The fuel tax dilemma has long existed, and the pandemic may be the final push to end it

After months of travel and work restrictions during the COVID-19 pandemic, drivers returning to the wheel may find that road conditions are not what they once were.

The sharp drop in driving during the early lockdowns meant less fuel tax revenue for state and local governments, exposing a concern transportation agencies and lawmakers have had for years: fuel taxes are no longer sufficient to fund America's infrastructure. Budget problems existed long before the pandemic, but new driving trends could accelerate discussions about replacing fuel taxes with innovative approaches.

Susan Howard, director of the highway financing program at the American Association of State Highway and Transportation Officials (AASHTO), said, "We have always believed that the current model is unsustainable in the long term, and the pandemic has only exacerbated these issues. We all agree with the user-pays principle, where the amount paid is based on miles driven... but the pandemic has indeed highlighted some weaknesses of this approach."

Infrastructure funding woes

Facing budget shortfalls, cities and states are making difficult choices about how to address infrastructure issues, with some governments considering cutting maintenance or pausing capital projects aimed at improving road access.

For example, Maryland has proposed cutting $3 billion from its six-year consolidated transportation plan budget, including delaying about $900 million in road projects and reducing some bus and rail services. Meanwhile, a report from the California Legislative Analyst's Office predicts that the state's revenue for fiscal year 2020-2021 will be $1.2 billion lower than the initially projected $12.8 billion, mainly affecting transit projects and shared revenue for local streets and roads.

New Jersey even had to raise its fuel tax by more than 9 cents per gallon this fall, part of a 2016 law that automatically requires a tax increase if state revenue falls short.

Nationwide, AASHTO predicts state transportation departments will face a $37 billion deficit over the next five fiscal years and is calling on Congress to fill the gap in future pandemic relief bills.

Because states have different revenue structures and formulas for sharing funds with local governments, cities will be affected differently. Public transit agencies face particularly severe challenges: the American Public Transportation Association says that without federal aid, six in ten transit systems nationwide would need to reduce service and furlough employees. A June survey by the National League of Cities (NLC) found that 65% of cities are delaying or canceling capital expenditures and infrastructure projects.

Overall, transportation departments are now more likely to focus on specific tasks like filling potholes and plowing snow—along with restoring ridership—rather than more innovative long-term projects.

Brooks Rainwater, director of the NLC's Center for City Solutions, said, "The key is the tremendous progress we've made in looking at mobility in new ways. Expanding transit systems, providing micro-mobility options, designing car-free streets—these societal changes require significant government work and investment."

Empty streets drain funds

The most visible sign of the early pandemic lockdowns was the increase in empty streets. Closed offices meant no commuters, closed downtowns reduced suburban traffic, and travel restrictions halted leisure trips within cities.

According to the Federal Highway Administration, vehicle miles traveled (VMT) in March fell nearly 19% compared to March 2019; in April, the year-over-year decline was close to 40%. Summer driving picked up somewhat, and by August, the cumulative decline was about 15%.

Less driving means fewer people filling up at the pump, and fuel tax revenue drops accordingly. Even as driving recovers, Highway Trust Fund revenue is still about 10% lower than the same period last year. More than 80% of that fund comes from fuel taxes, but also from tire and heavy vehicle taxes. State transportation departments have their own revenue sources, including state fuel taxes above the federal level, but still rely on Washington funding.

After economic recessions, VMT tends to recover slowly because people are slow to return to work or resume leisure travel. Federal data shows VMT declined during the 2008 recession and did not recover until 2015. States are already facing years of potential losses due to pausing or cutting long-term projects. Alexis Campbell, a spokesperson for the Pennsylvania Department of Transportation, said the state withdrew bid advertisements for 19 projects and canceled 7 advertised projects. Campbell said losses could reach as high as $550 million by the end of the fiscal year.

Campbell said, "Our funding challenges are not new, and COVID-19 has highlighted the fact that fuel taxes are insufficient to meet highway and bridge needs. We have made significant progress in improving our transportation system, but more investment is needed to address funding challenges, rising costs, and other funding impacts."

