Opinion | Replace gas tax with mileage fee to pay for Michigan’s roads

Gov. Gretchen Whitmer and legislators are considering two important policy questions concerning road finance: Should Michigan adopt tolls to help finance roads? Should Michigan move toward a mileage fee to replace the motor fuels tax to finance roads?   

YES (to one or both)!

A few approximate magnitudes make the point. State and local governments in Michigan spend about $5.8 billion on highways annually for all functions. Almost $2 billion of that total spending is capital outlay for roads – construction and major repair. The rest goes for keeping the roads and bridges functioning.  

Where does the money come from? About $2 billion comes from the state motor fuels (gasoline and diesel) tax. Another $1.2 billion comes in the form of federal grants, which are funded by the federal government motor fuels tax. About $30 million (yes, million, not billion) comes from tolls, exclusively for bridges/tunnels – not roads. The remainder is paid for with general state (income and sales) and local (property) tax revenue and vehicle registration fees.

Eventually the $2 billion collected from the Michigan tax on gasoline and diesel fuel and the $1.2 billion from federal motor fuels taxes will disappear as consumers and businesses switch to alternative powered vehicles – hybrid, electric, hydrogen, solar, or whatever. This amount of revenue needs to be replaced, at least. Indeed, some would argue that we need more revenue to improve the quality of roads.

We in Michigan should be particularly aware that this is happening soon from the statements and behavior of the state’s major and historical industry. GM proclaims, “GM is on its way to an all-electric future.” Indeed, GM has announced a goal for all its light-duty vehicles to be battery electric by 2035. Ford Executive Chair Bill Ford has said ”Ford will lead America’s transition to electric vehicles and usher in a new era of clean, carbon-neutral manufacturing.” The company plans for nearly 50 percent of total production to be electric by 2030 and 100 percent of all vehicle sales in Europe to be electric by 2035. Same with the other manufacturers.

Thus, a move away from using the gas and diesel fuel taxes to fund roads is inevitable, a point noted by others as well. However, a number of challenges and obstacles must be overcome -- not the least of which is citizen understanding and acceptance – before some new mechanism can be implemented. Perhaps some of this discussion will help.

How much would a mileage fee be?

If a vehicle gets 25 MPG, 100 miles takes 4 gallons of gasoline.  At Michigan’s current tax rate of 28.6 cents per gallon, that is $1.14 in tax or about 1.14 cents per mile.

In fact, in 2020 cars average about 24 mpg, according to data from the U.S. Energy Department. But a van averages about 16.5, a delivery truck only 6.5, large trucks about 5, and a bus about 3. 

So, to be equivalent to the gas tax, the mileage fee would vary for different types of vehicles.  Just as larger and heavier vehicles pay more in fuel tax per mile now, the mileage fee could accomplish the same. Perhaps 1.1 or 1.2 cents per mile for cars, but 1.7 cents for vans, 4.4 cents for delivery trucks, 5.7 cents for large trucks, and 9.5 cents for a bus. These are just rough, illustrative calculations. A method for determining actual fees would have to be set in any legislation.

Eventually, the mileage fee could vary by location and time of use in addition to type of vehicle, being set higher for congested areas or times of day (serving as a congestion charge).

How much would I pay?

Let’s use some simple numbers as an example. Suppose you drive 1,000 miles a month (12,000 yearly) in a vehicle that gets 25 MPG. That requires 40 gallons of gas each month, which is a tax amount of about $11.50 monthly at Michigan’s tax rate. You pay $11.50 to the  government in Michigan to use all the roads. Seems cheap. If the mileage fee is 1.15 cents per mile, you would still pay $11.50 per month.

Is a mileage fee fair?

Some argue that a mileage fee is not fair because the more you drive, the more you pay. First, that is exactly the same as now with the gasoline tax. More miles requires more gasoline means more tax paid. Besides, it makes sense that those who use roads more — driving more distance or imposing greater costs on the system from larger or heavier vehicles – should contribute more to funding them.  

Are mileage fees and tolls different?

Only in name, really. Tolls typically have been charged only on limited-access highways or bridges, with the toll typically higher the longer the distance and higher for some types of vehicles than others. A mileage fee, then, is just a type of toll that applies to all roads.

Mileage fee or tolls?

