Urban[ism] Legend: Gas Taxes and Fees Cover All Costs of Road Use

No doubt, mass production of the automobile is one of the greatest innovations of all times. It has allowed for increased mobility of goods and people, which has greatly improved productivity and leisure. But, is subsidizing mobility at the expense of taxpayers taking things too far?

In various blogs and forums, I frequently come across the argument that the costs of automobile use are fully (or mostly) internalized through gas taxes and fees. Often, this argument is used by free-market impostors against transit subsidies, or by automobile enthusiasts in defense of highway socialism. The usual argument is that the costs of roads and infrastructure are paid through gas taxes, and thus the users of the roads are funding what they use.

This is a powerful and pervasive myth that will continue to distort the truth, unless serious scrutiny is given to the assertion. Let us first examine the validity of the assertion through studies of the explicit costs (actual dollars) of roads in the US and the taxes and fees collected. Next, we will look deeper and discuss the implicit costs (ie opportunity costs) of roads and automobile use as well as acknowledge externalities involved with automobile use.

The Explicit Costs

We can see the extent of the Urbanism Legend by looking at wikipedia:

Virtually 100 percent of the construction and maintenance costs are funded through user fees, primarily fuel taxes, collected by states and the federal government, and tolls collected on toll roads and bridges.[citation needed] (The claim that only 56 percent of costs are funded by user fees is based on the misinterpretation of a table that applies to all highways, roads, and streets, not just the Interstate Highways.[citation needed]) In the eastern United States, large sections of some Interstate highways planned or built prior to 1956 are operated as toll roads.

Mark A. Delucchi of The Institute of Transportation Studies at UC Davis has researched this topic extensively. According to one study, Do Motor Vehicle Users in the U.S. pay their way?:

I make a comprehensive analysis of all possible expenditures and payments, and then compare them according to three of the four ways of counting expenditures and payments. The analysis indicates that in the US current tax and fee payments to the government by motor-vehicle users fall short of government expenditures related to motor-vehicle use by approximately 20–70 cents per gallon of all motor fuel. (Note that in this accounting we include only government expenditures; we do not include any ‘‘external’’ costs of motor-vehicle use.) The extent to which one counts indirect government expenditures related to motor-vehicle use is a key factor in the comparison.

In the summary of the results , DeLucchi observes:

[C]urrent user payments probably are on the order of 80–90% of the associated government expenditures on MVIS.

[I encourage readers to link to other research on the matter in your comments - even if it dissents]

One could argue that simply closing the funding gap with higher fees and taxes would take more than 20-70 cents per gallon since the higher cost would reduce demand of driving and thus gas tax revenues. As DeLucchi states:

[A]n initial increase in the motor-fuel tax likely would reduce the quantity of motor-fuel demanded and thereby necessitate a further tax increase to compensate for the reduced volume of fuel subject to the tax.

Thus, we can clearly see that from a simple sources-and-uses analysis, roadway use is significantly subsidized above gas tax and fee revenues in the United States.

The Implicit (Opportunity) Costs

Looking only at the dollars going in and out is a simplistic way of looking at an economics issue. However, to fully analyze, we must look at the opportunity costs of resources and productive activity that is forgone in order for the government to provide roads. According to Nobel Laureate, James Buchanan, opportunity cost expresses “the basic relationship between scarcity and choice.” To ignore opportunity cost would result in a huge distortion in the perceived value of roads in society.

Land: Most empirical research looks only at construction and maintenance cost, which are easier to track. However, we need to consider that highways and roads take up a considerable amount of valuable real estate. If not used as roads, the land would likely serve some other productive use. It would be difficult to estimate what the opportunity cost of the land would be, but it certainly would be significant. Even more difficult to quantify is the forgone property tax revenue of the road land.

Consider land currently occupied as roads that could relatively easily be privatized for more productive uses. The most obvious example of this is street parking. In many instances, adjacent property owners could very profitably put street spaces to good use as seating for cafes, or landscaping and setbacks that improve home values.

