As Delaware Transportation Secretary Jennifer Cohan notes, no community leader will deny the state has a funding problem for its roadways. However, as those same community leaders will acknowledge, there is practically no way we are going to solve that problem. Americans in general, and Delawareans in particular, do not like paying taxes. They never did. In recent years the hostility to taxes are grown. The anti-tax movement remains strong and any proposed tax on gasoline makes it even stronger.
The result is, as Secretary Cohan told legislative budget writers last week, $600 million worth of highway projects will be on hold for years. That sounds reasonable, until the missing roadwork affects them. Then it gets personal. The demand for services will go up. However, there still will not be tax increases.
David Levinson, a professor of transportation studies at the University of Minnesota, explains it this way: “Roads are governed by elected officials, who believe they are re-elected when they keep taxes down and are sometimes punished when they raise taxes.” Voters do not trust transportation departments, Professor Levinson says, and they are not always wrong.
Congress is in the same shape as the Delaware General Assembly. It is supposed to fix the federal highway trust fund. However, it seems highly reluctant to do so if it adds anything to the taxpayers’ gasoline bill. Economists believe a way can be found so that the private cost of driving a car comes close to the actual public cost. Despite what we pay at the pump or for tolls or fees, the cost of using the roads and polluting the air is much higher. Economists, both right and left, argue this should be evened out.
Economists, however, do not run for re-election.
The largest source of revenue for the road projects are the tolls on I-95 and Del. 1. This makes sense and follows the same no-tax logic of gasoline levies. The Del. 1 toll is higher on the weekend. The drivers paying that extra money are usually driving for pleasure, not work. The extra cash goes down more easily.
The I-95 tolls is better yet from this point of view. It is a border tax, if you will. The bulk of it is paid by people driving through Delaware. They are highly unlikely to protest a high toll by voting against Delaware incumbents. Our trouble is that we do not have more borders that strangers want to cross.
Every driver has welcomed the current lower price of gasoline. Tax increase suggestions from infrastructure advocates have been shouted down, both by the diehard anti-tax groups and the average motorist who is enjoying the relief. Therefore, the impasse continues. Cars will become even more efficient on gasoline and thus lower the amount of tax coming in. Postponed maintenance will grow more costly and wear and tear on the roads will get worse.
Somewhere along the line, something will have to give. Even re-election wary politicians will be forced to agree.
Delaware of course has some of the highest share of revenue from tolls in the US due to its strategic position of owning a short turnpike between Maryland, Pennsylvania, and New Jersey, of being able to tax foreigners living abroad. Yet even they face the same issue as other states as to how to raise revenue.
Highway users of course pay a user fee to pay for the cost of highways. Federal gas taxes are dedicated to the federal Highway Trust Fund, and many states, including Minnesota, have similar rules at the state level. So far, so good. The trust fund has in recent years fallen short of the amount that politicians want to spend on roads, but that is in principle easily corrected with an increase in the user fee or a decrease in spending. Most local roads (municipal and county) are paid for via local general revenue. This is also well known in the community, if not the general public.
The hidden subsidy is in states which have general sales taxes, but don’t apply them to gasoline. Thus, in Minnesota, I pay a sales tax on prepared food, but not gasoline (or clothing, or random other things). Thus relatively, spending is encouraged in those untaxed areas, which are 6.875% less taxed than other goods. This lack of a tax is not a subsidy in a state which doesn’t tax sales, and instead taxes income or property. But where sales are taxed, but gasoline is exempted, other goods are implicitly taxed more so gasoline can be explicitly taxed less. Note this is not universal across the US.
In California, there has long been both a sales and use tax. However the value of the sales tax on gasoline is now lower the sales tax on general goods, though for many years it was close or the same. There is argument about the fact that the sales tax is levied on both the gasoline and the user fee associated with the gasoline. In short, the general principal is that gasoline cannot be simultaneously be taxed with the funds dedicated to highways (thus acting as a user fee) and exempted from sales taxes without there being a subsidy that at least partially offsets the user fee. At a $3.00/gallon price of gas, a 6.875% tax raises $0.20625 per gallon. To compare, the state gas tax is $0.286 per gallon. Thus, in Minnesota the net state user fee is only about $0.08 per gallon, not the $0.286 per gallon widely advertised. The federal gas tax is $0.184 per gallon. This is more truly a user fee. Also since there is no federal sales tax, gasoline is not disproportionately favored. The tax in Minnesota is higher in some localities to pay for other things. We could similarly look at the motor vehicle sales tax (MVST), which is dedicated to transportation in Minnesota. It is 6.5%. Nothing wrong with dedicating the funds, but as a result, they cannot be counted as user fees, since sales tax revenue would otherwise go to general revenue. Based on this document, since 2011, 60% of the MVST goes to the Highway User Tax Distribution Fund, and 40% goes to the Transit Fund.
