for some of your VMT miles in exchange for a 30 second commercial. Law Enforcement Essentially everyone would have a Lo Jack device installed in their car. With a proper warrant, law enforcement could use the location to find stolen vehicles and determine a suspects possible location at the time a crime occurred. Rewards Credit card companies could offer VMT Miles instead of Sky Miles to customers as a reward.

A Platform for Growth 4 Apps Apps are a huge business, and they would continue to be on the VMT platform. Wheres my Car parking lot apps, streaming audio/video apps, VMT reduction apps (would provide routes and times of day to decrease VMT costs), and Friend Finder apps. Many of these types of apps are already available for smartphones, but the VMT platform offers some subtle differences that could be utilized.

The ability to maximize profits for a VMT system is accomplished by utilizing the core functionality of a mileage capturing device, and using that functionality to provide additional value to consumers for a price. The idea of extending potential profits from just the base taxes collected by a VMT system with the ideas listed above goes a long way in maximizing total profits, but it does not illustrate the complete ability of the VMT platform to create profits and improve economies. A direct investment by government in a VMT tax system as described would utilize the power of the multiplier to achieve maximum economic efficiency. There are many required components on an automobile that do not necessarily improve the vehicles performance, but provide a larger societal or environmental benefit. The catalytic converter does not increase vehicle performance, but it does reduce harmful emissions that can damage the environment. Brake lights and turn signals do not inherently improve a vehicles performance, but it does increase safety and driver awareness, which in turn decreases the risks associated with automobile accidents. The negative externality of road damage created by vehicles on the highway is not being fully accounted for in the current gas tax system. The VMT would require a new device to be added to every vehicle, not unlike the previous examples, which would help fully cover the cost of road damage and the true cost of highway travel. One of the possible downsides of this new platform might be the potential to create incentives to drive more. If the new VMT platform is too successful, there is a possibility that people will drive more than they ordinarily might, and use public transportation less. Any decrease in negative externalities created by the VMT system might create a bigger negative externality in the form of increased emissions into the environment if the number of miles traveled increases. Some of these factors could be controlled

A Platform for Growth 5 by charging different VMT rates for different areas and times, and the continued decrease in vehicle emissions by moving to hybrid and electric vehicles in addition to further advancement in high-speed trains and mass transit systems. Google and other companies are already working on self-driving cars; perhaps the robust nationwide internet and GPS system created for the VMT system would help to increase the speed of innovation in that technology and put the U.S. at the forefront of yet another emerging technology. In order to implement this plan, the nationwide internet system would need to be built, which would directly and indirectly provide jobs to millions of Americans. Full implementation of this plan would create jobs in myriad ways. The VMT devices would have to be designed and manufactured. Devices would have to be installed and retrofitted into existing vehicles by technicians. Revenue could be created by imposing fines for hacking and tampering with VMT devices. This endeavor would require innovation and cooperation between the public and private sectors difficult but possible. This public/private cooperation will create the ability to truly maximize profits. The cost of the free-rider prone and no-price function Public goods of highway infrastructure will be fully paid, while the competition and free-market ideals will take the profit making abilities of the VMT device to a level that it couldnt have achieved as strictly a tax collecting device. This kind of investment in new technological platforms will allow the United States to remain a leader nation. Taking the lead on VMT technology will not only directly help our own economy, but other countries will look to us when they are considering VMT technology in their country. New jobs and new revenue will be created from the VMT platform; much like the new platform of the internet did not too long ago. This will not be jobs and revenues scavenged from other industries, but a new industry to fuel new growth for the U.S. economy.

A Platform for Growth 6 References Congressional Budget Office. (2011, March). Alternative Approaches to Funding Highways. Retrieved April 7, 2013, from Congressional Budget Office: http://www.cbo.gov/sites/default /files/ cbofiles/ftpdocs/121xx/doc12101/03-23-highwayfunding.pdf Internet World Stats. (2011, December 31). TOP 50 COUNTRIES WITH THE HIGHEST INTERNET PENETRATION RATE. Retrieved April 7, 2013, from Internet World Stats: http://www. internetworldstats.com/top25.htm Mineta, N. Y., & Skinner, S. K. (2009). Well Within Reach: Americas New Transportation Agenda. Retrieved April 7, 2013, from Miller Center of Public Affairs: http://web1.millercenter.org/ conferences/report/conf_2009_transportation.pdf Shirley, C. (2011). Spending and Funding for Highways. Retrieved April 7, 2013, from Congressional Budget Office: http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/120xx/doc12043/01-19highwayspending_brief.pdf Yglesias, M. (2011, August 11). Sophisticated Road Taxing In The Netherlands. Retrieved April 7, 2013, from ThinkProgress.org: http://thinkprogress.org/yglesias/2011/08/11/293654/sophisticated-roadtaxing-in-the-netherlands/