Tolls have more limited revenue potential and are more difficult to implement than a mileage fee. Current federal rules limit the use of tolls for highways constructed with substantial federal funds, which includes most of the major interstates in Michigan. Thus, without a change in federal law tolls might be limited to only a few major highways in Michigan as well as new roads, or roads with major capital improvements, or new lanes. And in Ohio (yes, I know, Ohio) toll revenue from the Ohio Turnpike was just $335 million in 2020 compared to $2.5 billion from the state motor fuels tax.

How would a mileage fee be collected?

There are several options. A fee might be collected with annual vehicle registration, with miles required to be reported or read from the odometer. Increasingly, however, road and bridge tolls are collected electronically using systems like E-ZPass or I-Pass or license plate readers.  Similar electronic systems might be used for a mileage fee. A recorder in a vehicle could record miles driven (with or without recording location). The fee could be deducted continually from an account in the way that E-ZPass works. Or the vehicle owner might receive a monthly or quarterly mileage bill just as businesses and households get water or electricity bills.  

Interstate freight trucking mileage by state already is monitored and reported, which is used to allocate fuel tax revenue among states based on usage. This same reported mileage can be used to assess the mileage fee for interstate freight trucks.

What about vehicle registration fees as an option?

A concern with increasing vehicle registration fees by $150 - $200 annually (above what they are now) to replace the gas and diesel taxes is that this amount is not related to road use.  Someone who drives 5,000 miles a year would pay the same as someone who drives 15,000 with the same type of vehicle.

Michigan as a leader

Gov. Whitmer has pledged to “continue engaging in forward-looking policies to remain on the cutting edge of mobility and electrification growth.…” Therefore, just as Michigan is working and planning to continue to be a leader in the automobile industry, with efforts to have both modern battery development and EV manufacturing in the state, Michigan might also become a leader in new methods for financing the roads and bridges that those vehicles utilize. The governor should be congratulated for starting this discussion.  

Oregon is the state that has gone furthest so far in implementing a vehicle mileage fee (and coincidentally, Oregon also was the first state to adopt a gasoline excise tax, back in 1919).  After a pilot program, drivers in Oregon today have an option of paying the gasoline tax or the mileage fee, currently 1.9 cents per mile. Those who opt for the fee have three choices for how mileage is measured and the fee paid. If the vehicle has a plug-in device, owners can choose one that uses GPS or one that does not, and immediate or quarterly payment. Those with gasoline-powered vehicles in the program have fuel taxes rebated. There are active plans in Oregon to make the program mandatory eventually. A couple other states have followed Oregon in establishing a voluntary fee option, and a few others are actively considering mileage fees.

How about if Michigan races past Oregon (and other states) to be the first to use a mileage fee to replace the gasoline and diesel fuel taxes entirely? Think of the headline: Michigan (really Michigan State) beats Oregon!  

Perhaps feasible for 2025? 

Several hurdles need to be cleared, the first of which is citizen understanding and acceptance.  

As we have seen with dramatic tax changes, rather than piecemeal change, it might be easier to make one substantial switch in financing method rather than continuing a gas tax and gradually substituting a fee and possibly tolls. With a complete switch from tax to a fee, drivers could see that this is not adding a new cost. Drivers would pay 1.2 cents per mile instead of 29 cents per gallon of gas – pay differently, not more. Now, I understand we all might prefer to pay nothing – but experiencing road quality (or lack of quality), we in Michigan understand this is not an option really. 

Second, policy agreement requires the Whitmer administration and Legislature find a way to negotiate this road forward. Of course, even with policy agreement and citizen acceptance this idea depends on what state transportation, treasury and Secretary of State officials think is possible operationally. Though there are many operational challenges, it would be easier and more effective than trying to implement limited tolls and continuing to collect a gas tax, or worse, having all three (gas tax, tolls, fees) operating at once.  

The federal government will face the same issue with the federal gas/diesel tax, so Michigan can provide lessons to guide federal action. Also, it sends a great message about Michigan as a modern and innovative place.

Lee Iacocca famously noted “We are continually faced by great opportunities brilliantly disguised as insoluble problems.” The change to alternative powered vehicles offers many such great opportunities, which Michigan can both embrace and advance. As one of those opportunities, let’s race forward and be first with a modern transportation finance system.