Tag: gas tax

Maryland’s gas tax proposal and the politics of subsidies

Lisa Schweitzer

The WashPo ran a story yesterday on a state commission’s recommendation that the Maryland raise the gas tax by 60 percent. The proposal would raise the tax from 23.5 to 38.5 cents per gallon.

Like just about everywhere else, Maryland hasn’t raised its tax since 1992, which means most of the purchasing power of their state coffers is a fraction of what it was back then. And they have identified about $40 billion in projects to do, with a shortfall of $12 billion.

They would also increase vehicle registration fees and, it sounds like, transit fares.

It’ll be interesting, as always, to see how this recommendation fares. Here’s a quote:

“We’ve got to be adults about this. We’ve got a serious problem. The federal spigot is running dry, and we can’t print money,” Bauman said. “Once assurances are made that the trust fund will be protected, I think this is a package that people can accept.”

Rail interests are already starting in:

For one, the plan doesn’t answer the question of how Maryland will pay for its share of the proposed Purple Line light-rail project connecting Montgomery and Prince George’s counties, which could cost nearly $2 billion, or the proposed Red Line expansion on Baltimore’s transit system. The commission endorsed studying whether the state should also set up regional taxing authorities to fund those and other projects.

So the Feds are devolving transit to the states and the states, in turn, are devolving transit funding to regions.

I got yelled at the other day about refusing to acknowledge the socialistic, subsidized system we have for cars with the huge subsidies that motorists enjoy while rail is just at a huge disadvantage. In general, I interpret this as “I’m mad at you because you should be outraged, and you’re not, that the infrastructure we have is not the infrastructure that *I* want.” It’s reasonable to want different infrastructure, but I’m not sure why I’m meant to get outraged because the truth is, yeah, cars are subsidized, but transit users get subsidies, too, and rail riders get much bigger subsidies per ride than everybody else. They’re special, but not, apparently, special enough to suit this outraged person.

What strikes me as unreasonable is the tendency to want to raise costs on motorists and then expect them not to turn around and demand infrastructure projects that suits them. How many times we gotta do this, folks?

In theory, we should have a high petrol tax that goes straight into the general fund and gets doled out like any other revenue, with projects being allotted out of general fund so that they are debated right along with education and policing, etc. In reality, gas taxes in the US have always been targeted to serving the group that pays the tax into a special fund. So if we want to blame a culprit for overdeveloped auto infrastructure and underdeveloped transit infrastructure, we could blame the way infrastructure is budgeted.

But our financing dustups should be making it more obvious than ever: motorists pay for a lot of what’s going on, including transit investment. Now that the feds are trying to take themselves out of the game, it’s going to become a bit of a hot potato who is going to provide for capital subsidies to transit investment because there are precious few cities that are going to want to dip more into their general fund to help build transit.

In addition to the typical modal hair pulling, we’re starting to see inter-jurisdictional claims of social equity that strike me as utterly specious for the most part. It runs like this: if you are going to tax suburb X, you’d better put a project in suburb X, no matter how stupid and wasteful that project is. Why? Because it’s sinful to expect the residents of suburb X to contribute, no matter how much or how little, to the well-being of the region to which they are attached, without quid pro quo. It’s a recipe for overcapitalization. I’m willing to buy the jurisdictional arguments surrounding equity if we are talking about jurisdictions of poor people: you don’t get to tax south LA to benefit west LA (subway to the sea funded by sales tax, anybody?), unless you really are providing a smart project that really enhances the system (the return argument in favor of sales taxes to fund the subway to the sea.)

Continuing the Times discussion to respond to emails I’ve received

Lisa Schweitzer

I had a flood of emails after the privatization piece appeared in the Times, and I don’t have time to respond to everybody, I’m sorry to say. However, to the guy who spent roughly a page and a half telling me that of course I would support higher taxes because I am a blood-sucking professor growing fat off the taxpayer, I just want to say one thing: USC is a private university, m’kay?

Now that I have that out of my system, we can talk about some of the other, more interesting questions that came in.

Are you saying we should or shouldn’t privatize?

I’m not saying either one. I am saying that privatization is inevitable if Americans don’t want to pay taxes for infrastructure.

