Chapter 3. Program Structure and System Costs

This chapter describes the cross-cutting findings related to organizational structure and costs for administering a road usage-based alternative revenue mechanism.

Currently, the Federal government and all States tax gasoline purchases. At the Federal level, the majority of the taxes are collected when the product is removed from the bulk storage terminals. The companies pay the tax to the Internal Revenue Service, which is eventually deposited in the Highway Trust Fund. The States have different rules for the point of taxation, as some tax the product “at the rack,” which is upon removal from the bulk terminal, while other States impose the tax at the distributor level, from distributors who hold licenses and file regular (usually monthly) returns where the State and local taxes are paid. Notably, the method of collection of the MFT does not involve collecting tax at the point of sale from individual drivers.

By contrast, a user fee (i.e., a road usage charge [RUC]) typically comprises the following key features, contributing to relatively higher cost of collection and administration as compared with the MFT:

• A high number of data collection points if the fee is assessed for each individual vehicle.
• Significant front-end technology and back-end operations needs, including hardware, wireless communications, and data processing costs associated with using in‐vehicle and aftermarket mileage reporting technologies, which an RUC often relies upon.

Additionally, collecting an RUC in the form currently being explored by the STSFA Phase Ⅰ sites is likely to necessitate significant organizational and programmatic changes:

• Evolving role of the departments of transportation (DOTs). Several alternative transportation revenue approaches are being championed by State DOTs that have not traditionally been involved in tax revenue collection. With the shift to a user-fee system, that is likely to change as DOTs get involved with several functions associated with a RUC system, and as they begin interfacing with other existing or new entities to administer the program effectively. These entities may be DMVs, Departments of Revenues (DOR), private account managers or others.
• Need for capacity building to deliver the additional functions associated with RUC collection. Additional functions involved with RUC collection, such as those described above, can necessitate both capacity building efforts within a public entity through expanding existing departments or creating new ones, as well as contractual engagements with private entities to perform specialized functions. Broadly, the following are the two main organizational functional areas that are part of most programs based on the concept of mileage data collection from individual vehicle drivers:
  • Oversight and management: Responsible for overall oversight and management of an RUC program.
  • Account management: Responsible for collecting mileage data and, in some instances, payment.

The remainder of this chapter presents significant findings from Phase Ⅰ efforts with regard to administrative costs of collecting a user fee and potential savings or synergies explored.

Key Cross-Cutting Findings

The following lessons learned emerged from Phase Ⅰ explorations with regard to program structure that have implications for system costs:

• Explore organizational efficiencies: Oregon’s Phase Ⅰ efforts were directed significantly towards identifying efficiencies in their ongoing RUC program, particularly in oversight, certification, and management functions that are likely to be performed by a State agency. Caltrans and Missouri also studied several approaches to streamline and build upon existing workflows in an incremental fashion. Additionally, RUC West concluded in its ConOps that, to mimic the advantages of gas tax collection, a limited number of account managers may be used over a regional geography in combination with a regional clearinghouse.
• Explore economies of scale: As the RUC program becomes widely adopted, the costs of the system (particularly, the fixed-cost components) would be spread over a larger taxpayer base. This is likely to have an effect of reducing the per-user costs. Further, the initial ramp-up costs—from the perspective of organizational capacity building (i.e., hiring and training staff) and public outreach and education—are likely to diminish over time as the new system becomes default for the organization and the driving public. This is likely to be explored in future phases of RUC explorations by pilot sites.
• Explore the role of new and emerging technology in streamlining data collection: As vehicle technology evolves and data ownership issues are progressively resolved, obtaining mileage data from individual vehicles may not be as onerous as it is under the currently available technology options that most pilots are exploring. For instance, Minnesota’s user-fee structure is premised on the convergence of potentially disruptive technologies, specifically MaaS either in the market currently or on the horizon.

Significant Phase Ⅰ Efforts Exploring Program Structure and System Costs

With the exception of a few grantee sites, Phase Ⅰ primarily involved setting up a first pilot or conducting pre-pilot activities. Most rate-setting analyses were focused on estimating a “revenue-neutral” rate considering fuel tax collection costs (that potentially range being between 1 and 5 percent). This section details some significant efforts towards streamlining.

Eastern Corridor Coalition’s Administrative Cost Analysis

The Eastern Corridor Coalition conducted a looking-ahead analysis of the two key cost components for the main organizational functional areas defined above. A previous Eastern Corridor Coalition study identified fuel tax collection cost to be an average of 0.86 percent for the Coalition States.⁶ The Eastern Corridor Coalition Administrative and Compliance Issues Technical Memorandum quotes the following excerpt from a paper by Fleming, D.S. (2012), “Dispelling the Myths: Toll and Fuel Tax Collection Costs in the 21st Century”:

This analysis did not include a true accounting of system costs of administering an RUC system because several dependencies, organizational structures, processes, and functions are still being developed.

States’ oversight and management costs. Based on a high-level analysis of additional functions required to administer an RUC program, the Coalition assumed that the cost of collecting the RUC would be approximately 8 percent of the revenue receipts. The additional cost items identified included the following:

• Education and outreach, certification, and monitoring of account managers.
• Changes to DMV operations and software to support system enrollment and compliance efforts.
• Payment enforcement and collection activities, including accommodation of cash payments.

