Blog Post

A bill of lading tax creates more problems than it solves

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Bill of lading

In a recent Politico op-ed, former state transportation official Pete Rahn argues for a “surcharge on all commercial activity occurring on U.S. streets and highways” as a pay-for solution to our nation’s infrastructure needs. More commonly known as a bill of lading tax, this proposal is essentially a sales tax on commercial truck transportation. 

The concept isn’t new, having been floated and dismissed in the past. A bill of lading tax has serious shortcomings, both in principle and practice. What might seem feasible on paper is far messier when applied to reality.

While we agree with some points in Rahn’s piece, we take strong issue with others. He writes:

The first step is to get rid of the existing federal gas tax entirely, which is obsolete in an era when more and more of the cars and trucks on the roads are hybrid, electric or powered with alternative fuels….
 
The federal fuel tax has outlived its usefulness. Both the looming electrification of the automotive fleet and the rapid increase in the fuel efficiency of the country’s automotive fleet has doomed the tax. 

Let’s begin with the common fallacy that the fuel tax is obsolete. While that may be true ten years from now, to claim it has outlived its usefulness is at odds with current reality. The fact is more fuel was purchased in 2019 than in any previous year (COVID made 2020 an obvious outlier), and fuel consumption will remain flat over the next decade, according to the U.S. Energy Information Administration. 

Contrary to conventional beltway wisdom, the fuel tax’s capacity as revenue generator is just now reaching its apex, and it remains the most viable, efficient and cost-effective revenue source available as we build a bridge to the next solution – whatever that may be. 

Rahn correctly notes that that the mechanics of the fuel tax are designed for maximum efficiency. That’s because it’s collected at the wholesale level long before gasoline reaches the retail pump. There are roughly 1,300 wholesale racks across the country collectively operated by less than 270 entities – meaning fewer than 300 entities actually remit this tax. The result is a tried-and-true system that minimizes overhead costs and maximizes value for road users, with ninety-nine cents of every dollar collected flowing directly into the Highway Trust Fund. 

By way of comparison, a bill of lading tax requires collection from hundreds of thousands of tiny entities. The costs of enforcement, processing, collections, training and other regulatory initiatives—just to name a few—would be astronomically greater. Given the sheer number of entities and transactions involved, the IRS will severely lack the necessary resources to prevent evasion on a massive scale. 

For reference, New York’s weight-distance tax has a 50% evasion rate, primarily due to the fact that most carriers subject to the tax are small operators unlikely to be audited.

Rahn continues:

(The more difficult case is a company like Walmart or Amazon that ships its own products, but even they maintain figures for their shipping costs.) These are numbers that companies routinely have in their accounts already. As a result, the surcharge would also be relatively easy to collect, since it could be assessed at the time of companies’ quarterly federal tax filings.

There are significant differences in how private carriers (e.g. fleets owned and operated by retail or manufacturing companies) and for-hire carriers (e.g. companies solely in the business of trucking who are hired to move freight) account for transportation costs. For one, most private carriers are not large operators like Amazon or Walmart. The vast majority are small and unsophisticated operations, such as farmers or construction contractors, which don’t keep fastidious track of these costs—if at all. 

The only way to address these challenges would be to collect information from for-hire carriers to establish a valuation that could then be imposed onto private carriers. Given the many potential adjustments (contract terms, commodity, additional services, etc.) it would be nearly impossible to come up with an equitable tax rate for both private and for-hire carriers. The required record-keeping would also create a new administrative burden for the for-hire carriers, and separating transportation from accessorials (e.g. broker fees) would be very difficult, as is separating the cost of intermodal and international movements. 

All of these issues not only create significant opportunity for evasion, but they also lead to endless litigation and have the potential to create market distortions between for-hire and private carriers that could be disruptive to the U.S. supply chain. 

More from Rahn:

To be clear, the surcharge should be applied to the value of the commercial activity itself, not the value of what’s being transported. For example, whether it costs $1 to transport a ton of rocks one mile or $1 to transport a ton of gold one mile, the surcharge should be the same — eight cents. After all, the roads don’t know if you’re shipping rocks or gold, but the wear and tear would be the same.

This proposal assumes the same per-mile rate for all forms of freight, but that’s not how trucking works. Freight rates vary dramatically depending on what’s being hauled. Shipping hazardous materials like gasoline is far more expensive than shipping a truckload of wood pulp, for example. It costs a lot more to ship gold than it does rocks because of the additional security-related costs, and because you move it in smaller shipments. 

The destination also factors into the equation. All things equal, shipping to NYC is more expensive than shipping to a rural destination because of congestion, tolling and other factors.  

Freight’s impact on roadways also varies widely depending on the type of load. Ironically, low-cost shipments, which tend to be raw commodities, usually move in heavier loads, which impose greater infrastructure costs and therefore in principle should be taxed at a higher rate to achieve equity. 

To imply that an equitable, flat surcharge can be applied to all freight moved by truck is an oversimplification teetering on fantasy. 

A commercial activity surcharge is easy and fair. It’s time to ditch the gas tax for good.

We appreciate constructive ideas in pursuit of common goals, but a bill of lading tax is neither easy nor fair. Especially when we have existing alternatives available today, which are already in place, more efficient and yield far greater returns.