Capital: Road construction is typically financed through tax-exempt bond issuance. This puts a burden on the borrowing ability of governments for non-road spending, and diverts capital from non-exempt private investments in competitive capital markets.

Taxes: On top of lost revenue from tax-exempt bond issuance and property taxes, the fact that roads are not private means governments forgoes taxing a private operator of the roads as it would tax other private enterprises. Instead of being a source of corporate tax revenue, roads themselves drain government resources.

Environmental and Other Externalities

One externality we can see plainly is the value of properties along highways, between nodes. Because of noise, air quality, and other externalities, homes typically don’t locate along highways. (although commercial uses pop up at critical nodes) As a result, this land is usually left undeveloped or used by location-insensitive industrial firms who keep land costs low. The extent highways hurt nearby property values would be very difficult to estimate nationwide, but certainly significant.

It is even more difficult (and contentious) to quantify the environmental externalities involved with road use, and costs of defense of US oil interests. So, I’ll leave that discussion for another time, if I ever dare to touch it. But, for your reading pleasure, at the extreme, one study estimates the subsidies and external costs of oil use to be $5.60 to $15.14 per gallon! I am very skeptical of this study, but it does open discussion to many of the subsidies and externalities that could be considered in thoughtful examination.


Total gas tax and fee revenues fall short of funding total road expenses in the US. This gap widens when considering opportunity costs before even considering externalities. What’s the proper solution? Just raise the gas tax and let politicians battle over the right amount to cover opportunity costs and externalities? Or even better: privatize the roads, and let the market sort out the optimal use of roads for automobiles. (And when I say privatize, ideally I wouldn’t leave highways as a tax-exempt, public-private partnership. Let roads compete in the marketplace with all other goods and services on a completely level playing field.)

also check out:
streetsblog – Highway Funding: The Last Bastion of Socialism in America
Environmental Economics – Social cost of gasoline
Greg Mankiw’s Blog – The Pigou Club Manifesto: Raise the Gas Tax

To receive future Urbanism Legends posts, subscribe to the Market Urbanism feed by email or RSS reader here. If you come across an interesting Urbanism Legend, let me know by email or in the comments and I’ll make a post debunking the myth. Of course, I’ll give you credit for the tip and any contributions to the post you make…

Boudreaux: Roads Don’t Need New Taxes

Don Boudreaux to the Washington Times:

LETTER TO EDITOR: Roads don’t need new taxes

Thursday, July 24, 2008

Upset that Virginians’ taxes were not recently raised to construct more roads, State Delegate Brian J. Moran, Alexandria and Fairfax Democrat, declares that “Government has an important role to play in strengthening our infrastructure, developing our economy and creating new jobs” (“Virginia’s transportation conundrum,” Op-Ed, Tuesday). Not so fast.

Infrastructure that we today naively suppose must be supplied by government has in the past often been supplied by the private sector – supplied so well, indeed, that these private-infrastructure projects helped to spark the Industrial Revolution in 18th-century Britain. Harvard University historian David S. Landes explains:

“At the same time, the British were making major gains in land and water transport. New turnpike roads and canals, intended primarily to serve industry and mining, opened the way to valuable resources, linked production to markets, facilitated the division of labor. Other European countries were trying to do the same, but nowhere were these improvements so widespread and effective as in Britain. For a simple reason: nowhere else were roads and canals typically the work of private enterprise, hence responsive to need (rather than to prestige and military concerns) and profitable to users…. These roads (and canals) hastened growth and specialization.”



Economics Department

George Mason University


Also, Cafe Hayek – Infrastructure and the State (by Don Boudreaux) for some good discussion in the comments.