We can cut back on supposedly “wasteful” projects (and we should), but those are about a millionth of a fraction as important to the total, overall maintenance needs budget than Tea Partiers make them out to be. We’ve had years and years of shrinkage in value from the gas tax because we don’t index it for inflation; in the interim, demand has risen. The fund shrinks, on and on. With the recession, demand has scaled back a little, but when you are using facilities and your funds are shrinking, the money for maintenance and repairs has to come from somewhere. And in a no-tax situation, that means privatization, or letting your maintenance go.

In general, there is very little evidence that suggests private infrastructure costs anybody less than projects simply owned and operated by governments. There are many reasons for this finding: privatization deals are often hamstrung politically–e.g., concessionaires limited in what they can charge no matter what the demand or unforeseen operating issues they can’t recover, etc etc etc, forced operation in faraway, unprofitable areas, etc. Many argue we haven’t seen terribly fair experiments with privatization, and they may be right. But they also may be wrong.

Is the US really in as much trouble as Greece?

No. The US economy, even with our recession, is massive; our debt is a portion of our total productive capacity. Greece, on the other hand, is underwater for lack of a better term. There’s a big difference there.

Forced privatization, however, can come from multiple sources. In Greece’s case, they have to sell, period. In our case, we could decide tomorrow to tax ourselves to get the revenues we need to maintain our existing system.

But if you simply defund infrastructure maintenance, the assets go to pot or you force governments to go looking for private investors. And that’s where the US is. We’re making bad decisions to defer maintenance and to seek public-private partnerships on new projects (which everybody still loves, all the chattering about “cutting the fat” notwithstanding).

The basic point of the op-ed is that yes, we can try to force gummint to privatize its services. But cutting off the funding and not maintaining the assets is a terrible way to do that, and forcing down government bond ratings is a Stupid McStupid way to do that.

But I think government is just too big and out of control. I want more privatization.

The better way to go forward with privatization, if you really, really, really ideologically hate government and would rather live in a world of tolls and fees for quasi-public goods, is to let government negotiate privatization deals when the assets are in good condition (desirable), and they can bring to the table something other than the concession rights—the ability to absorb some of the capital risks associated with large-scale infrastructure. That ability to deal with the risks associated with building and maintaining large-scale facilities, with bond financing, is really what governments can bring into public-private partnerships. If you constrain that ability with tax aversion and letting bond ratings go to pot, you hamstring the ability for institutions, both public and private, to draw on the sort of deeper, longer-term revenue-smoothing commitments that you need to build something like a train line between San Diego and Sacramento rather than a hotel.

Not keeping our infrastructure maintained is a bad strategy, even if we DO want to get parts of it out of gummint hands: private companies do not necessarily want to run concessions on poorly maintained facilities, and they do not want to inherit a maintenance risk. Used cars that have a certified maintenance record with them usually have a price premium over those that don’t–just so.

My taxes are already too high. I can’t stand anymore.

That may be true, but one final word of caution. There’s a reason why every single commentary on infrastructure privatization always includes the words “there’s no such thing as a free lunch.” Because there is no such thing as a free lunch in infrastructure. If you privatize infrastructure, you may (or may not) have lower taxes over time as those facilities move into private hands.

But Santa Claus doesn’t run private infrastructure projects: profit-making companies do. They need to charge tolls and fees for you to use their stuff so they can stay in business. So on the one hand, I’m told that Americans HATE tolls and fees, too. Well, best get over that if you want privatization because that’s how road/parking/park/school/etc concessionaires make their money.

Maybe the sum total of what you pay when you select out of some services and select in to only those you patronize, but there is little evidence to suggest that actually works out. There are always cross-subsidies, even in privately produced goods (the beer pays for a lot of the food in restaurants, etc).

Gummint workers are lazy and incompetent. We’d get better service if our roads were in private hands.

Ok, but if we weren’t all working in the same place, Dilbert wouldn’t be as funny as it is, now would it?

One thing that private companies do tend to be able to do better than governments: they differentiate levels of service to let people buy into the service level they want. It’s very hard for governments to charge a “first class” and “third class” fee on tax-supported goods. Service differentiation can really make a big difference in how well services are fit to market demand.

