Pay-as-you-drive auto insurance

In this week’s Freakonomics column Steve Levitt and Stephen Dubner write about an idea called pay-as-you-drive (PAYD) auto insurance, recommended by some economists, and recently adopted by Progressive. Businesses are not the only organizations experimenting with PAYD systems, either for auto insurance or as a potential substitute for a gas tax.

PAYD in the States

Last year, King County government in Washington State, using federal dollars, split the cost of a $5-million PAYD auto insurance pilot program with Unigard.

Oregon has passed a bill that provides corporate income tax credits to insurance companies of $100 per PAYD vehicle (up to $300 per policy). The tax credit extends through 2010.

Texas also passed a bill giving insurance companies the authority to offer PAYD policies, but the idea doesn’t appear to have taken off because companies do not receive tax breaks as they do in Oregon.

PAYD instead of the Gas Tax?

This year, 2,700 drivers in six states – Texas, Maryland, Idaho, California, Iowa, and North Carolina – are helping test a PAYD tax structure that could replace the existing gasoline tax structure. In the PAYD structure, people would be charged on the basis of the number of miles they drive. Using technology provided by the University of Iowa Public Policy Center and dollars from the Federal Highway Administration, drivers’ cars are equipped with satellite and computer equipment that will calculate monthly bills based on the number of miles driven, which will then be compared to the amount of money they currently pay in gas taxes. Researchers will collect two years worth of data, and results should be available in 2010.

A PAYD tax structure should be less appealing to drivers with fuel efficient cars since the savings they reap through less fuel consumption will be lost to taxes paid on the additional miles they drive. So a Hummer owner who only drives a couple times a week may pay less than a Prius owner who drives everyday – even though their tail pipes have probably spewed a similar amount of carbon dioxide into the air. The purpose of the PAYD tax structure is to find new ways of increasing revenue for roads and highways (revenue has been flatting over time and the federal gas tax hasn’t been raised since 1993), rather than give an added bonus to some group of environmentally conscious or safe drivers

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