Conservatives and Urbanism

Matthew Yglesias – Straight Talk on Gasoline on drilling and how conservative deviation from free-market principles has hurt the environment:

Meanwhile, take something like the accessory dwellings issue. Here you have a bunch of regulations that make it illegal for people to live more densely. Illegal, in other words, to build the kind of communities where the gas price issue wouldn’t hurt so much. But there’s a movement afoot to change things. Similarly with minimum parking rules — regulations that interfere with the operation of the free market in such a way as to make it more difficult for people to live energy efficient lives. And again, there are people trying to change this. These things are regulatory barriers to solving our energy problems every bit as much as the ban on offshore drilling is. And conservatives are against regulation, right? Except the anti-drilling regulation is good for the environment and for coastal economies whereas anti-urbanist regulation is economically inefficient and environmentally destructive. Naturally, conservatives have chosen to aim all of their fire at anti-drilling regulations. And that’s the sort of thing that makes the conservative movement hard to take seriously — it’s an organized defense of existing power and privilege that now and again adopts principled rhetorical modes of various kinds but basically can’t be moved to act unless some lobbyists pay them too.

Similar arguments could describe progressives too, but that (and drilling for oil) is a topic for other blogs…

I agree about the inconsistent anti-market sentiments of conservatives when it comes to urbanism. Conservatives tend to embrace socialism when they can abuse government to create barriers that exclude others from their communities, but not when others benefit from socialism. (Public schools, free parking, government roads, exclusionary zoning, community centers, etc…) They are just fighting over different crumbs than progressives.

Video: Driven to the Brink

I enjoyed this short video that compares Chicago’s Lincoln Square, where I have lived and Buffalo Grove, which is a suburb similar to where I grew up.

The video was produced by CEOs for Cities, a Chicago based organization that advocates for cities. Their website gives this description:

A new analysis shows that high gas prices are not only implicated in the bursting of the housing bubble, but that the higher cost of commuting has already re-shaped the landscape of real estate value between cities and suburbs. Housing values are falling fastest in distant suburban and exurban neighborhoods where affordability depended directly on cheap gas.

Urban[ism] Legend: Density is Bad for the Environment

This is a topic I want to cover more thoroughly, but for now I present a one hour documentary video on green buildings for you leisurely viewing.

I came across the snagfilms website from a recent Wall Street Journal article. Most of the documentary videos lean towards “progressive” tastes, but hopefully they’ll add some free-market content such as Friedman’s “Free To Choose” videos.

Through quick browsing, this video seemed to be the only one that had relevance to Market Urbanism. I think it does a decent job dispelling the Urbanism Legend that high density is bad for the environment. However, some of the commenters seem to fall for the myth that further government intervention will somehow solve the problem. They all seem to forget that progressive government meddling in transportation and land use has done much to cause the problems of sprawl and auto-dependency that modern progressives are now trying to fight with more intervention.

[Watching it a second time, I wanted to point something out. One commenter stated that European and Japanese developers plan for a 50 year life-cycle of buildings, while in the US only 12 months. This is absolutely false. Developers usually use a 10-year discounted cash flow model, but still incorporate a sale value of the property based on projected incomes in the 11th year. That sale value could be calculated on the cash flow of the next 10 years and so, on, but they usually use a more simple calculation for the 10th year sale. They could use 50 year models, but they wouldn't give much better information than the standard 10-year model. European developers use the same methods as the US. Anyone who says otherwise is trying to decieve you.]

Neighborhood Walkability Scores

A recent Wall Street Journal blog post refers to a website called Walk Score. Walk Score will let you know the walkability of a neighborhood based on the address you type in. The site also features ranking of cities and neighborhoods.

Here are the city rankings:
1. San Francisco, CA
2. New York, NY
3. Boston, MA
4. Chicago, IL
5. Philadelphia, PA
6. Seattle, WA
7. Washington D.C.
8. Long Beach, CA
9. Los Angeles, CA
10.Portland, OR

I assume San Francisco beat New York, because New York City includes the less walkable areas such as Staten Island. I can brag that I have lived in 3 of the top 4 most walkable cities: New York, Chicago, and Boston. (although I actually lived right accross the river in Cambridge, which I think still counts) I was also pleasantly surprised at how many of Milwaukee’s neighborhoods ranked above 90.

How It Works
Walk Score helps people find walkable places to live. Walk Score calculates the walkability of an address by locating nearby stores, restaurants, schools, parks, etc. Walk Score measures how easy it is to live a car-lite lifestyle—not how pretty the area is for walking.