The general sales tax should apply to all goods equally to minimize distortions. Better, a value added tax should be used. Special taxes on beneficiaries should be used where they can be, but not in lieu of general taxes. There is sufficient economic capacity in the highway system for users to pay for the whole thing (the evidence being how much people have paid for gasoline per gallon in the past here, and how much they pay in other countries), it’s a shame we don’t take advantage of that. After paying for roads, and their externalities, and their share of the general tax burden, road users will be paying about their fair share. Taxes are needlessly complicated by special interests in the United States. This allows all sorts-of hidden subsidies. Let’s expose them to the sunlight, and then make objective decisions about whether we should lower the general sales tax on all other goods, and impose that tax rate on fuel.
Roads exist largely to serve two purposes: movement and access (specifically, access to property). Different types of roads have characteristics of different types of goods based on their functional classification. In other words, there is a correspondence between the functional classification of a road and the type of good it represents. What types of roads are which type of goods?
Limited access highways (freeways) and some arterials with signalized intersections and few access points, could be considered private goods, since it is possible to identify and exclude users with appropriate toll technologies. These roads are also rivalrous since, in the absence of pricing or other measures to limit demand, an additional user can affect the use of the road by others.
It is very clear that users could pay for private goods directly. The most obvious way is a toll, a bit less obvious is a gas tax. Nefarious politicians in a few states have come to realize that a wholesale tax on gas is more hidden than a retail gas tax, even if the incidence is essentially the same. The gas tax collected on users of freeways at the state and federal levels would more than pay for freeways (even if some is diverted to transit and other uses).
Local roads lie on the other end of the spectrum in terms of functional classification, since they exist primarily to provide property access. Local streets can be excludable if access to them is restricted. Access restrictions may take many forms, ranging from the simple posting of signs indicating that access is restricted to residents to actual physical restrictions, such as gates. The latter type of restriction is typically associated with gated communities or other forms of private residential development. Local streets are also generally non-rivalrous in that their low levels of traffic tend to preclude problems with congestion. This combination of characteristics (excludability and non-rivalry) indicates that some local streets may be considered club goods. The oldest such example in the United States is that of Benton Place in St. Louis, Missouri, where adjoining property owners were required to join a private association which was responsible for road maintenance, with assessments being levied on each association member.
These kinds of local roads are essentially club goods. The ideal club might be the homeowners association, the downside is diseconomies of local management of roads and potential interruptions in the local road network (e.g. more cul de sacs and fewer gridded blocks). Division of labor is a good thing, but requires scale. So the club is usually the local municipality rather than the homeowners association. The revenue that is collected for this tends to be a property tax, paid for by everyone. Tolls are impractical for local streets because the cost of collection outweighs the benefits. A local option gas tax may also be impractical because the purchase area of gasoline exceeds the size of the municipality (e.g. our most used gas station might be in St. Paul, even if we live in Minneapolis). Any jurisdiction that tried to raise too much from this fee would see more out-of-municipality purchases, and the gas station (or the landowner of the gas station, if they differ) would bear much of the incidence of the charge.
An additional challenge associated with fuel taxes for roads is that some local roads, when privatized or used as a club, restrict auto traffic. In the Seward neighborhood Milwaukee Avenue is essentially a club good for bikes and pedestrians. In such cases property taxes are much easier and effective for financing the roads. St. Louis, MO, has long featured private local streets in all types of communities.
Local streets are typically provided by local governments with no restrictions on access. In the absence of access restrictions local streets may be both non-rivalrous and non-excludable, leading them to take on more of the character of a public good. Note the term “public good” in this case is defined by the economic characteristics of the good, and not simply by the fact that it is supplied by the public sector.
Some local streets are not excludable because of their functional design connecting places (one of the drawbacks of a connected network is that it is used to connect people who are not local). So design of the network greatly affects how it is best managed and funded.
Between limited-access highways and local streets are a middle level of road, collectors, that link local streets with limited-access highways. These “linking collectors” serve both access and mobility functions, since they may also provide access to some adjacent properties. These roads may be considered “congesting” or common goods.
