Impose an Excise Tax on Overland Freight Transport

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017-2021 2017-2026
Change in Revenues 21.9 33.2 33.8 34.3 34.9 35.6 36.3 36.9 37.6 38.3 158.1 342.9

Source: Staff of the Joint Committee on Taxation.

This option would take effect in January 2017.

Existing federal taxes related to overland freight transport consist of a tax on diesel fuel; excise taxes on new freight trucks, tires, and trailers; and an annual heavy-vehicle use tax. Revenues from those taxes are credited to the Highway Trust Fund, which finances road construction and maintenance and mass transit. Railroads, which generally operate on infrastructure they own and maintain, are currently exempt from the diesel fuel tax, other than an assessment of 0.1 cent per gallon for the Leaking Underground Storage Tank Trust Fund.

The two most recent federal surface transportation laws—the Moving Ahead for Progress in the 21st Century Act of 2013 (MAP-21) and the Fixing America’s Surface Transportation Act of 2015 (FAST Act)—define and establish a set of national policies to improve the movement of freight. The FAST Act commits funds from the Highway Trust Fund to two programs that focus on freight. (One of them is a grant program designed to reduce congestion and improve “critical freight movements,” and the other is a formula-funded program that supports investment in freight projects on the National Highway Freight Network.) Neither act, however, establishes a source of revenue for funding such programs. Under current law, the Highway Trust Fund cannot incur negative balances. As a result, with its existing revenue sources, the trust fund will not be able to support spending at current levels (with adjustments for inflation) beyond 2021, the Congressional Budget Office estimates.

This option would impose a new tax on freight transport by truck and rail. The tax would be 30 cents per mile on freight transport by heavy-duty trucks (Class 7 and Class 8 vehicles in the Federal Highway Administration’s vehicle-weight classification). The tax would apply to all types of freight haulers: common carriers (available for hire by any shipper), contract carriers (which work with a limited number of client shippers and can refuse transport jobs), and private fleets (which haul goods only for the fleet owner). Under the option, freight transport by rail would be subject to a tax of 12 cents per mile (per railcar). The tax would not apply to miles traveled by trucks or railcars without cargo. According to estimates by the staff of the Joint Committee on Taxation, the option would increase federal revenues by $343 billion between 2017 and 2026. (Because higher excise taxes would raise businesses’ costs, they would reduce the tax base for income and payroll taxes. The estimates shown here reflect reductions in revenues from those sources.)

One rationale for imposing an excise tax on freight transport is that it would promote economic efficiency. Freight transport imposes “external costs” on society, including pavement damage, congestion, accidents, and emissions of air pollutants. Existing taxes on fuel better target emissions than do taxes on miles traveled, but they do not cover the other external costs that freight transport imposes on society. A tax on transport distance would address some of those costs (pavement damage, accidents, and congestion) more directly than increasing the existing fuel tax. The higher tax rate on truck transport reflects the fact that estimates of the external costs imposed by trucks are greater than estimates of those costs for rail. Although the higher rate would induce some shippers to shift some of their freight business from truck to rail, that effect would be small; most companies that ship by truck prefer that mode of transport over rail to a sufficient degree that the difference in tax rates would not alter their choice.

A second rationale is that the tax would create a source of revenue that could be used to lower other taxes, reduce the deficit, or finance public infrastructure projects that would facilitate the transport of freight. Such projects—which could include building additional transfer stations (where intermodal shipping containers can be shifted between truck and rail), dedicated highway truck lanes, grade separations (bridges and tunnels that keep rail and vehicular traffic apart at intersections), and bypasses to route trucks around crowded sections of highway—would ease traffic congestion and accommodate expected future growth in shipping. Traditionally, infrastructure projects have been funded out of transport tax revenues, but the current taxes on trucks and diesel fuel, which are credited to the Highway Trust Fund, do not provide enough revenue to finance such projects while also building and maintaining federal highways. The trust fund receives no revenue from rail freight transport.

An argument against this option is that it would be costly to administer. It would require that carriers report their miles traveled and that systems be developed to collect the taxes and audit the reported distances. Moreover, because fuel consumption has some external costs that do not depend on miles traveled, economic efficiency would still require taxes on motor fuels even if other fees were assessed at their efficient levels.

Another argument against this option is that it would apply the same tax rate to cargo of all weights, even though external costs tend to be greater for heavier cargo. The tax based on miles traveled would encourage shippers and carriers to maximize the weight per shipment. The tax would also encourage some shifting of truck freight to smaller Class 6 trucks to avoid the tax. Those effects would be constrained by statutory weight limits on roadways and bridges and by the capacities of truck trailers and railcars. An alternative would be to base the tax on weight and distance, but such an approach would be costlier to administer because it would require information on the weight of every shipment.

An additional argument against this option is that the tax would probably be passed on to consumers through increases in the price of final goods. For many types of goods, the price increase would be relatively small because freight transport accounts for less than 5 percent of the cost of the merchandise. For some bulk commodities such as coal, however, the transport cost share is substantially higher, which would cause the tax to have a larger impact on final prices.