Fleming-Poole study from Reason says all-electronic tolling costs competitive with fuel taxes, should be "embraced now" as primary highway funding mode

2012/11/27: An exhaustive study by toll industry consultant Daryl Fleming and veteran transportation policy analyst and writer Robert Poole says all-electronic toll (AET) collection is already comparable in collection costs to the gasoline tax. The study titled "Dispelling the  the Myths: Toll and Fuel Tax Collection Costs in the 21st Century" finds that fuel taxes and AET alike cost in the region of five percent of revenue to collect, but that the other benefits of tolling make it the preferred mode for highway financing.

A summary: "21st-century all electronic tolling is already a viable alternative to motor fuel taxes as a highway user fee. In particular, toll collection costs in the vicinity of 5% of the revenue collected are entirely possible today using proven methods and technology."

This they say is similar to the costs of gasoline/diesel fuel tax collection.

"The results of this research demonstrate that with existing technology and a proper operating framework, the costs of collecting fuel taxes and the costs of collecting tolls for an urban corridor can be very similar. In fact, when all the costs of collection are considered in both cases, the cost of collecting tolls in some toll operations today may actually be less than the total costs of collecting motor fuel taxes"

Tolls have significant additional advantages according to Fleming & Poole: "21st-century tolling offers the opportunity to charge for use of a specific highway, when it is used, and by the type of vehicle being operated. As with paying one’s water bill or electric bill, the toll customer pays a user fee for the service provided."

The study concludes that from the highway operator’s perspective, AET provides more flexibility to price the entire vehicle mix than do motor fuel taxes.

"When implemented with a value-pricing toll schedule, AET can also be used to manage traffic - offering significant benefits that motor fuel tax programs cannot provide."

And whereas improved fuel efficiency saps the revenue from fuel taxes tolls are a surer revenue stream.  The ability to link tolls collected directly to the facility financed reduces the scope for diversion and is likely to be viewed by highway users as fairer, and less susceptible to manipulation by politicians.

The report says that waiting on  further improvements in toll technology is unwarranted. The viability of AET was demonstrated on Toronto's 407ETR back in the late 1990s with technology long surpassed. Broad industry acceptance has taken 15 years, and the acceptance is still grudging (MTAB&T? editor.)

"The time to embrace electronic tolls as a primary source of highway funding is now," the authors write.

Fleming and Poole write that the myth of fuel taxes as an 'efficient' means of collecting revenue versus tolls as 'inefficient' is partly the result of poor and partial data but also a product of special interest propaganda. For example a bogus American Transportation Research  Institute - in fact nothing more than a trucking lobby in Washington DC - has published some outlandish costs for toll collection such as 30% of revenue. Apparently they think they are better able to manipulate taxes to their members' advantage than tolls.

Less obviously biased reports for WsDOT and TRB are faulted for simply adding up costs incurred as opposed to looking at lower cost operations, and opportunities for more efficiency: "All three reports suffer from taking a broad historical perspective of costs incurred, instead of focusing on those agencies that have significantly reduced toll collection costs, identifying how they did it, and suggesting ways to further reduce toll collection costs using proven methods and technologies."

Different toll operators use different ways of estimating costs of collection. And since the mix of cash, electronic, and video tolling is changing rapidly apples-to-apples comparisons can't be obtained. In the end, they argue it's all likely to be history, since toll collection is inexorably going cashless or all-electronic.

Tax costs

FHWA publishes a cost of collecting motor fuel tax as 1.1% of revenue, but this is below real costs because it is only one set of public sector costs. It omits the costs incurred by private sector distributors in recording, reporting and paying fuel taxes - costs described as a "hidden tax" which are passed on to motorists.

Additional costs are incurred in seeking exemptions from the tax on motor fuels used for off-highway purposes - farming, boating, mining, construction etc.

Evasion of the fuel tax is uncertain but almost certainly several times the one percent, the authors write. Both the evaders and the collectors have an interest in minimizing the issue. This is especially so with diesel fuel which is chemically identical with a range of non-taxable fuels (your editor reputedly ran a diesel VW Golf for many years on untaxed home heating oil!)

A Montana study showed fuel tax evasion over 2% for gasoline and over 16% for diesel, and composite evasion rate about 7%. The Fleming/Poole report suggests 3.4% as a reasonable estimate of fraud and abuse involved in motor fuel taxes.

A further item is the opportunity cost of forgoing the benefits of variable or congestion pricing in financing roads with taxes rather than tolls.  Even taking the benefits of congestion pricing at 10% of congestion costs - $10b of the Texas Transportation Institute's $100b cost of congestion estimate this represents 15% of motor fuel tax (MFT) collections.

"15% of the MFT collected each year is a conservative estimate of the opportunity costs associated with retaining the motor fuel tax in lieu of a value-priced, AET revenue collection program."

They conclude this section:

"In summary, as long as highways are funded by motor fuel taxes rather than a modern, congestion- priced AET program for urban expressways, a conservative estimate of the overall costs of retaining the motor fuel tax could be close to 20% of the revenue collected—20 times the metric usually referenced as conventional wisdom for the cost of collecting motor fuel taxes."