The characterization of roads in terms of functional classification may also inform decisions about which level of government should be responsible for providing a given road (assuming the decision is made to provide the road publicly). Local units of government seem best suited to providing local streets, since they are closest to the problem. Roads that provide for a higher level of movement, such as limited-access highways, ought to be provided by higher-level jurisdictions, such as states. Of course, there are tradeoffs involved in each of these decisions. Smaller jurisdictions may not be able to fully realize scale economies, while larger jurisdictions may encounter problems with span of control. Between these extremes there is some optimal mix of expenditures between different levels of government that minimizes capital and operating costs.
The larger jurisdiction (the state) could set a higher fuel tax to redistribute back locally bysome formula, but there still remains different preferences in different municipalities for different levels of service, which require some locally different levels of funding. How is that to be collected if not a property tax?
The property tax can be thought of as a charge for having the option to access roads and receive public services such as police and fire. There are other types for local tax that can be used; a variety of land value capture mechanisms, from the land value tax or split rate tax, to transportation utility fees change the basis of collection, but even TUFs are still not strictly proportional to use. If a mileage-based usage fee were already widely deployed, it could be varied by municipality to collect more revenue, but that ideal revenues collection scheme is not worthwhile to implement if the only user were local governments, and would require standardization and enforcement to enact.
Regardless of whether one favors or opposes subsidy for roads, distributional considerations of how the subsidy monies are generated are important. We discussed fuel taxes, tolls and property taxes, but many cities and states turn to sales taxes to pay for roads (and transit. For instance, the Minnesota Legislature is considering an increase in sales taxes dedicated to transit. Sales taxes are a shift away from direct user fees and impose the burden of subsidy broadly. Sales taxes also tend to be regressive in that households who end up paying the largest share of their income in sales taxes receive less than proportionate value in return. So subsidy is an issue of distributional fairness depending on how the money is raised as well as how it is spent. At the very least money used for subsidy should not rely on regressive tax policy.
Rationales for subsidizing roads:
Universality: Everyone uses roads, everyone should pay.
Midwest Energy News quotes succinctly: “There isn’t a person in the United States who doesn’t get some use out of the roads,” says Levinson, who also writes the Transportationist blog. Even people who don’t drive still benefit from things like fire protection, ambulance services, and mail delivery — all of which depend on roads. “I suppose you could be Ted Kaczynski, but even he had to use the U.S. Postal Service to mail his bombs.”
Even if you don’t drive, or bike, you still use roads. We had roads before cars and bicycles, and will continue to have them even when we have flying cars in the future. Their nature will of course vary, but at least some of the costs are communal. We collectively want the option to be accessed by ambulance should the need arise, or fire or other emergency services. We all make use of ground delivery for things like the mail or packages. We all partake of public utilities running along public rights-of-way. Even bus riders use roads. We also like to have things delivered. When we order a pizza we use the roads, but we have substituted our travel to the restaurant for the delivery person’s. When we order things online, FedEx, UPS and other carriers use the roads to deliver our stuff. It is impossible to “opt out” of using the road network.
Democracy: Most people drive, therefore it is a subsidy from everyone to almost everyone else, which is more democratic than a subsidy from everyone to the very few.
Administrative efficiency: Paying for roads out of general funds, or with imperfect gas taxes, is a lot easier to administer than trying to enforce specific payments for specific roads at specific times of day. Tolls are costly.
Cost structure: Uncongested roads are on the left-side of the U-shaped cost curve, and charging for them leads to suboptimal levels of use.
Non-excludability: There is not a good non-governmental finance mechanism for signalized arterials, roads which are rivalrous but not excludable. One could establish a congestion charging zone, but those are very expensive, and have yet to be tried outside a few center cities.
Agglomeration benefits: Accessibility leads to positive spillovers for the urban economy and increase total development.
Network spillovers: A better connected network makes all other roads more valuable. Much like the temporal Mohring effect in transit, there is a similar spatial for roads effect, each additional road reduces travel costs between places, increasing demand on other roads (and raising overall usefulness of the transportation network still more). Like the Mohring effect, this too reaches diminishing returns, but it is important when networks are sparse.
Mutually assured subsidy: Transit is subsidized, therefore roads should be subsidized.
Off-mode effects: More roads reduce congestion on other modes (transit, rail, air). Subsidizing roads can help support car-free roads, since bikes and pedestrians currently don’t directly pay for their infrastructure. However, relying on drivers to pay for roads used primarily by non-drivers may lead to principal-agent problems.