However, service quality on privately owned concessions tends to vary, too, for a whole bunch of reasons. Remember when United Airlines was putting the hammer down on its employees in the mid2000s? Worst. Service. Ever. Heaven Help You if your flight got cancelled.

Of course you want us to spend money on infrastructure! That’s how you make your living! You’re writing out of self-interest.

I hear this charge a lot. Truth be told, it doesn’t matter to me professionally whether we privatize or not. I have private companies asking me to consult, I have governments that ask me to consult. My skills are portable between sectors.

Ultimately, I think it’s an open question about whether we need to spend more money overall on infrastructure. Is it more important than education or health care? I can’t presume to answer that question. But it’s really hard to maintain markets and everything Americans say they believe in if nobody can get decent water service, our energy grid is outdated, and we have potholes big enough to swallow 1980s Buicks. Infrastructure is one of those things where you have to spend money to make money: casinos, for example, have routinely built their own little transit and road projects to make it easier for their customers to come gamble.

So whether we strategically disinvest or not, whether we decide never to build HSR or anything new ever again, we do have to maintain our system if we want to function as an economy. It’s like this: you either pay for repaving, or you pay for new shocks and struts on your car more often than if the roads were in good repair.

Keep the questions coming if you like, and thanks for reading.

Alex Marshall being wrong about gas taxes

Lisa Schweitzer

In what I guess is supposed to be a take-down of the Reason Foundation folks, the normally interesting and reflective Alex Marshall explains that gas taxes are not user fees in Governing.

Marty Wachs wrote my favorite piece on how gas tax taxes mirror user fees about a decade ago: A Dozen Reasons to Raise the Gas Tax.

No, gas taxes are not perfect proxies for car usage. They vary by vehicle make. But in reality, gas taxes are the closest thing we have to proxying for a pollution tax or carbon tax. We may wish for policy reasons to tax gasoline consumption more than we wish to charge for system usage. For system usage, our major externalities are congestion and accidents, and while it would be really nice to charge based on mileage or time of day for either of those, I’ll just not hold my breath and wait for that public policy to develop.

Even though most analyses show that gas taxes are regressive, these taxes are pretty low in the US, and thus are pretty socially responsible even though low income people do pay proportionately more.

In other words, gas taxes are use-based taxes, and they work an awful lot like user fees, even if they are not strictly user fees. And making this distinction isn’t really as useful as Marshall would like it to be.

Ultimately, Marshall wants to use this issue to argue that car users don’t pay their own way, and so Reason Foundation people should stop criticizing Federal money for high speed rail and sidewalks. By all means, go ahead and make that argument–as if anybody really cares because it’s not like we haven’t been listening to this “cars get subsidized” argument for the last 25 years.

But come on. Do we really think that cities would be better off without surface streets paid for out of property taxes? What are bicyclists supposed to bike on without streets? What are buses meant to run on? And is it really the case that we need federal money for sidewalks? Why can’t local property taxes pay for sidewalks?

Even though gas taxes may not cover the full costs of roads, the gas tax has paid for a lot of public transit in the US and–more significantly–around the world.

It’s pretty clear that Alex Marshall really knows little about finance and budgeting and that he’s used to preaching to a choir over at Governing because he’s not bothering with research for his posts:

I went to the grocery store today and bought an apple. While eating it, I complained that proceeds from the sales tax I paid were used for other things than agricultural support programs.

Ok, again–do some research. Food at grocery stores is only subject to sales taxes in a really small number of places. All of which are evil places, like Mississippi and Alabama.*

(I suspect that Marshall lives in New York. So he’s wrong. He doesn’t pay sales taxes on apples from the grocery store, unless NYC has a special “Alex Marshall tax” on apples.)

He goes on:

Plus, once we pay the gas tax, we have no choice about where the money goes. When I fill up my car with gas, I can’t choose that the tax money goes to repair the potholes on my street instead of the brand new interchange on the other side of the state. However, once I do pay the gas tax, I can use one stretch of road or a bridge as many times as I like with no additional charge. That’s not a user fee. There’s a reason the gas tax is called a tax—because it is one.

