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Transportation user fees: the government's new source of revenue.

During the decade of the 1980s, there were dramatic improvements in the relative efficiency of logistics in general and transportation in particular. Much of the improvement can be attributed to the loosening of regulatory shackles in the late 1970s and 1980s. Another contributing factor has been the application of techniques such as JIT, MRP, DRP, and others that have increased the efficiency of logistics systems. In many instances, it was the freer operating environment made possible by deregulation that enabled these advanced logistics techniques to be utilized.

As can be seen from the table on the next page, total logistics costs and transportation costs declined as a percentage of GNP throughout the 1980s. Transportation costs are the largest single cost component of logistics, averaging approximately 60 percent of the total.

Unfortunately, there is a trend that threatens to halt, if not reverse, the efficiency gains of the past decade. This trend is the result of the increasing reliance by government on various user fees and taxes on transportation as a source of revenue. The following is a delineation of the major categories of these costs, as well as the likely impacts these would have on the industry and on the economy.


Generally speaking, a user fee is a tax imposed upon the user of a government good or service and is allegedly used to pay for the upkeep, expansion, or new construction of the good or service. A tax, however, is a fee assessed without regard to the use of any particular good or service. In practice, the distinction is blurred. Many of the increased fees were assessed on the water transportation industry, although no mode (except pipelines) escaped totally. The move toward higher taxes seemed to originate in the Budget Reconciliation Act of 1990. Most would remember this act as the one where President Bush broke his "read my lips" TABULAR DATA OMITTED campaign promise of no new taxes.

The two major fees coming out of this act are the increases in the Harbor Maintenance Tax (HMT) and the Vessel Tonnage Tax (VTT). The former has more impact on shippers of high-value cargo, while the latter is felt more by bulk commodity shippers. The HMT was increased from 0.04 percent of a cargo's value to 0.1255 percent, while the VTT was raised from 2 to 9 cents/ton and applies to vessels from North, South, and Central America. Ships from other ports of origin had their costs increase from 6 to 27 cents/ton. However, there is a yearly limit on the number of visits by a given ship on which the fees are collected. Estimates on the burden of these two taxes are in the neighborhood of $700 million to $800 million per year.

The Coast Guard has gotten into the user fee game, under directions from Congress. There are direct user fees for inspection, examination, licensing, and documentation which are forecast to generate $173 million by 1995. In addition, indirect fees are assessed on operators and owners of recreational vessels more than 16 feet in length that are anticipated to total $265 million by 1995.

The Department of Agriculture now also imposes fees via its Animal and Plant Health Inspection Service (APHIS) that cover inspections of vessels for various pests and diseases. The fee is $544 per ship and will be collected even if no inspection is performed.

The inland waterway industry also had its fees increased. The fuel tax, currently at 15 cents/gallon, up from 10 cents, will increase to 20 cents by 1995. The revenue from this tax is estimated to be $150 million/year by 1995. Also, an additional 1 cent per gallon tax for the Leaking Underground Storage Tank (LUST) trust fund, which was scheduled to expire on September 1, 1990, was extended.

Other miscellaneous fees on the water industry include customs service fees, USDA warehouse inspectors' licenses, and increases in the Corps of Engineers' construction permits and review of environmental impact statements. These fees are estimated to garner an additional $130 million a year.

As stated earlier, the waterway segment was not the only transportation mode where taxes were increased. The trucking industry had a fuel tax increase of 5 cents per gallon, and the railroads had a 2.5 cents per gallon fuel tax imposed. This was the first time ever that the railroads were subject to a fuel tax. Interestingly, one-half of the truck tax and all of the rail fee go directly to deficit reduction and not to infrastructure construction.

The airline industry saw its Aviation Trust Fund aviation excise tax increase. Passenger taxes went from 8 percent to 10 percent, while the freight tax increased from 5 percent to 6.25 percent. Non-commercial gasoline tax increased by 3 cents a gallon, and jet fuel went up by 3.5 cents a gallon. Prior to 1990, airport taxes were to be cut by 50 percent if the Aviation Trust Fund appropriations were not 85 percent of authorizations. This provision was repealed, and these increased funds now go to the general fund for deficit reduction.


The argument has been made that at least some of these fees directly benefit the industries upon which they are levied. This is accomplished through the use of trust funds. There are three major trust funds: highway, inland waterway, and aviation. Monies collected from user fees, in the form of fuel taxes, are deposited into these funds, and the revenue is used for infrastructure construction. Unfortunately, there are political games being played with these funds. Since the revenue generated by these taxes are counted as part of the general government revenue, in reality these fees, if the trust funds are not spent down, can serve to make the deficit appear smaller than it really is. There has been a surplus within the highway and aviation trust funds in the recent past. There have been recent proposals in Congress to place these trust funds (including social security) "off budget," to remove the incentive not to spend the monies collected and thus mask the true deficit. However, these proposals have not been successful.

