Wednesday, 16 January 2013

Free roads - no, really!

For those of us who advocate better road pricing, the objectives may vary somewhat, but some of the principles remain clear.  One of them is "user pays", that those who use the roads should pay for them, in proportion to the degree to which they use the roads, and the costs they impose upon the system.   This may be around wear and tear, road space when demand is at a premium, or simply sharing the fixed costs amongst those who use the network the most.

Fuel tax is seen as very much a second rate option, largely because although those who use the roads more pay more, levels of fuel consumption don't vary at the levels necessary to reflect variations of other costs.  For example, as trucks get heavier their fuel consumption doesn't raise at levels commensuration to the damage they cause to roads, similarly it doesn't rise to reflect scarcity of road space when demand for it exceeds supply.   Still, it is better than nothing - a point that seems to have somewhat escaped Virginia's governor Bob McDonnell (Republican).

According to various news sources he wants to abolish the state's gas tax  (fuel tax) and replace it with an increase in the general sales tax of 0.8%  (which wont apply to "groceries" but will be hypothecated into transport).  In short, he wants roads to be paid for, not on the basis of usage, but on the basis of how much shopping you do in the state.   Those who drive the most, but are frugal with consumer goods, will be getting subsidised by those who don't drive at all, but buy large expensive items.  Of course it will also promote interstate tax arbitrage, as motorists in neighbouring states will seek to buy petrol at the lower rates.

He wants to retain tax on diesel, because he recognises that trucks cause more damage to the roads (although transport economists will explain that the 4th power rule means that when trucks get beyond 9-12 tonnes of gross laden weight, diesel tax is simply incapable of fairly reflecting this increased damage).  

The lack of diesel cars in the US means this will make little difference to light vehicles, although I would have thought anyone with light commercial diesel vehicles would move to the petroleum equivalents.   Interestingly about two-thirds of state diesel tax revenue comes from interstate trucks, it's curious that there hasn't been a similar figure given for interstate cars (although the figure would be lower).

He wants to introduce new ownership taxes on alternatively fueled vehicles (US$100 a year) and increase other ownership taxes by US$15 a year.  However, according to TollRoadsNews this extra revenue is going to subsidise public transport.  It's not clear the economic justification for that connection to those fees, as again, it penalises those who hardly use their cars at all, but not those who drive the most frequently.

Virginia's state fuel tax is 17.5c/gallon (4.6c/litre), so that is the saving that would be made for motorists.

It is economically irrational as it means highways will be subsidised by virtually everyone buying goods and services in the state.  Environmentally, it means that those who drive the most and emit the most will pay no more than those who do not drive at all, unless of course they also do bigger shopping sprees.

McDonnell makes the sound point that fuel tax is unsustainable because of vehicle efficiency and alternative fuels, but then claims that it is "regressive" because people in rural areas pay more, yet the main costs upon the system are in urban areas.  Unfortunately, this misses some key points.

Maintenance is the bread and butter of highway expenditure, and it is commonplace that motorists in urban areas tend to cross subsidise those in rural areas, because around half the costs of maintenance are fixed, and in rural areas there are less vehicles to divide those fixed costs between.  It is possible to justify charging the fixed costs of highway maintenance in part to property owners adjacent to roads (because they benefit directly from the access amenity), but this argument is difficult to sustain when a road is primarily arterial.  It is also possible to justify charging those costs using a fixed annual licence fee, as an access charge, but this creates its own deadweight distortions, and the externality costs of congestion (and emissions) can be equally as serious, and they are not readily addressed by ownership taxes.

However, what's apparently missing is any serious economic analysis behind this proposal.

I'd argue that what Virginia needs is an economic land transport costs and charges study, similar to those carried out in the UK, New Zealand and several countries in Europe.  That would establish who is underpaying, who is overpaying, the long run infrastructure costs for the state, costs of congestion (and emissions if desired), what existing taxes, tolls and charges do (it can also include public transport and the private railroad networks as well if desired), and provide an evidence base for moving forward.  That would be more robust in terms of economic impacts and distributional impacts, and would address concerns about any existing taxes being regressive or otherwise.

My expectation is that the conclusion would be that motorists do not pay enough to keep the network in a steady state, except those on toll roads.  It would need to be followed by a separate evaluation of options for charging, including expansion of tolls, the role of fuel taxation and options for alternatives like ownership taxes, property access levies and vehicle mileage tax (including a weight based one for trucks).

You see, as much as politicians may focus on the finances, they ignore the economic impacts of what they do.  Abolishing the gas tax will increase private vehicle use, increase congestion and emissions, which will increase demands for new capacity.  Increasing other taxes will see a small deadweight loss in consumption of various goods and services, which will likely have a distributional impact highest on those with the least discretionary spending.

It's astonishing, it is economically irrational and is a step away from the sort of smaller government more market oriented agenda some in the Republican Party espouse.  Indeed, it does absolutely nothing to ensure the roads are better maintained and the quality of service motorists get improves, in fact why should it?  They aren't paying for it.  They should expect what happens in other jurisdictions when governments offer something for next to nothing - unpredictable and wildly varying standards of service.

It has been criticised in many quarters, the Baltimore Sun suggests it would complicate debates for neighbouring states such as Maryland, but some of the public think they would be better off.  Motorists, of course, would be.

I can only hope for a rational debate to come about this proposal.  Well intentioned, with the key issue of the sustainability of fuel tax being central to it, but creating new subsidies and almost completely disconnecting the cost of highways from most of the users is neither economically rational, nor sustainable, nor a solution I'd expect in an economy that purports to be predominantly embracing the principles of market capitalism.

It's even more astonishing when you consider the point made in TollRoadsNews that tolls are important in Virginia today, yet don't form part of the Governor's plan.   Though I am now less surprised that there are now politicians in the state seeking to nationalise some private toll roads, because they think the price is too high.  Yes, they are Republicans too.   No, really!

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