The 20x number is derived from about 1% as conventionally reported public sector costs, 3.4% as the estimated fraud and abuse, and the 'opportunity costs' of forgoing congestion pricing benefits as 15%. (COMMENT: although it doesn't affect the conclusion we suggest this 15% might be better understood if presented as a large positive benefit of tolls rather than as an opportunity cost of fuel taxes.)


Business model for AET

Fleming & Poole detail a business model for all-electronic tolling designed to be customer friendly and businesslike.

They call for abandoning the 'police powers' model in which the aim is to collect every last toll regardless of the cost. Another way of thinking about is to call it the 'tollgate model' in which the gate doesn't go up until after the toll is paid.

(Even at gated toll points there's the issue of the motorist who shows up and says he has no money. He's blocking the toll lane. In theory you could turn him around and send thin back, but in practice that's so disruptive of traffic flow you ask for the name and note the license plate, give them a self-addressed envelope and ask them to pay by mail, knowing they likely won't.)

They advocate building around three transactions:

- the transponder account prepaid

- license plate read linked to a prepaid account

- unknown license plate to be pursued via motor registry lookup and billing at substantial premium

Fees and penalties need to be tailored to make each form financially self-supporting. They say this requires state support in the form of motor registry lookup rights and ultimately license denial.

They oppose all compromises by way of offing credit accounts and discounts.

So long as the rules are clear, and communicated well, they say customer treatment is fair.

They advocate support for toll routes and limits on diversion by way of legal bars to trucks and through traffic on parallel untolled facilities.

3 small 'uns "exemplify possibilities"

Three smaller toll operators are cited as providing exemplary service and efficiency:

- CO/I-25 Managed Lanes

- Ft Bend Co Toll Road Authority

- Tampa HIllsborough Expressway Authority

They manage tag transaction costs 5c to 11.6c each and costs/revenue 3.9% to 9.1%. Two of the three have low toll rates. All use AET. All contract out account management and transaction processing. One, FBCTRA, is virtual with everything contracted out.

Toll collection costs, they say, are proven by these examples to be competitive with the costs of collection of fuel tax revenue on a percent of revenue collected basis (4% to 5% of revenue collected) when normalized to a $5 toll, which is equivalent to an average combined rate of federal and state fuel taxes at 45¢/gallon and an average fill-up of 11 gallons.

Costs of collection for transponder transactions, even in relatively small toll operations, indicate the real costs of collection under AET.

With service fees and penalties priced appropriately, service fees on those who choose not to enroll in the AET program and the penalties imposed on scofflaws to cover lost toll revenues from those who cannot be found can recover the extra operating costs.

Contracting out toll transactions, accounts management and processing can capture efficiencies from economies of scale.

They report:

"CDOT, FBCTRA and THEA have demonstrated that significant savings in toll collection costs can be realized when a toll authority implements AET and abandons conventional wisdom regarding the structural and operations framework necessary to collect tolls—but the management of these authorities didn’t do this alone.

"The results they have achieved are a tribute to their prowess and ingenuity, as well as the diligence and cooperative efforts of the agencies they have partnered with to make these efficiencies in toll collection costs happen.

"Most notably, the E-470 Public Highway Authority, the Harris County Toll Road Authority, the Miami-Dade Expressway Authority and Florida’s Turnpike Enterprise program contribute significantly to the success of these programs.

"A number of other toll authorities have also realized that cooperative efforts such as (these) can result in significant savings in their collection costs."

eTrans (Fleming and colleagues) models a 'ramp-down' of AET costs (see graph nearby.)

In a steady state gross toll collection costs relative to toll revenue go from about 12% for average tolls of $2 to  7% for average tolls of $5.

Simple is usually good

The report emphasizes the virtue "Simple is good."

Complexity they point out generates confusion and ill will, and puts stress on communications and customer service.

Every exemption or favor increases administrative costs and opens up opportunities for abuse.  Frequent user discounts should be avoided.

"(T)here will always be misunderstandings about such preferential programs and, even when the customer is given the benefit of the doubt, some customers will invariably feel that they have been wronged. Finally, once a preferential program is started, canceling it is extremely difficult."

As tolling expands in scope and volume it should be able to take advantage of the extremely low transaction processing costs of credit and bank card transactions.

Fleming & Poole say that AET can effectively be deployed today on all the country's controlled access highways, interstates and others at a cost competitive with fuel tax collection and with many benefits they don't provide.

"When all data are considered, the collection cost for AET compares very favorably to the cost of collecting motor fuel taxes. Once opportunity costs are considered, including the fact that AET programs can be used to manage congestion through value, time-of-day pricing programs, AET is a much more efficient means of collecting revenue for our motorways than motor fuel taxes."

Toll revenue bonds financing is less susceptible to political raids for non-highway purposes - an additional benefit.

Mileage based fees could be implemented now with AET on access-controlled highways by instrumenting entry and exit points, and installing a low-cost sticker tags on every vehicle through motor registries.

Full Study: Dispelling the Myths: Toll and Fuel Tax Collection Costs in the 21st Century, PDF, 1.3 MB
Daryl Fleming and Robert Poole:

http://reason.org/files/dispelling_toll_and_gas_tax_collection_myths.pdf

TOLLROADSnews 2012/11/27