Commentary
The American Trucking Associations (ATA) have come out in support of a fuel tax increase to fund infrastructure and raise revenue for the federal government. The US Chamber of Commerce also supports such a tax. The argument goes that our infrastructure is crumbling and is out of date, so we need to invest in it to make improvements to ensure our economy thrives long term. Anyone who has ever flown out of New York’s airports or driven on New Jersey highways would agree that work needs be done.
National media locked into the story reminding viewers that the truckers are directly impacted by both the cost increases and are also huge beneficiaries in having improved transportation infrastructures. The fact that the ATA supports the tax increase suggests that the tax could ultimately be good for trucking, but that may not be the entire story.
The discussion around a $.25/gallon fuel tax will affect trucking industry costs disproportionately. A few years ago, carriers were only getting 5 miles per gallon, but with more efficient engines and truck technology, larger carriers are achieving fuel economy that ranges from 6.5 to 7.5 miles per gallon. On a per mile basis, a $.25/gallon fuel tax would be the equivalent of a tax of $.03 to $.05 per total mile for truckers.
The assumption is that if truckers are all paying the fuel tax, the rewards and costs will be evenly distributed–after all, it’s a national tax increase. Unfortunately, this is not the case.
The impact to the majority of paying members to the ATA will be minimal, but smaller independent operators in the market will be hit much harder. Larger enterprise carriers, LTL, and parcel providers recoup a large percentage of their fuel costs in the form of fuel surcharges, and run more efficient trucks and freight networks than the smaller operators. Shippers that have agreements to pay the fuel surcharges will also end up paying a greater share of the fuel tax compared to enterprise truckers.
LTL and parcel fuel surcharges operate a little differently than truckload fuel surcharge tables, but since most of the carriers that operate these networks would classify as “enterprise carriers” and have fuel surcharges built into their shipper contracts, we are not going to dive into the discussion here. The big delta in the freight market between companies that have fuel surcharges and those that don’t are found in the truckload sector.
Spot trucking rates often include the fuel price into the shipper charge. It’s an “all-in” rate normally, plus any non-fuel accessories (like detention). Because most spot freight is quoted within five days, it is not necessary to break out the fuel expense from the line-haul rate. Committed rates (or commonly called contract rates) are typically broken up between line-haul rates, fuel surcharges, and accessorials. Committed rates are locked in for a long period of time and since fuel can fluctuate a great deal over the life of the contractual relationship, it makes sene to have a floating fuel surcharge structure in place.
Any large carrier that plans to survive the brutal volatility of the freight markets will end up building their freight networks around committed freight, supplemented with spot freight in backhaul or high-dollar spot markets. Most enterprise carriers we track have a range of 75-95% of their freight in the committed contract market, only receiving a relatively small portion of their freight from the spot market. So, any increase in fuel taxes will be of marginal importance to these carriers. They would be exposed on their spot freight, idling, and empty miles, but would likely recoup everything else.
Owner operators and small operators receive little to no percent of their freight from the contract market and therefore end up paying 100% of the cost of fuel directly out of the freight contract. They are 100% exposed to the price of fuel with little ability to offset the rate against and index. Some brokers have fuel recovery programs available, but this is the exception, not the norm.
There is even reason to think that some large carriers–the core of the ATA’s membership–would end up ahead (at least for a portion of their freight) if a fuel tax increase were to be implemented. Fuel surcharges are usually based on a national DOE index and the delta between the base price and the index price. For every increase in fuel price per gallon, the index allows for incremental per-mile charges to be billed by the carrier. According to supply chain consultants that were active this year in helping shippers with their bid packages, the base mileage is around six miles per gallon.
If the carrier operates more efficiently than the base mileage, then they will end up as winners, if they operate worse, they lose. Most enterprise carriers are operating more efficiently these days and are expected to do so going forward. Owner operators, as a rule, tend to operate less efficiently. They lack the latest technology, engines, and aerodynamic equipment of the larger carriers. They also tend to pick freight that has more empty miles than the more network-efficient enterprise carriers.
The other reason to think that enterprise carriers will gain an advantage with a fuel tax increase relates to the movement toward electric, hydrogen, or hybrid trucks. A fuel tax has been called a carbon tax by Bloomberg. Electric vehicles would not be subject to the tax, nor would non-carbon based fuels. The larger carriers–like the big fleets putting down deposits on the Tesla Semi–are much more likely to buy the higher priced carbonless trucks than the independents, giving them at least a $.04 per mile advantage in the market over carbon-based truckers.
Our nation does need better infrastructure and someone needs to pay for it–I just hope that it doesn’t end up being a tax on the American indepedent trucker.
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