Overconsumption: Subsidies induce overuse. This can lead to congestion.
Negative externalities: Roads, and in particular cars, generate negative externalities which we cannot properly price. At least we shouldn’t subsidize their production.
Off-mode effects: Reducing demand for transit (by subsidizing roads) worsens the strong positive feedback system that drives transit, lowering congestion on transit is seldom the critical problem, encouraging demand is more likely to be important.
Mutually assured subsidy: A key point is that just because we subsidize roads does not mean we should subsidize transit, and vice versa. The economics of the technologies differ significantly. One bad subsidy does not deserve another. Just because transit is subsidized is not a reason to subsidize roads. It may be an argument to remove the subsidies that exist. Mutually assured subsidy is the “fairness” logic of a 4 year old complaining about a sibling.
Obsolescence: Following the Great Gretzky, “Skate to where the puck will be.” Roads will be made obsolete by upcoming technologies, we should cut our losses now.
So what is the net?
In the short run, states should raise their gas tax to replace the general (property tax) revenue from a baseline set by lowest common denominator jurisdiction within their domain with user charges. That is, figure out which jurisdiction spends the least per capita on roads, and raise the gas tax to replace the property tax by at least that amount of money for each jurisdiction. In all cases states should be extremely wary of using sales taxes to pay for roads. (States will also need to cover the declining federal gas tax, but that is separate.)
Over time, states should move toward a vehicle mileage fee varying by weight (for trucks and other heavy vehicles), location and time of day to replace the motor fuel tax. This should be phased in with EVs (and Hybrids) which don’t pay (much) motor fuel taxes, and trucks which would be charged for weight and distance, going first. Off-peak discounts would encourage peak-spreading. Rates would vary by area to account for different costs of running networks.
Road networks should be organized and operated like public utilities, managing to generate revenue from users to pay for cost of operations. Restrictions on usage should be allowed in this model, where auto and truck traffic can be limited to specific times of day or excluded altogether. Road design that allows access for emergency services can be regulated.
Road pricing has been unsuccessful because it is framed wrong. I say it is unsuccessful because it is not widely adopted, despite being a policy proposal on the table for decades, despite its widespread support among transport economists. Unfortunately, it is perceived (by drivers) as punitive.
Pricing has two complementary objectives, raising funds and allocating resources. We already raise funds for roads, with gas taxes. Gas taxes are in the present (non-EV) world almost perfect as a fund raising mechanism, as they don’t have much in the way of administrative costs, but they are poor at allocating resources. See Marty Wachs’ paper on this.
We of course might want more funds, but I believe we cannot raise revenue and switch methods at the same time. If we want to switch methods (to better allocate roadspace) we need to be revenue neutral. If want to raise revenue, we should raise rates under whatever system is adopted. These two debates should not be conflated.
The primary objective of any new road pricing strategy should be to better balance loads, i.e. manage the use of a scarce resource, roadspace, during the peak hours. Basically we want to move some drivers from the peak to the shoulders of the peak or the off-peak to reduce congestion.
Because it is costlier to provide extra capacity to support travel in the peak, and because of congestion externalities, travelers in the peak should pay more than travelers in the off-peak to satisfy both equity and efficiency arguments. Currently most federal and state road funding is from a gas tax that is proportional to fuel consumed, more or less proportional to miles traveled, but almost entirely independent of when that travel takes place (more fuel may be consumed per mile in the peak than the off-peak because of additional braking events in stop-and-go traffic, but this is too small to affect people’s behavior).
The critical aspect of urban travel is its peak by time of day. We have morning and evening rush hours, corresponding to when most people go to and from work. However, there is a lot of non-work travel in these periods as well, people going shopping, to the gym, or eating out, which may have more sensitivity to price than work travel. We can see peaking in the attached figures. Demand for work travel peaks in the morning and evening (non-work trips are flatter, but not flat). Speeds drop in the morning and afternoon peaks. If we balanced the load more evenly, average speeds would rise in the peak and drop in the off-peak. But the net should be an overall gain, since there is excess off-peak capacity. Figures from Parthasarathi, Pavithra, Anupam Srivastava, Nikolas Geroliminis, and David Levinson (2011) The Importance of Being Early. Transportation 38(2) pp. 227-247
Just as we want to balance trips across time of day, we might want to balance trips across the network. While during the peak, some links are congested, others have spare capacity. Perhaps we can move travelers around?
