Americans, Their Taxes and Transportation Funding

by: Ryan Avent

Elana Schor reports on efforts to fund the next transportation bill and notes that the latest craze is a move to tax oil futures and (perhaps) all stock transactions. This strategy is gaining ground because oil markets and traders are very unpopular and (still worse) geographically concentrated, whereas users of transportation infrastructure tend to enjoy the support of most Americans and are spread across many Congressional districts.

There’s no reason that a transport funding mechanism has to involve transportation. Money is fungible, and to a certain extent we should simply be focused on raising revenues in the places where it’s least costly to do so and spending revenue where it does the most good. And certainly there are some economists out there arguing that a financial transactions tax would prevent some negative market behavior while raising revenue (although they tend to argue that the revenue should then be used to capitalize insurance funds or cover other bail-out costs).

But there is one big benefit to tying the funding of transportation projects to transportation revenue sources: Better transportation funding mechanisms allow us to make better transportation spending decisions.

So, a lot of current transportation planning is a sort of misguided attempt to solve congestion problems with additional road (and sometimes rail) capacity. That won’t work. But let’s say you began pricing roads in an effort to reduce and ultimately eliminate congestion. In some cases, you’d find that you don’t need more capacity at all! In others, you’d find that the tolls necessary to reduce congestion entirely are so high, that it’s clear new capacity of some kind is needed. And in general, you’d see a better balance between driving and transit, which should improve planning.

Gas taxes would have effects that are somewhat similar, though the effect would be less direct. (There would be compensating benefits, like reduced dependence on oil.) But the bottom line is this — small increases in the cost of using transportation systems will get people to cut out trips they don’t really need to take (just as putting a small price on a stack of cookies will ensure that folks who aren’t really that hungry don’t grab up all the sweets). The efficient price increase might be higher than what’s politically possible, and I don’t know that there’s any way to get around that. But that doesn’t mean that the transportation system — and its maintenance, planning, and construction — wouldn’t function much better if a pretty healthy share of the needed increase in funding came from increasing the price on negative externalities.

The obvious rejoinder to this is that even the smallest increase in gas tax rates or tolls is a political non-starter. Maybe. But a lot of people have said that about a cap-and-trade system, and that’s already been passed by the House of Representatives. I still find it difficult to believe that a sustained case for an increase in and indexing of the federal gas tax, which focuses on reduced oil dependence, needed maintenance, and the economic benefits of new investments, wouldn’t sell.

But hey, that would take a lot of work. Foisting the cost burden on to unpopular (and geographically concentrated!) traders is much, much easier.

That’s no doubt one reason that tolls and higher gas tax rates are easier to pass at the state and local level. Local dollars for local spending. Which is fine to a certain extent. But states and local areas rarely contain the whole of a relevant economic unit. It’s important to improve infrastructure across the whole of the northeast region (for instance), and the quality of intracity transportation in Philly (for instance) has spillover effects on the economies of Washington and New York. These are critical connections, and so there is a role for federal coordination and a need for the raising of federal revenue.

It’s crazy to me that people think households won’t tolerate higher transportation costs. Families will finance themselves within an inch of their lives to get a newer and bigger car, and they won’t pay $5 extra bucks a day for fewer potholes and an extra hour with their spouses and kids?