Motor Vehicle Transportation and Proper Pricing

User Fees, Environmental Fees, and Value Capture

H. William Batt, Ph.D.

[A paper delivered at The Other Economic Summit, Denver, June 20-22, 1997; revised November 20, 1997. Published in The Ecological Economics Bulletin, First Quarter, 1998 (Vol.3, No.1), pp. 1-14.]

The sector of our economy that is most at odds with policies of sustainable living is transportation policy. It's not just the fact that cars are deadly—that 43,000 people are killed each year by motor vehicles and an additional two million injured, and that costs from accidents alone equal to about 8 percent of our GDP. <

It's not just that dependence upon motor vehicles disenfranchises large elements of the population who—for reasons of age, financial means or disability—are unable to rely upon cars. It's not even that communities built around highway transportation cease to be communities.It not even solely the fact that the cost of motor vehicle transportation threaten to bankrupt us. In the final analysis, apart from the political, economic, and social liabilities of a transportation system built largely on motor vehicle dependence, it is environmentally unsustainable. And of course that is what we must recognize.

One 1993 study concluded that "when the full range of costs of transportation are tallied, passenger ground transportation costs the American public a total of $1.2 to $1.6 trillion each year. This is equal to about one-quarter of the annual GNP and is greater than our total national annual expenditure on either education or health." Japan, by way of comparison, spends an estimated 10.4% to satisfy all its transportation requirements, although the figure might be a bit low because not all externalities are included in the calculation. One of the reasons we are spending so much on motor vehicle transportation is that our public policies encourage it. User fees represented only about $33 billion in 1991 while the true costs to society were ten times that; put another way, drivers pay only 10% of the true costs of their motor vehicle use. Moreover, our practices on property tax and zoning land use also foster patterns of development—typically termed urban sprawl—that make us auto-dependent. The latter is beyond the scope of discussion here, but should be borne in mind.

The results of these policies are mainly two. First, as much as the policies mentioned above, patterns of land use owe their evolution to subsidies we offer to motor vehicle transportation. Second, enormous environmental externalities result from our over-dependence upon cars, especially in air pollution and in the emission of greenhouse gases. I need not talk here at any length about the consequences of SO2, CO2, and ozone, or, for other nations, about the consequence of leaded gasoline. I wish to address pricing solutions that will help us to correct imbalances and to recover appropriate costs of car and road use.

At the present time, as noted above, user fees pay about 10% of road costs. These are mainly collected in motor fuel taxes, vehicle license and registration fees, highway tolls, and parking fees. Heavy trucks pay additional fees levied largely at the state level and in different ways.

Levies on gasoline and diesel fuel in this country average about 30¢ per gallon. European nations, by contrast, have motor fuel taxes as high as $3 per gallon. This country commonly earmarks revenues from certain sources to finance highway services only. Only four states unequivocally do not dedicate any portion of their motor fuel tax, and another twelve states have partial dedication. Twenty-seven states dedicate drivers' licenses and 38 states do so for vehicle registrations. Twenty five states dedicate all three. Hence highway users groups typically crow about all the taxes they pay to support the road system, but this is belied by all dispassionate analysis. When it comes to supporting the most commonly identified 33 direct operating functions of highway administration and maintenance, only 10 states agree on 13 or more, and the average is a bit over twenty. So it is misleading to refer to a state as having dedication or not when it comes to highway finance. The remaining support comes from general funds of government or else is diffusely shifted back to society. Society subsidizes road use.

Of course there are other taxes levied on various items of motor vehicle related consumption. Sales taxes, for example, are imposed on vehicles, parts, and often on motor fuel as well. But those are general purpose taxes for support of government generally, i.e., of "public good" functions which motor vehicle use is not. Motor vehicle travel is largely a private good, and costs therefore should be recovered mostly by user fees, not taxes. It is important to understand the difference between taxes and user fees. User fees are paid according to the benefit, wear or damage which comes about from use of a service. If one doesn't use a service, one doesn't pay for it. Taxes, in contrast, are paid by everyone according to one's ability to pay; they are not voluntary. When talking about taxes, equity is measured by their progressivity or regressivity; for fees, in contrast, equity is measured in proportion to use, and progressivity and regressivity are irrelevant, just as for one's grocery bill. Taxes should support public goods and user fees government-provided private goods; many government services involve a combination. Some states illogically exempt motor fuel from sales taxes because a user fee is levied on it. When one understands the purposes of each, one sees that this makes no sense, and causes further social and economic distortions.