Work in our labs with computer models of the Twin Cities road networks is that moving from a user equilibrium solution, where each driver selfishly chooses his or her own route, to a system optimal solution where each driver chooses a route that is best for society, reduces total Vehicle Hours Traveled by less than 5 percent. This suggests there is not much to gain for all of the complexity involved in getting travelers to switch routes, but keep their time of day.
A strategy that respects privacy.
A concern that arises with most road pricing proposals is government tracking. While I am personally of the belief we don’t really have privacy anymore, I can understand the desire to at least make it more difficult to track you. Installing devices in vehicles as a government mandate is not reassuring to anyone, tin-foil hat wearing or not. To be adopted, policy has to respect that.
Suppose we increase the gas tax to the desired peak hour rate. [This is the politically difficult part.] We then offer a discount for off-peak travel. This discount requires voluntarily installing in your vehicle a device which tracks when your car is in operation, and the odometer reading. (Not where, just when). For each hour of travel during the peak, you have already paid the peak rate. For each hour of travel in the off-peak, you get an off-peak discount.
So for instance, let’s assume you consume 500 gallons of fuel per year (@20 MPG, this would be 10000 miles). Let’s assume half of your time is in the peak and half is in the off peak, as measured by the clock. Assume previously, the gas tax was 35 cents a gallon, all the time. You would have paid $175 a year.
Now the “peak” gas tax is 50 cents a gallon, so you paid $250. The off-peak gas tax is 20 cents a gallon. If you install the device, you would get an annual off-peak travel rebate of $250-$175 = $75 (500 gallons * 50% of time * $0.50/gallon peak + 500 gallons * 50% of time * $0.20/gallon off-peak = $175). If you wanted to keep your privacy, you would not install the device. Privacy is not costless.
The device of course makes the system somewhat more complicated than existing, but is hopefully inexpensive in large numbers (my insurance company issues one to me, it can’t be that expensive), and the rates make the system slightly more complicated. Altogether, that is unavoidable if you want to add a time dimension to the prices charged to travelers.
As the saying goes YMMV (Your Mileage May Vary), so while this example was revenue neutral in a world of static demand, it might lose money if everyone installed the device and people respond to incentives and change behavior. Based on experience with changes in gas prices, we expect those changes are relatively small (the elasticity of demand with respect to gas price changes is pretty low). Further, not everyone will install the device. But changes don’t have to be large to have an effect, and we don’t want them to be too large (otherwise the peak is uncongested and the off-peak is congested). We could come up with schedules that would be appropriate, and might have different rates at different times (e.g. peak of the peak, shoulder, mid-day, and off-peak).
Another objection is out-of-state travel. Here, we are simply computing when you travel and assuming all fuel is purchased in the home state. If every state has such a system, this probably has very small boundary effects. If one small state adopts this, and its neighbors don’t some residents might travel out of state to purchase fuel (leading them to not adopt this). Again, I suspect the losses will be small, though they may be measurable. There could either be a federal mandate for such a system (which I would not like), or agreement among the various states to coordinate the pricing mechanism. If the rates differences (peak vs. off-peak) are small, they will not distort behavior much, and that might be the best way to implement, and then the differences can be increased over time (peak prices increasing, off-peak decreasing, until the desired load balance was achieved).
“The survey results show that a majority of Americans would support higher taxes for transportation—under certain conditions. For example, a gas tax increase of 10¢ per gallon to improve road maintenance was supported by 58 percent of respondents, whereas support levels dropped to just 20 percent if the revenues were to be used more generally to maintain and improve the transportation system. For tax options where the revenues were to be spent for undefined transportation purposes, support levels varied considerably by what kind of tax would be imposed, with a sales tax much more popular than either a gas tax increase or a new mileage tax.
“David Levinson, a University of Minnesota professor who studies transportation issues, argues that the trend is long-term and is as much cultural as financial.
Teens, historically the most avid drivers, are waiting longer to get their licenses and are driving less, pushed by higher costs and also tougher rules for young drivers, stronger enforcement of drunk driving laws, even technology. Another theory: smart phones and the Internet have supplanted the car as a central platform of young people’s social lives.
Cars themselves have also changed. Some don’t burn a drop of gas or pay a penny in gas taxes. Others use less, due in part to tougher federal mileage standards. ‘It’s official government policy to drive down gas tax revenue,’ Levinson said. “
The 2012 proposal by David Cameron to “privatize” UK roads, by contracting out management of the roads in exchange for a stipend of taxes (but notably not tolling existing roads, only new construction) (Watt, 2012) is interesting, and promises a short-term revenue fix (and possibly better managed roads) in exchange for less funds downstream. In Great Britain, after World War II public corporations managed most utilities (electricity, gas, water, and rail) while others remained within the public sector (post and telecommunications, roads). The Thatcher administration successfully privatized British Telecom in 1984 and other public utilities in subsequent years, including bus transit and some rail transit, but not roads. The government retained the power to regulate these natural monopoly industries.