Okay…but if you drive on that same stretch of road 100 times, you will, in fact, use more gasoline than if you drive on it once, and you will pay more tax related to your usage. No, the gas tax isn’t a perfect proxy for a mileage fee, time-of-day pricing, or a toll, but it’s not completely unrelated to use, either.

And it’s not like you have any real choice about where your user fee money goes either. There are plenty of cross-subsidies in the national park system. And why wouldn’t there be? If didn’t need cross-subsidies to run something, it’s probably a private rather than a public good. Governments exist to handle cross-subsidies and distributional conflicts.

And (again) just because a government service charges a user fee doesn’t mean that user fee covers the full costs of the program. Transit is everybody’s prime example of that: we pay fares, and most systems still require operating subsidies. But plenty of programs charge user fees and supplement services with general revenues, such as garbage collection. So whether the gas tax is a user fee isn’t really germane to what Marshall wants to say: we could undercharge drivers with user fees just as easily as we have undertaxed gasoline.

I repeat: the gas tax has served the US remarkably well for decades. It’s an easy tax to pay–drivers pay in small amounts at point-of-purchase, and even if it hasn’t paid the full freight of auto infrastructure–or any other infrastructure and even if it isn’t strictly a user fee.

I’m so tired of the “it’s not fairrrrrrrr that cars don’t pay their way but trains are expected to” whine.

Nobody among mainstream transport finance researchers actually expects transit users to pay their way based on some idea that car users somehow pay their own way. This shadowboxing about subsidies with the Reason Foundation is a waste of time, and it distracts transit advocates from doing what they need to do in order to get our transit infrastructure finance and subsidies in order: pursue a) prudential investment so that comparatively productive public transit investment take precedence over unproductive investments (e.g., light rail in Buffalo) and b) a responsible finance plan for high speed rail rather than the puff and smoke and amateurish general revenue grabs we’ve watched for the last year around high speed rail.

*With my apologies, but it is evil to charge sales taxes on food. It’s a regressive enough tax without charging on grocery store food. Some other states charge on groceries, but they rebate the tax. Still evil. Don’t do it.

New fuel economy standards

Lisa Schweitzer

Keith Hennessey (former economic advisor) has some economic analysis of the costs and benefits of the fuel economy policy change, in between all his grumbling about how the EPA (US Environmental Protection Agency) is ‘in charge’ rather that the National Highway Transportation Safety Administration (NHSTA).

This last comment–about who is in charge–is designed to generate comment. He’s been around long enough to know that NHTSA and the EPA are coming out of the Bush Era positioned differently and that the EPA has some strategic agenda-setting to do early on in the new administration. That said, EPA is a cabinet-level agency and these proposed rule changes have been in circulation for a bit. For public policy, we engage both agencies because we are trying to optimize across goals here, ones that are, like many, in tension with each other. Nonetheless, environmental rationales have a lot of currency, and perhaps more than they should here. Given the dominant discourse about sustainability and green-ness–i.e., that we are not supposed to be in our cars anyway–it should not surprise us that crash safety is an undeservedly low visibility issue relative to climate change or that NHTSA is a low-visibility agency, despite the considerable public service it provides.

The tension here–between fuel economy and crash safety–has been in dispute since the original 1975 law that provided for CAFE. The late Charles Lave and his brother, Lester, really helped to clarify the issues. One of their most accessible discussions appears in:

Lave, Charles and Lester Lave, “Fuel Economy and Auto Safety Regulation: Is the Cure Worse than the Disease?” Pages 257-290 in Essays in Transportation Economics and Policy: A Handbook in Honor of John R. Meyer, edited by Jose Gomez-Ibanez, William B. Tye, and Cliffor Winston, Brookings Institution Press, Washington D.C., 1999

There’s always just raising the gas tax, which over time might induce changes in fuel economy similar to the standards, but it allows consumers some flexibility in that they can still opt simply to drive less with their bigger, safer car if that is what they prefer–and driving less would have expected crash safety gains, too. Or what about raising the driving age–something that would lower crash costs considerably–at the same time we encourage fuel efficiency through differentiated vehicle registration fees? There are options here that address both the environment/safety trades. I haven’t looked at any data, so I don’t have any real conclusions here.

One last link: NHTSA’s CAFE page .