Property taxes, which go into local government general funds, can also be construed as user fees, and do indeed pay some road costs, particularly for residential and lightly traveled areas. They do not cover all costs; in fact, because their usual design fosters sprawl, they actually create further costs.

Of government revenues streams commonly labeled taxes, I want to identify three major kinds, each with different functions. These are 1) taxes—compulsory levies for the general purposes of government according to one's ability to pay; 2) user fees—paid by those who use services according to benefits received, direct costs imposed, or wear and damage caused; and 3) environmental fees—which recover the costs of negative externalities that otherwise are imposed on others. There is no reason why any particular item (or "base") cannot be used to collect revenues for more than one purpose. A quick illustration of each will make the case clearer.

In the case of cigarettes, for example, governments usually levy a sales tax as for any other item of consumption. We also often see what is known as a "sumptuary tax" (or sin tax)—one levied on activities or items which society disapproves of. Lastly, there is beginning to be sometimes called a "Pigou tax" to help pay the spillover costs of health care that result from smoking. But most Pigou taxes are environmental, or "green" taxes.

User Fees and Environmental Fees

For motor vehicle revenues, logic dictates 1) taxes on the commodities themselves as long as we choose to rely on sales taxes to support government, 2) fees levied on some proxy for road use such as tires and fuel to pay for such costs to the extent that they represent private consumption—i.e., are a private good, and 3) environmental fees to recover the costs of (or else to correct) damages to nature that are otherwise externalized. Again, it is often appropriate to attach more than one revenue to any particular base, and it is particularly appropriate to do so for petroleum.

The federal motor fuel user fee currently adds 18.4¢ per gallon. State gasoline taxes, also user fees dedicated to highway support, currently add an additional 20¢ average per gallon. State sales taxes are a percentage of sale price, no more than 8 percent, but all but fifteen states exempt gasoline from sales tax in the mistaken belief that it is already burdened by a user fee. This creates rather than corrects distortions. Calculating a precise fee for environmental externalities is a challenge largely beyond our current abilities but we cannot wait until such time that we know. We know at least that we should have one, and we could begin it at a modest level and raise it incrementally until changes in technology and behavior patterns result in a tapering off of auto emissions. It could happen that environmental fees could totally supplant all personal and corporate income taxes as well as sales taxes, gradually phased in revenue-neutral fashion while conventional taxes are decreased. (Real property taxes are a separate discussion below.)

Highways and associated services should have user fees higher than present to recover the full costs of operations and service. Motor fuel is an excellent proxy base for highway use because it charges proportionate to use except for very heavy vehicles. Supplemented by other user fees just for those vehicles—the best design is an ESAL fee (axle-weight x distance)—would fully address the problem of rational highway pricing. The US Department of Transportation calculated total direct expenditures for highways for 1992 as $84 billion, of which about $78 billion came from user revenues. More recently it has been argued that, were nothing of this revenue diverted to pay the costs of constructing and expanding additional highway infrastructure, it would be sufficient to pay the maintenance and operating costs of all roads included as part of the federal highway system. These major roads carry the bulk of the traffic of the nation, they constitute only a small proportion of the total lane-miles of roads, however. But as earlier noted, US-DOT chooses not to include as "highway related" many related costs, resulting in the distorted perspectives reflected in current policies. Local residential streets have even more the character of private goods than trunk lines, and are appropriately supported by local property taxes. Property taxes, well designed, reflect local value and the enjoyment of local (private good) services and should therefore pay for them.

Fossil fuels are the prime candidate for the third category of revenues, Pigou fees (or taxes), because, arguably, they do the greatest environmental damage, are simple to impose, and are highly efficient in correcting the most alarming environmental problem the world faces: global warming resulting from the creation of greenhouse gases. A tax on carbon, depending on how heavy, would go far towards reducing its consumption. This is important because the best recent data project the doubling of atmospheric CO2 in the next 50 to 100 years.