In many countries, freeways are operated by private sector firms under a franchise or concession agreement with the government, which usually retains underlying ownership of the road (Daniels and Trebilcock, 1996; Poole, 1997; Poole Jr and Fixler Jr, 1987). As of 2004, more than 37 percent of motorway length in the EU25 plus Norway and Switzerland was under concession, and 75 percent of that was privately operated (Albalate et al., 2009).
There is even limited experience in the US with contracting operation of existing roads, which has not been without controversy, the most notable examples are the long-term leases of the Indiana Turnpike and Chicago Skyway (Samuel and Poole, 2005). New toll roads built and operated by private firms are much more widespread, and include the Dulles Greenway and Pocahantas Parkway in Virginia, the Adams Avenue Turnpike in Utah. This experience applies well to toll roads, and variants such as High Occupancy/Toll (HOT) lanes (Poole et al., 1999) and Truck-only Tollways (Samuel et al., 2002). California’s SR-91 median toll lines were privately built on public right-of-way, and later bought out by a public toll agency. Presently, the MnPass HOT lanes in Minnesota manage toll collection under a concession to private organizations. A large share of the few new limited-access roads built in the US have adopted the toll model, and more could follow suit (Fields et al., 2009; Poole and Samuel, 2006; Poole and Sugimoto, 1995; Staley and Moore, 2009).
Yet, most roads, and even most freeways, in the US are not toll roads. Strategies such as mileage-based user fees or vehicle mileage taxes, which replace and improve upon existing motor fuel taxes have been vetted, and may ultimately be implemented. But allocating funds to particular roads, while technologically straight-forward, may face resistance from privacy concerns.
There are technical solutions to privacy issues, but implementing these, in the face of the desire of security agencies to be able to track individuals, will be difficult. It may turn out with cameras, mobile phones, and other devices, we lose privacy about our whereabouts well before road pricing is implemented. The solution may be as Brin (1998) suggests a Transparent Society, where everyone can watch everyone, the state does not have a monopoly on monitoring. Based on historical experience (Levinson, 2002), implementing tolls on existing untolled roads is likely to be politically difficult and unpopular. A 2007 petition in the UK to then Prime Minister Tony Blair beseeched:
“The idea of tracking every vehicle at all times is sinister and wrong. Road pricing is already here with the high level of taxation on fuel. The more you travel the more tax you pay.
It will be an unfair tax on those who live apart from families and poorer people who will not be able to afford the high monthly costs.
Please Mr Blair forget about road pricing and concentrate on improving our roads to reduce congestion.”
– The petition, now closed, could previously be found at: http://petitions.number10.gov.uk/traveltax
This petition to scrap “the planned vehicle tracking and road pricing policy” was signed by more than 1.8 million UK residents by 2007, more than any other petition in history. It clearly has informed Cameron’s proposed policy.
Further the problem of rates differing by route (such as marginal cost prices, the theoretical ideal from a micro-economics perspective), would undoubtedly increase system complexity and distrust, with likely only small gains from system efficiency. Our best estimate from computer models is that moving from a user equilibrium solution, where each driver selfishly chooses his or her own route, to a system optimal solution where each driver chooses a route that is best for society is less than 5 percent reduction in total Vehicle Hours Traveled in the Twin Cities. This suggests the “price of anarchy” (the ratio of user equilibrium to system optimal travel times) is not large on real road networks, despite externalities such as congestion, and imperfect competition among roads. Much larger gains are to be had if travelers shifted to different times of day, but that need not be route-specific.
If the rates were set by private firms in an unregulated manner, monopoly links would have higher prices and be rightly perceived as exploiting their position. In a robust network, monopoly routes are scarce, often there are many viable paths between given origins and destinations, but local monopolies remain, especially on poorly designed, or geographically constrained networks. While there are innovative economic solutions it is likely that a disjoint system of too many road operators, in addition to being complex and unpopular, may be inefficient as economies of scale and network externalities are not fully realized.
