The Real Costs and Benefits of Various Transportation Methods

Executive Summary

Purpose

The purpose of this paper is to attempt to document the extent to which tolls, taxes, and fees levied primarily for the construction and maintenance of public highways have been used for non-highway purposes. In order to provide a balanced treatment of the subject, the extent to which property taxes and other general fun sources are used to support the construction, preservation, maintenance, improvement, and operation of highways will also be explored. The paper presents the results of an accounting analysis in tabular form along with a supporting policy narrative.

Background

A debate has raged for years regarding the equity and efficiency of user charges and other earmarked taxes. Highway finance in the United States is merely a special case. One position in this debate regards those tolls, taxes, and fees whose receipts are directly and uniquely attributable to the activities of highway users as the analogues of market prices. Since market prices generate revenue solely for the benefit of producers, the analogous arrangement to highway users be dedicated solely to highway purposes. In practical terms, the proceeds of tolls, sales, and excise taxes on the automotive and truck groups (highway fuels, lubricants, trucks, trailers, autos, tires, parts, accessories, and vehicle repair services), motor vehicle license fees, and driver's license fees should be dedicated solely to the construction, preservation, maintenance, improvement, and operation of highways. This approach to public finance represents a strong form of the theory of benefits taxation developed by Lindahl (1958) and Johansen (1963).

The opposite position regards public finance as a fluid proposition in which significant distinctions between taxpayers and beneficiaries lead to inefficiency and inequity under a regime of benefits taxation. Following McMahon and Sprenkle (1970), a number of arguments may be advanced against the benefits taxation approach. First, the existence of external benefits (e.g. appreciation of property values, stimulation of economic activity) and external costs (highway congestion, air pollution from vehicle emissions) implies that the benefits taxation approach cannot assign a welfare maximizing private price to highway transportation. Second, on a more pedagogical level, tolls, taxes, and fees differ considerably in their relative ability to mimic prices. Tolls are a perfect analogue to prices (due to the ability to exclude non-payers), while taxes and fees merely serve as proxies for an "average" price (unable to cope with peak load pricing and related issues). Third, McMahon and Sprenkle demonstrate that sole reliance upon benefits taxation would lead to an unacceptably regressive system of taxation in which less affluent, less mobile households would bear a larger burden of taxation relative to their more affluent, more mobile counterparts. Overall, these drawbacks suggest that both subsidies (general fund user fees to the general fund) are appropriate and acceptable public finance practices. For convenience, this approach will be referred to as hybrid taxation.

Evaluation of actual public finance practice indicates that hybrid taxation is generally accepted as the norm, although the emerging transportation policy of the U.S. Department of Transportation exhibits strong support for the benefits principle.

For a full report please contact Jeff Horton.