The VMT slowdown has also highlighted the importance of diversifying revenue sources. For example, the Oregon Department of Transportation (ODOT) announced it expects revenue losses of about $170 million in 2020 and 2021, with cumulative losses projected at $250 million by 2024 compared to October 2019 forecasts. The department is funded by state and federal fuel taxes, DMV fees, and mileage- and weight-based truck taxes. Travis Brouwer, ODOT's assistant director for revenue, finance, and compliance, said this last source has remained stable, helping the state avoid more deficits.

Brouwer said, "Truck taxes account for about 35% of our budget, much higher than other states with similar requirements. Our revenue sources are like a three-legged stool, and having this leg makes the whole thing more stable. The other two legs are a bit wobbly right now."

Can Congress find a new path?

Despite the COVID-19 impact, transportation funding has been unstable for over a decade. As vehicle fuel efficiency improves and electric vehicles become more common, the federal fuel tax has been losing effectiveness, and since 2008, Congress has had to shore up the Highway Trust Fund through Treasury transfers. Congress has also not raised the tax since 1993, and it is not indexed to inflation.

Even before the pandemic, the Congressional Budget Office projected the federal Highway Trust Fund would run out of cash in 2021. Congress had planned to pass a long-term transportation reauthorization bill this year, but lawmakers ultimately passed a one-year extension, avoiding the funding debate.

Now, the reauthorization debate will take place in the shadow of states cutting projects and competing for funds, which could put more pressure on Congress to seriously consider alternatives to the fuel tax. The most frequently discussed idea is a mileage-based fee (VMT fee), which charges drivers based on miles driven.

Adie Tomer, a fellow at the Brookings Institution's Metropolitan Policy Program, said, "The fuel tax is a relatively stable source, which is powerful, but as we move away from fossil fuels, it is losing purchasing power. A VMT fee is more like a utility fee, just as we pay for water or electricity. It sends a price signal to users."

Alternatives face technical hurdles in tracking and correctly charging drivers, but a few states are piloting their own programs. For example, Oregon has a voluntary VMT pilot program that is growing, but ODOT's Brouwer has no data on how it was affected by the lockdown. Meanwhile, Washington state is actively exploring road usage charges. A coalition of states along the I-95 corridor is also considering implementing its own user fees.

Cities have a smaller role than states in implementing VMT or alternative funding, although some cities have begun exploring congestion pricing. New York City has approved a congestion fee for cars entering Manhattan's central business district, originally scheduled to begin in January 2021, but it has been delayed pending federal highway administration approval. Other cities are also discussing their own congestion fees, which could become increasingly attractive because they can help cities recover pandemic losses without relying on state or federal governments.

NLC's Rainwater said, "Discussions about long-term funding need to happen at all levels of government and in the private sector. We need to see greater cooperation among levels to get there. Now that we've seen the consequences of relying on a few funding sources, it's time to study the best funding mix."

Of course, VMT and congestion pricing schemes depend on normal driving habits, which may change after the pandemic as more companies allow remote work.

In a recent Bloomberg Intelligence webinar, tax policy analyst Andrew Silverman noted that the next administration and Congress may need to look beyond taxes—which could disproportionately affect low- and middle-income drivers—to meet the nation's infrastructure needs. This could include bonds and public-private partnerships, combined with taxes and tolls.

There have even been proposals to use a carbon tax to fund the transition away from single-occupancy car use; 12 northeastern and mid-Atlantic states in the Transportation and Climate Initiative are exploring a "cap-and-invest" program to support funding for public transit, zero-emission vehicles, and bicycle and pedestrian infrastructure.

AASHTO's Howard said that when lawmakers return to transportation bill work, they should consider the lessons of the pandemic and look to more innovative states and cities for new funding strategies.

Howard said, "A program so dependent on gasoline purchases can pose challenges for forecasting when events like this occur. Long-term forecasts assume a certain level of sustained use, and long-term conditions are changing. The whole situation continues to reveal that we have not yet modernized."