Albalate et al. (2009) describe recent toll road privatizations as indicating a change in government intervention which sees “transitions from internal control on processes and inputs to external control on performance outputs.” Toll privatization results in an increase in price regulation. In Europe, privatization entails transfer of management and operation (through concessions) for a time period, while underlying asset ownership is retained by the government. It is widely observed in the public management literature that found that more agency autonomy is accompanied by an increase in external controls. Still focusing on the outputs (the performance measures) rather than on how those measures are achieved should, by decentralizing decision-making, produce a more efficient outcome.
Economic solutions to the monopoly problem include auctions for the privilege for operating routes which would allow the public to recover these monopoly profits, or reverse auctions where firms would bid to charge the lowest rate to operate the route. Future franchising such as Present-Value of Revenue (PVR) auctions may entice government agencies to reconsider the toll finance mechanism. The PVR auctions are similar to the so called Demsetz auctions (used in the Build-Operate-Transfer (BOT) approach) with the exception that private firms compete through bidding for the present value of toll revenue they want to obtain from the project. In this way, the consequences of these auction are: no renegotiations (franchise terms are lengthened or shortened to meet bid PVR); no special clauses such as competition (the governments may build additional competing infrastructure projects because of previous consequence); incorporated buyout option (private firms receive their PVR bid, and governments acquire the infrastructure without bargaining behavior); and others. However, disadvantages of PVR auctions include: no incentives to increase demand (if demand increases it shortens the franchise term), and thus projects that require higher service quality may not be appropriate for PVR auctions (Engel et al., 2006).
A model that has been insufficiently explored in the US is that of public utilities. Many utilities share with transportation systems the characteristic of having a networked structure. Most, if not all, of these utilities are operated on the basis of a payment-for-use system. Utility pricing varies regionally, some locales vary prices by time of day, and users often have the option of choosing different rate plans. These models are never strict marginal cost pricing, but they may improve upon average cost pricing. There are strong parallels between public utilities and transportation services, though some differences exist in the nature of the services consumed, the role of technology, and the structure of institutions and decision making (Hillsman, 1995).
Water faces similar difficulties to transportation in the ambiguity of appropriate property rights. Institutional reforms began in the 20th century to better allocate water resources and to improve the efficiency of water use. The perspective of water changed from being perceived as a free good to a scarce economic good took place around the world (Saleth and Dinar, 2004). Institutional reforms differ by political setting and social environment (Saleth and Dinar, 1999), who observed that decentralization (from central to state and municipal governments) took place in Mexico, Brazil, while corporatization and privatization occurred in Chile, Brazil, France, United Kingdom, Australia, and New Zealand, among others.
Hillsman (1995) suggests four categories in which utilities have developed to manage demand:
Substituting technologies, and
Changing the price of service.
Transportation agencies have considered all of these, but implemented them weakly. In reverse order: Prices are largely invariant, technological (modal substitutions) are not viable for most passenger or freight users, bundling and packaging of services is not considered when looking at pricing, and infrastructure is hidebound to engineering standards, and difficult to modify. One could easily imagine more creativity on the part of road providers in all of these aspects. The constraints on the application of creativity are due to the engineering culture in a public agency, where risk-taking is discouraged if not punished, and certainly never rewarded.
With some modification, it seems possible to transfer the utility model of governance to road transportation. This model separates the organization delivering the service from the client, is subject to rate regulation, and implements a more direct, user-pays system of financing. This model could depoliticize management of the existing transportation system. Whether rate regulation is in fact economically necessary is the subject of debate; for instance Stigler and Friedland (1962) argue there is no difference in prices in the electrical sector due to regulation, because electricity is competitive with other energy sources in the long run. One expects from experience with other utilities, toll roads, and road concessions in other countries that it would be politically necessary to have some public guarantee of an upper bound on the rates a road utility could charge, as provided by a regulatory agency. The risk is that an upper bound on revenue would be too tight, resulting in financial losses (and one of the causes of municipal takeover), as occurred in the then private mass transit sector throughout in the US in the early to mid 20th century.
Such a system would transform but not replace public highway or transportation authorities as the party responsible for providing and maintaining roads. One example of a transportation system that has transitioned to more of a utility-based model is the road authority in New Zealand (Starkie, 1988). This system was designed to be self-financing, with what was originally called the National Roads Board allocating charges among users on the basis of costs incurred. Three types of costs were identified: load-related costs, capacity-related costs, and driver-related costs (covering signing and other costs not related directly to road use).