Account management costs. Based on a discussion with account management companies currently involved in RUC pilots, the Coalition estimated that commercial account management costs are about 10 percent of annual gross revenues for a system with 1 million customers.

The above analysis indicates total costs of an RUC program to be approximately 18 percent of annual gross revenues. However, this analysis is very preliminary.

Minnesota’s Approach to Partnering with Shared Mobility Providers

Minnesota’s proposed DBUF system is not a single technology or system, but rather a series of agreements to collect mileage fees from commercial mobility operators. The DOT assumes that RUC will not replace the gas tax, instead it will operate as a parallel system. A Minnesota DOT project manager noted in an interview conducted on September 18, 2018, that the Minnesota DOT expects that the fuel tax, despite its deficiencies, is likely to continue for a long time, primarily because of its simplicity and efficiency. The cost of collecting the fuel tax in Minnesota is less than 0.5 percent of the fees collected. Structuring a DBUF approach around the MaaS business model may afford a comparable level of efficiency to existing tax collection systems, because onboard technology embedded in the MaaS vehicles is already used to collect trip and mileage data for the MaaS business. Minnesota aims to have costs of collecting the DBUF fall between that of the fuel tax and sales tax.

While the future of mobility remains uncertain, this approach allows for a high level of flexibility with data collection to compute an RUC. The approach leverages data that is already being collected or may be collected by intermediary entities for other purposes than assessing an RUC. As such, it minimizes the number of data collection points and the need to acquire front-end technology for collecting data. However, the approach will still need to account for incremental administrative costs of back-end operations.

Oregon’s Approach to Streamlining System Costs

Although Oregon did not conduct a full-scale program cost evaluation during the Phase Ⅰ effort, several tasks were focused on identifying efficiencies that could be gained within existing program parameters that could result in cost reductions, including the option that an agency can serve as account manager to reduce costs. The role of the account manager is important because it collects the number of miles driven and whether those miles are eligible to be charged as part of a mileage fee program. The best practices that emerged from this task for decreasing administrative costs include:

• Identifying allocations of projects and systems between agency and account manager and developing a market exit process: This identification streamlines the effort for an account manager to leave the market and lowers administrative costs for the agency to manage the account manager exit, audit, and participant transitions.
• Ensuring business requirements provide clarity: Clarity in business requirements ensures implementations are aligned with the intent behind the requirement.
• Optimizing the certification process with instructional steps: Oregon revised the certification processes to combine steps where appropriate, streamline evaluation procedures, and provide more robust training to evaluation staff.
• Ongoing certification and periodic compliance checks: Compliance measures are for account managers. Compliance mechanisms ensure that account managers deliver specific outcomes in regards to the management of the data collected.
• Aligning program requirements with existing standards: Program requirements include audit requirements as well as State procurement laws and policies to reduce barriers to market entry.

Missouri’s Alternative Approach to Road Usage Charges

One of the motivations for Missouri to explore a non-RUC option was the potential for higher administrative costs for an RUC system due to the factors mentioned earlier in this chapter. A mileage-based tax will not be viable in Missouri if RUC vendor costs are above 3 percent of the total revenue, because the Missouri constitution (Article 4, Section 30 a) limits the actual cost of collection of MFT to 3 percent.⁸ As preliminary efforts indicate that RUC collection costs will likely be higher than 3 percent of revenues, Missouri has taken an approach that makes up for the lost buying power of the State fuel tax through a registration fee system that considers the vehicle’s fuel efficiency. This approach, while not an RUC, is an attempt to address the inequitable burden that the fuel tax, in its current form, imposes on vehicles with low fuel efficiency.

California’s Evaluation of System Cost Considerations

One of the key aspects of California’s Phase Ⅰ Program was the development of a cash-flow model. However, the model, while useful to calculate a revenue-neutral RUC rate, does not address system costs. The Final Enhancing Road Charge Pilot Program Report presents the following considerations regarding system costs:

• Higher costs of California DMV operating as a State account manager: California’s final report for Phase Ⅰ contends that the DMV may be best suited to lead the administration of a potential future road charge program because it is already performing most of the necessary functions. Road charge payment penalties could be tied to vehicle registration, and additional enforcement functions would not be required because they already exist within DMV. These approaches could significantly reduce system costs. Overall, however, California expects the costs of having the DMV operating as the State account manager to be higher than current costs of fuel tax collection. Some components of the additional costs, based on specific operational scenarios, are likely to be:
  • Additional staff resources to manage the road charge program.
  • Certifying the commercial account managers, and administering cash payments for those who choose not to work with a commercial account manager.
  • Modifying the DMV automated fee system to accommodate the RUC.
• Enforcement costs: Road charges are anticipated to be relatively low amounts, making collective actions for nonpayment less cost-effective. Several options could be considered to mitigate enforcement costs, including having the private entity (commercial account manager) take on enforcement, or keeping the fuel tax in place because it has low administrative costs. In the latter case, in the event of road charge noncompliance, the fuel tax would still be collected.