The flaw in the general argument in favor of user fees--that it is only fair that the beneficiaries of the roads, rivers, airports, and ports pay for their construction and upkeep--is that there are other parties who benefit from an efficient transportation system. There are benefits that accrue to society as a whole such as price stability, lower costs, personal mobility, efficiencies from mass production, and economies of scale, among others. There is also the problem that a transportation system is, at least in part, a public good subject to the non-exclusionary and non-divisibility problems which make the assessment of direct benefits to any single group difficult at best and pragmatically impossible. For example, in the case of the construction of a new lock and dam on a river, several categories of beneficiaries can be noted. There are barge operators who benefit from navigation; farmers who benefit from flood control; utility companies and ratepayers who benefit from hydroelectric power; cities that benefit from a source of drinking water; shippers who benefit from lower transportation costs; boaters, fishermen, campers, and others who benefit from the recreation aspects; states that benefit from increased attractiveness in terms of economic development; employees who benefit from increased jobs and income; states who benefit from increased taxes; ad infinitum. The question arises as to the equitable assessment of the costs among these various groups. It is difficult to imagine that our policymakers have the requisite expertise to accurately make these assessments, or even to identify all of the individuals who benefit. This is why certain goods and services are provided by government and financed by general revenues.


The question arises as to the potential impact of this increased tax burden. There are several obvious effects that will likely occur such as higher costs for firms that utilize transportation (practically all firms), higher prices for consumers, lower profits for firms resulting in lower levels of investment, and lower employment. There are other potential impacts that are not as apparent. One is the reduction in competitiveness in the world market of U.S. exports. While there has been no rigorous investigation into the impact of these fees, there have been estimates given as to the costs on certain commodities. If only the HMT, VTT, Customs, and USDA fees are considered, the tax burden would be 33 1/2 cents/ton on wheat, 47 1/2 cents/ton on soybeans, $3.10/ton on cotton, 47 cents/ton on coal, and 70 cents to $2.00/ton on steel. Note that this does not include the increased inland transportation costs to get the product to the port.

Another greater impact involves cargo diversion to foreign ports, i.e., Mexico and Canada. As these fees increase, it becomes increasingly efficient to make export shipments out of, and import shipments into, foreign ports and use inland transportation to the foreign docks to escape the fees. Both Canada and Mexico are embarking on massive port and transportation infrastructure improvements, making this scenario more probable. The impacts of these diversions would likely be great and could result in the scaling back and/or elimination of operations at U.S. facilities.


Not only has there been no study undertaken by the government to measure the costs of these fees, there are proposals underway to increase them even more. The Congressional Budget Office (CBO) is evaluating several options for funding the costs of operations and maintenance (O & M) on the inland waterways, costs that historically have been borne by the Corps of Engineers' budget. Only new construction and rehabilitation have been funded (50 percent) from the inland trust fund. Dr. Elizabeth A. Pinkston, principal CBO analyst, in a presentation at the Transportation Research Board's annual meeting, stated that three options were being investigated. These were an additional fuel tax of 85 cents/gallon, ton-mile fees of 0.169 cents/ton-mile, and annual licenses costing $80,000 per towboat and $12,000 per barge. She also stated that no attention was being given to the economic effects of such proposals on waterway users or competitors, or on local economies.

In fiscal year 1993, the Department of Transportation (DOT) will rely on users to pay for 82 percent of its program. Aviation is targeted for 100 percent coverage by user fees. The Corps will receive 24 percent of its budget from users and will fund 33 percent of O & M and 50 percent of construction costs. It seems as though there is no end to this user fee phenomenon. The problem is that as debt service consumes a larger and larger share of the federal budget (14 percent currently and increasing) as the deficit continues to increase, there is less and less of the budget left for government programs. This forces policymakers, who seem reluctant to deal with the real problem--the deficit and government spending--to seek new outside sources of revenue. The source that these policymakers have discovered is higher taxes on transportation, especially the waterways segment. In addition, there is increasing pressure to use the trust funds for funding programs not originally intended. Currently, AMTRAC is pressing to tap the highway and aviation funds for its subsidy. There has been discussion to increase the highway fuel tax to fund education. It is time to halt this process and force our elected officials to deal with the real problems facing this country--those of the deficit and runaway government spending. As a country, how many more Lawrence Welk memorials funded with public revenue can we afford?

Dr. Cunningham is director of the Waterways and Transportation Research Center at the University of South Alabama in Mobile.
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Author:Cunningham, William A.
Publication:Business Perspectives
Date:Mar 22, 1992
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