There are other elements of costs not included, such as access costs (the cost of accessing the network from land and the cost of a connected network, which can be separated from capacity costs (related to the width of the roadway), and load costs (related to the thickness of the roadway), and environmental costs (both how the system deteriorates due to weathering independent of use, and how the environment is degraded due to use).
Vehicles are split into two classes on the basis of weight, with vehicles less than 3.5 tonnes paying a charge in the form of a fuel tax. In the US, Oregon has a weight-mile tax for heavy trucks. Heavier vehicles pay a distance license fee, which is essentially a form of weight-distance tax. Such a system is relatively straightforward and requires minimal new technology, leading to low collection costs compared with most proposed road pricing systems. (Newbery and Santos, 1999) have also estimated the costs and relevant charges for a similar, though hypothetical, system of user charges for the UK.
These types of road user charging schemes contrast with user charges based on a mileage tax concept utilizing GPS systems (Forkenbrock, 2008). There are a variety of potential technologies for assessing mileage taxes, most use GPS (or an equivalent such as cellphone triangulation) to identify location, since one of the advantages of these types of systems is the ability to charge different rates for different locations (city vs. country, freeway vs. local street, congested vs. uncongested road). GPS receivers do not normally transmit information. GPS-equipped vehicles can log the vehicle location internal to the vehicle. Some additional communication technology, which might report a reduced form of information (e.g. total amount owed) would be used to complete the transaction. For instance, a pilot study in Oregon (Zhang et al., 2009) had a chip in the vehicle log distance traveled by zone (an aggregated version of location) and time of day, without storing the precise location. The chip only reported to the external source the total charge owed, calculated by an onboard algorithm. So no detailed tracking information was shared. Simpler technologies such as a mileage based user fee would simply record the odometer reading, but this would not allow differentiation by time of day or location.
While the road user charging concept remains an attractive prospect, its application may still be many years away due to a combination of privacy concerns, implementation and transaction cost issues (Levinson and Odlyzko, 2008), and technological development issues. Some of these concerns might be obviated under a different governance structure, where it was neither the legislative nor executive branch of government making these decisions. Public utilities have a “mean level of trust” of 42%, (Jenkins-Smith and Herron, 2004), which is much higher than the trust in the federal government, which hovers in the 20% range (Pew Research Center for the People and the Press, 2010). Dynamic pricing, as suggested for toll roads, significantly reduces consumer’s trust in an organization (Garbarino and Lee, 2003), as prices are no longer predictable and feelings of price gouging take place. Other US surveys suggest that the public feels dedicating the gas tax to transportation (hypothecation in the British jargon) would be a good idea. Of course this already occurs in most states and at the federal level, the public just does not realize it, and the political debate does not help. Hypothecation does not occur in localities, where roads are in fact funded out of general revenue, typically property taxes.
The discussions of road pricing for financing and congestion management in the US are still largely under the guise of existing institutions doing the pricing. To date, this has essentially been a non-starter. Perhaps with institutional reforms, reconfiguring state and local DOTs as public utilities rather than departments of state and local government, the logic the public applies to roads will change, from one of a public service paid by the pot of general revenue to a fee-for-service proposition paid for by direct user charges.
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“It’s true that local property taxes, not gas taxes, pay for building and maintaining most roads, says David Levinson, an associate professor of civil engineering at the University of Minnesota, but whether or not that’s a subsidy for drivers is debatable.
“There isn’t a person in the United States who doesn’t get some use out of the roads,” says Levinson, who also writes the Transportationist blog. Even people who don’t drive still benefit from things like fire protection, ambulance services, and mail delivery — all of which depend on roads. “I suppose you could be Ted Kaczynski, but even he had to use the U.S. Postal Service to mail his bombs.””
A new report is out from Institute on Taxation and Economic Policy Building a Better Gas Tax: How to Fix One of State Government’s Least Sustainable Revenue Sources.
I like the report and generally agree that increasing the gas tax, and building a better one, is appropriate as a short-term fix (until vehicle electrification and better fuel economy overtake it), so long as the funds are not spent on system expansion until the existing system is properly maintained (or abandoned where appropriate). I have some quibbles:
“As Figure 4 indicates, even a twenty cent per gallon tax increase would cost the average driver under $9.00 per month, and at least some of that cost would undoubtedly be offset through lower vehicle repair costs and less wasted gasoline burnt while stuck in traffic.” – If raising the gas tax is a socially good thing, all of it should be offset by private gains on average. The average driver should save time and money (or achieve value and avoid losses) which exceeds the additional tax (over the long term). If they don’t, why should they support such a thing?