Since completion of the Interstate Highway System in the early 1990s, America has continued to rely mostly on motor fuel taxes at the federal and state levels to meet the need for maintaining the U.S. highway system. This worked well for some time as traffic (measured by vehicle miles traveled) routinely increased a few percent every year. However, these user tax rates have not kept pace with inflation, and recent large increases in the price of fuel and a lagging economy have reduced traffic growth rates the last few years. Since 1982, money from the Highway Trust Fund (HTF) has also been diverted to pay for transit and other non-highway projects. Hybrid vehicles and Corporate Average Fuel Economy (CAFE) standards have also eroded this source of revenue by making cars more fuel-efficient. Meanwhile, annual traffic growth over the last three decades (prior to the recent economic downturn) has led to major recurring congestion on most urban corridors during peak periods, emphasizing the need for new and expanded roadway facilities. In addition, many highways are aging and in serious need of reconstruction. Clearly, the U.S. highway funding mechanism must change.
A number of alternate revenue sources exist. Prior to the Federal Aid Highway Act of 1956 that enabled development of the Interstate highway system, tolls played a major role in the development and maintenance of many major inter-city highways. But the introduction of federal fuel taxes and the HTF refocused major highway funding away from tolls. Fuel taxes were also a much easier and, at that time, less expensive means for collecting revenue than tolls. But advances in toll collection technology have significantly reduced the costs of toll collection. First introduced nearly three decades ago, electronic toll collection (ETC) is now nearly ubiquitous on U.S. toll roads and bridges. Since the early 1990s we have also seen the development of open-road tolling (ORT), which allows transponder-equipped vehicles to bypass toll booths at highway speed, and more recently all electronic tolling (AET) has eliminated the need for toll booths altogether by eliminating cash toll collection at the roadside.
AET has reduced the direct operating costs of toll collection. In addition, AET has eliminated the secondary costs of manual toll collection such as traffic hazards at toll plazas, traffic congestion (and related emissions and fuel consumption), noise and consumptive land use. Nevertheless, though tolling technology and toll collection have become much more efficient, the conventional wisdom prevails:
Toll collection costs are disproportionately larger than the costs of collecting fuel taxes.
This study challenges this conventional wisdom. It addresses the lack of reliable and uniformly reported data on the costs of collecting both fuel taxes and tolls, and the inaccurate and misleading information reported by those with a vested interest in sustaining fuel taxes and resisting greater use of tolls. This study analyzes recent data on the costs of collecting motor fuel taxes. Since several toll authorities are transitioning from manual or ORT to AET, this study compares data on toll collection costs from three toll agencies already operating in a fully AET environment to provide a common baseline. It also addresses collection costs for potential U.S. mileage-based user fee (MBUF) programs.
Since AET is a relatively new concept for toll collection, this study presents the basic AET operations plan and business model. It also identifies the principal factors that affect toll collection costs in an AET operating environment, including functioning frameworks that, when implemented with best practices, enable the operator to keep collection costs to a minimum. As well, it explores a number of opportunities to further reduce the cost of toll collection. Though every toll facility operation may not be able to employ all of these methods, the additional methods discussed can be used when the political will exists to further reduce collection costs.
The most significant ramifications of this research on major transportation policy issues include:
1) The cost of collection for motor fuel tax revenues is significantly greater than the widely believed figure of 1% of the revenue collected.
Indirect costs, such as losses incurred at several levels of the process and taxes hidden in the collection of revenues (some are even imposed on those exempt from the fuel tax program), suggest that the costs of motor fuel tax collections may well be in the vicinity of 5% of the revenue collected. Also, continued use of motor fuel taxes to generate roadway funding rather than collecting this revenue through variable, time-of-day tolls to manage traffic and reduce congestion levels introduces an opportunity cost with a monetary value that could be well over 15% of the revenue collected by the existing fuel tax programs. In addition, since motor fuel tax receipts are routinely raided for other purposes, the opportunity costs associated with fuel taxes compared with AET could be even greater.
2) The cost of collection for all electronic tolling is significantly less than most historical toll collection cost data suggest.
Since the introduction of AET, the toll industry in North America has undergone a period of rapid change. Technology has eliminated the need for toll booths, the labor costs associated with toll collectors manning toll booths 24/7, toll plazas and the large infrastructure investments needed to support these facilities. Though AET has back-office processing, customer services, and violation and enforcement costs not incurred with cash toll operations, AET has also eliminated the costs of operating the infrastructure necessary to sustain cash toll operations, along with the safety, operational and environmental impacts of toll plazas. AET also eliminates the revenue losses from cash “leakage” (an inevitable cost in cash toll lanes), and, when priced appropriately, recovers the costs associated with additional processing and lost revenue from those attempting to defraud the system.
3) Toll collection cost data from toll operators that have taken full advantage of AET technology and its basic business plan are an indicator of what toll collection costs can be if deployed in a new framework on a much broader scale. Historical toll collection cost data for large public agencies burdened with institutional problems from decades of political interference, including labor restrictions that curtail their ability to convert to ETC operations in existing toll lanes, do little to provide an appropriate benchmark of what toll collection costs can or should be. Also, since many facilities have recently implemented AET and are still encountering the transition costs of converting to AET, their current cost data do not represent typical toll collection costs in an AET environment—especially an AET program to toll major highways on a broader basis.
4) Cost data for some AET operations in the United States demonstrate that the net collection costs of an AET operation can be in the vicinity of 5% of the revenue collected for a $5.00 toll (or 8% of revenue collected for a $2.00 toll).