Briefly, in 1994, the Clinton administration entertained the possibility of an energy tax using BTUs as the base. It was explained as, and was intended to be employed as, a straight revenue source to facilitate a balanced budget. But Congress declined to consider any further taxes on energy—of any sort. Currently the gasoline tax—that 30¢/gal user fee—brings the retail price of gasoline to a total figure roughly equal to about $10/million BTUs. If gasoline and diesel fuel were to carry the full burden of both an operations-sustaining user fee as well as an environmental fee to recover the cost of pollution as noted earlier, this would require its increase tenfold—that is, $3 per gallon. The efficiencies in a motor fuel tax grounded in environmental cost recovery could be further enhanced by converting the measure from direct count by gallons to count by carbon content. Either way this is several times the actual price of the product itself.

One might reasonably ask whether putting such a heavy burden of fees on motor fuel is realistic, regardless of its theoretical merits. A $3 per gallon combination user fee and environmental fee is obviously politically impossible in the current context, and would likely lead to an underground economy as well. The total motor vehicle fuel consumption in 1992 was 132,938 million gallons With an average consumption of 684 gallons per vehicle, that would mean over $2,000 in user/environmental fees paid per vehicle. Again, this multiplies by ten the typical amount paid by each vehicle owner in motor fuel taxes at the present time. Even granting its theoretical soundness, it would need to be phased in at the same time a substantial educational campaign was waged to help the public understand its logic and necessity.

It would help if Americans recognized that they are already paying the costs of their motor vehicle travel today indirectly, and that this shift would simply bring price into line with true costs. Even so, were any fee even approaching this level ever put into effect, it would alter driving behavior substantially, even granting the inelasticity of driving patterns in the short run. The total revenue from such a levy would approach $400 billion.

Bringing driving prices into line with costs would go far toward facilitating the success of public transportation services, even given the disparate location of residential and occupational trip patterns. One could conclude that pricing changes of this magnitude would alter the configurations of American urban land use as well. Personal choice would still be preserved, no longer skewed by the distortions imposed by the subsidies inherent in current transportation finance policies. There would be every inducement to increase fuel efficiencies from the current average passenger car miles per gallon figure of 21.6. And these forces would in turn likely work in the opposite direction to reduce the revenues paid from this base—all to the good.

Value Capture to Recover Capital Investment Costs

So far the charges enumerated above cover only the ongoing operating costs of motor vehicle transportation, and do nothing to address the capital costs of acquiring and constructing requisite infrastructure. Although the grand heyday of highway construction has largely passed in the U.S., the approach that follows can be employed for any remaining initiatives as well as for transit projects that may be envisioned. The best way to pay capital costs of acquisition, design and construction of transportation infrastructure is through what is called "value capture." When a highway (or for that matter transit service) is built to serve an area, the value of the adjacent properties typically experience huge increases in value. Should their title-holders reap windfall gains from government investment? They certainly didn't earn it; it's not typically an outgrowth of their efforts or investment. The very anticipation of such development even invites corruption of public decision-making. Usually adjacent landowners are speculators or are just lucky.

Those increased values can instead easily be recaptured by government in taxes to pay off bonds issued to finance that infrastructure. In various value capture studies that have been done, the added increment of land value immediately proximate to the transportation investments typically are far greater than the full costs of the investment itself. This increase sometimes is as much as six and seven-fold. It can be a supplement to the property tax—the site value component only—which is directly reflects the value increase because of its more attractive position on account of the development. This approach works especially well for transit, and ought to be the first option explored by those who develop (or expand) transit services— particularly light-rail urban systems.

Priced at proper levels it helps balance transportation service, rational and intensive development of land use, and equity in the distribution of private benefits. The development of attractive, livable, and intense activity can be enhanced further by removing the property tax component on improvements altogether. At a time when we are concerned about the destruction of useful farmland and watersheds, it makes no sense to foster urban sprawl by offering states and localities "free" federal money by which they can build more roads.

We really have to get our transportation service structure right. We will otherwise cease to be economically competitive vis-a-vis our international rivals. Typically they are spending half of what we do on transportation and are free to invest that much more in education, R&D and leisure time activities. And unless we change, we will continue to be the greatest culprit in the despoliation of the world's environment, a role which, I believe, we Americans will choose not to play if we understand.

( Contact the author for a full version of this paper with footnotes and sources.)