Thursday, December 4, 2014

Fred Thompson: You Can Pay Now Or Later And Now Is (A Lot) Better

Note: Another dispatch from Fred Thompson:

Highway trust funds all over the country are running on empty. That is true at every level of government: federal, state, and local.

Highway maintenance really isn’t optional. Street and highway deterioration is inexorable: highway wear and tear is a simple function of the number, speed, and axle weights of the vehicles using the road and the passage of time, but damage accumulates at a compound rate. Statewide, given current discount rates, every dollar of highway-maintenance spending deferred has an average present value of nearly three dollars in future outlays, ranging from about $1.50 at the margin in Multnomah County to $11 in Clackamas County next door.

Recognition of this fact is one of the reasons that transport funding was placed in trust funds. Earlier generations feared that, if gas-tax dollars were not carefully walled off, myopic officials would raid highway maintenance funds to sustain other, trendier endeavors. They were right, of course. What they failed to take into consideration was the failure of elected officials to keep gas-tax rates abreast of inflation, let alone the dramatic improvements in vehicle miles per gallon of gas that have occurred of late. State per-gallon tax rates have been static for 20 years and mileage per gallon is up nearly 30 percent.

Tim Nisbett, in a guest column in the November 21, 2014, Oregonian, opined that “our transportation funding system is ready for a tax fairness overhaul.” Nisbett cited with approval a recent editorial from the Grants Pass Daily Courier calling for a “shift to income taxes to augment or replace the state's existing gas tax system.”

Nisbett’s argument rests on a series of premises. The first is that the ‘user pays’ mechanism, which matches tax burdens to the benefits citizens get from public services, cannot keep up with our transportation needs. Second, transportation taxes comprise a sizable portion of the average working family's contribution to state and local services. Third, these taxes are inherently regressive and that “the roadways of the future will require greater support from those best able to pay for them.” Finally, user fees exact an especially unfair toll on rural Oregonians, who tend to use the roads much more than the rest of us.

I think I am on Tim Nisbett’s side on this issue, but I don’t buy his argument, at least not entirely. Only one of Nisbett’s claims is unambiguously correct: that gas taxes are regressive. While it is true that gas tax revenues haven’t kept up with transportation needs, doubling state gas tax rates would largely fix that problem. The reason gas-tax revenues are inadequate is that they have fallen way behind the nominal growth in the state’s economy, which is entirely due to the legislature’s unwillingness to increase tax rates, along with DMV fees, over the past fifteen years. Doubling the per gallon tax rate would merely return the transportation tax burden on ordinary Oregonians to the level of 2000.

Nor are gas taxes a particularly heavy burden for most of us. The average driver pays significantly less than $100 in gas taxes and DMV fees per vehicle per year. Of course, the burden is higher on folks who drive more than average, especially rural drivers, but those who drive more than average also cause more road wear and tear than the rest of us. Moreover, urban drivers already provide big subsidies to country-road users. It is estimated that gas and weight-use-per-mile taxes resulting from operations on rural highways cover less than a third of their construction cost and upkeep.

I am a fan of user fees. As an economist, I like their incentives and I like the information that they can generate. Consequently, I would argue that increasing per-gallon gas tax rates (and indexing them to inflation) is the first thing that needs doing. We ought to do the same thing with DMV fees, so that they are no longer a burden on the highway trust fund, but instead contribute to it, as they were meant to. There is a simple way to offset the regressivity of gas-tax increases: drop the marginal tax rate for the 5 percent bracket of Oregon’s personal income tax (the first $3,500 of adjusted gross income) to zero. That would meet our transportation needs and, at the same time, increase the overall progressivity of Oregon’s state and local tax system. Nisbett called for a Red/Blue coalition for meeting the state’s transportation needs; this seems to be a better candidate for such a coalition than boosting our highest marginal personal tax rate, which is already the highest in the U.S.

I would also note that it is now possible to design and implement cost-effective mechanisms that more precisely monitor road use than ever before. In the long run, that could be of immense value for transportation planning and influencing road use. Those devices should probably be tried out on commercial vehicles, which are already subject to a weight-use-per-mile tax (in part because the highway damage caused by multi-axle freight vehicles is not directly covariant with fuel consumption). If the system works, it could be adapted to personal vehicles as well. Indeed, the Oregon Department of Transportation is now testing alternatives to the gas tax that would similarly track participating personal vehicles.

However, treating ODOT’s experiments as a solution to the transportation-funding problem seems very much like putting the cart before the horse. Increasing taxes is politically difficult, changing tax mechanisms is nearly as hard; doing both at the same time is practically impossible. Our roads need more money now.


Doug Gabbard said...

It is true that existing revenue streams are not keeping up with the escalation of costs. But I wonder how much of the funding crisis is attributable to the maintenance and replacement liabilities of an overbuilt system. I know that it's hard to sit in traffic and believe that the road system is overbuilt, but we are now wiser about the fact that supply induces demand. Current levels of congestion represent an equilibrium that, in the long term, will be remarkably persistent whether we add lane-miles or rip them up.

fthompso said...

There is some truth to your claim, Doug. Which is why congestion pricing is attractive.

Brian said...

"Finally, user fees exact an especially unfair toll on rural Oregonians, who tend to use the roads much more than the rest of us." What? Wouldn't it be *fair* to charge those who USE the roads more?
If we use income tax there will be cases where we tax people who rarely use the roads at all. Is that fair?

Ken Patterson said...

Everyone has a responsibility to fund the transportation network. Whether you ride a single speed in the Pearl or drive a diesel pick up in Wallowa, you consume goods that move on the entire transportation network. What isn't fair is the current system of fees that create large pockets of economic free riding. That allows disconnects and allows users to devoid themselves of their responsibility of keeping the system intact. Fred is absolutely correct jn pointing out that deferred maintenance a terribly expensive public policy. The deferred 2 inch inlay becomes the 6 in deep inlay or complete reconstruct in a few short years.