This suggests that toll collection costs can be (and are in some cases) similar in magnitude to the actual costs of collecting federal and state motor fuel taxes. Once opportunity costs of retaining motor fuel taxes in lieu of using tolls to manage congestion are considered, tolls are clearly a more cost-effective option for generating revenue for our highway system.
5) When AET service fees are priced correctly, the (low) cost of tag (transponder) transactions is the best overall indicator of AET collection costs.
Pricing service fees and penalties within an AET operation appropriately recovers all operating costs beyond those needed to process basic transponder transactions. Service fees and penalties on non-members of the AET program and defrauders cover the additional costs of processing those toll options.
6) Toll collection costs can be reduced beyond those already demonstrated by toll road operators using AET.
Recent efforts by the Alliance for Toll Interoperability (ATI) to develop a nationwide hub (clearinghouse) for toll transactions should further reduce AET collection costs. Once the toll operator has vehicle ownership information, he still must get the vehicle owner to pay. Interagency cooperative agreements such as that recently implemented by Maine, New Hampshire and Massachusetts may help solve this problem. Legislation may also be necessary at the state level to criminalize toll evasion (which is theft) to enable operators to legally collect outstanding tolls. Consolidation of processing functions between toll and other agencies, such as the motor vehicle departments, could also reduce AET operating costs.
7) Keeping the AET operations plan simple will reduce toll collection costs.
AET operations should avoid complex schemes that are inappropriate for its design. This includes multifarious vehicle classification schemes often used with manual toll collection, dynamic pricing operations rather than simpler time-of-day tolling, and complicated HOV free passage, commuter, environmental and other discount programs and travel credit schemes. For example, offering credit to customers when it is not necessary can increase toll collection costs by as much as 50%, and, once credit is offered, this practice is very difficult to change. All add to the complexity and cost of toll collections, as well as to the likelihood of errors occurring in the billing process, which can lead to significant public relations problems and, in some cases, put the entire revenue collection program at risk.
8) An AET solution for mileage-based user fee charging could be implemented cost- effectively on limited-access corridors today.
AET allows for pricing all vehicles on the roadway by class (not just carbon-fueled vehicles), as well as by where and when each vehicle is operated. Toll operators now have the ability to establish and monitor the financial controls necessary to conduct a detailed financial audit of toll operations in an AET program. Collecting tolls linked to specific highway facilities also avoids the likelihood that the toll revenue would be spent on other uses. Traffic diversions to non-tolled routes can be minimized by ensuring that the customer is always offered value for the toll being paid and by regulating motor carrier traffic diversions with local ordinances if penalties are established at a level sufficient to deter others from diverting their trips.
9) Waiting for further improvements in technology before starting the shift in the funding of major highways from fuel taxes to all electronic tolls is unwarranted.
Opportunities to further reduce toll collection costs through technology may exist. Tellingly, even though the viability of AET was demonstrated on Toronto’s Highway 407 ETR in the late 1990s, it was 15 years before AET achieved broad industry acceptance—twice the life cycle of most aspects of toll systems. In addition, many of the opportunities to further reduce the cost of collecting tolls will likely come from cooperative arrangements between toll and other agencies supporting the motor vehicle industry to share databases, back-office processing and customer service functions. These opportunities exist today and do not depend on further technology.
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.
In addition to giving toll operators the ability to significantly reduce their collection costs, AET enables the operator to manage congestion through value pricing—a powerful tool to combat congestion, pollution and related social costs. The benefits of AET are difficult to overestimate. This study does not extend its scope to address second-order benefits of congestion management such as lower health care costs related to decreases in pollution, increased regional productivity or improved quality of life, but examining the straightforward direct benefits is compelling enough. Simply, major expressways that do not use tolling incur an opportunity cost due to their inability to manage congestion and its effects. AET is thus a powerful tool to manage problems beyond simply generating revenue.
The clear advantages of AET are not an indictment of previous policies; AET is simply an enabling technology that was not previously available. An apples-to-apples comparison of the collection costs of motor fuel taxes vs. tolling via AET shows that tolling is as efficient a tool to collect revenue for our roadways as motor fuel taxes—and, in some cases, it may be more efficient. Once the possible traffic-management benefits of using AET (or the opportunity costs of retaining motor fuel taxes instead of using AET with a value-pricing toll schedule) are considered, AET is a much more cost-effective tool for collecting revenue for expressways.
The policy implications of this research are significant. This work demonstrates that 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. From the road user’s perspective, 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. From the highway operator’s perspective, AET provides much 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 since tolls are not tied to fuel efficiency, the continuing progress in this area of technology will not diminish revenue, as with fuel taxes. Moreover, the fact that tolls are typically restricted to paying for the facility being tolled (and therefore far less likely to be diverted to non-highway purposes) increases their credibility as a true user fee. This direct linkage is likely to be viewed by highway users as fairer than other pricing programs and less susceptible to manipulation by elected officials.
The time to embrace electronic tolls as a primary source of highway funding is now. Though the viability and benefits of AET were first demonstrated in the late 1990s, we are just now seeing the broad adoption of AET in the United States—approximately 15 years later. This suggests that, even if a better technology for a mileage-based user fee were on the immediate horizon (which does not appear to be the case), the toll systems installed today would require at least one major systems upgrade before this new technology is proven and ready for broad implementation. Therefore, waiting for further technology to offer additional efficiencies in per-mile charging would offer few benefits at a significant cost and needlessly delay the transition from fuel taxes to 21st century tolling.