What does my score mean?
Your Walk Score is a number between 0 and 100. Here are general guidelines for interpreting your score:

90–100 = Walkers’ Paradise: Most errands can be accomplished on foot and many people get by without owning a car.
70–89 = Very Walkable: It’s possible to get by without owning a car.
50–69 = Somewhat Walkable: Some stores and amenities are within walking distance, but many everyday trips still require a bike, public transportation, or car.
25–49 = Car-Dependent: Only a few destinations are within easy walking range. For most errands, driving or public transportation is a must.
0–24 = Car-Dependent (Driving Only): Virtually no neighborhood destinations within walking range. You can walk from your house to your car!
The Walk Score™ Algorithm
Walk Score uses a patent-pending system to measure the walkability of an address. The Walk Score algorithm awards points based on the distance to the closest amenity in each category. If the closest amenity in a category is within .25 miles (or .4 km), we assign the maximum number of points. The number of points declines as the distance approaches 1 mile (or 1.6 km)—no points are awarded for amenities further than 1 mile. Each category is weighted equally and the points are summed and normalized to yield a score from 0–100. The number of nearby amenities is the leading predictor of whether people walk.

Your Walk Score may change as our data sources are updated or as we improve our algorithm.

How It Doesn’t Work: Known Issues with Walk Score
We’ll be the first to admit that Walk Score is just an approximation of walkability. There are a number of factors that contribute to walkability that are not part of our algorithm:

Public transit: Good public transit is important for walkable neighborhoods.
Street width and block length: Narrow streets slow down traffic. Short blocks provide more routes to the same destination and make it easier to take a direct route.
Street design: Sidewalks and safe crossings are essential to walkability. Appropriate automobile speeds, trees, and other features also help.
Safety from crime and crashes: How much crime is in the neighborhood? How many traffic accidents are there? Are streets well-lit?
Pedestrian-friendly community design: Are buildings close to the sidewalk with parking in back? Are destinations clustered together?
Topography: Hills can make walking difficult, especially if you’re carrying groceries.
Freeways and bodies of water: Freeways can divide neighborhoods. Swimming is harder than walking.
Weather: In some places it’s just too hot or cold to walk regularly.
As MarlonBain said, “You should use the Web 3.0 app called going outside and investigating the world for yourself” before deciding whether a neighborhood is walkable! And if you can’t go there in person, Walk Score includes Google Street View so you can use your own eyes to evaluate the walkability factors that our algorithm doesn’t yet include.

All of the amenities shown on Walk Score come directly from the Google Local Search API. Unfortunately, some listings may be missing or out of date. Business owners can go here to update their listings. Google recently enabled an “Add a place to the map” feature on maps.google.com and we are working with Google to integrate this directly into Walk Score. Unfortunately, there is currently no way to remove a place from the map (e.g. a grocery store that is no longer open).

This sight is a lot of fun. I definitely recomend playing around at Walk Score.

[Tip of the hat to Hyde Park Urbanist]

Cuba Grants Limited Property Rights to Farmers

Cuba reforms turn to state land

Cuba is to put more state-controlled farm land into private hands, in a move to increase the island’s lagging food production.

Private farmers who do well will be able to increase their holdings by up to 99 acres (40 hectares) for a 10-year period that can be renewed.

Until now, private farmers have only been able to run small areas of land.

The BBC’s Michael Voss, in Havana, says this is one of President Raul Castro’s most significant reforms to date.

Since the 1959 revolution, some Cubans have been allowed to run small family farms. But most agriculture has been placed in the hands of large, state-owned enterprises.

Our correspondent says these have proved highly inefficient – half the land is unused and today Cuba imports more than half its needs. Rising world food prices will cost the country an extra $1bn this year.

The presidential decree was published in the country’s Communist Party newspaper, Granma.

In it, co-operatives are also allowed to add an unspecified amount of additional land for 25 years, with the possibility of renewing the lease.

Grants cannot be transferred or sold to third parties.

Reason.org’s Staley Not in Favor of Property Rights if…

That is, he argues that private property should be subject to government planning restrictions if a developer building densely on its property creates a traffic burden on government roads.

Wooten points out that any solution to Atlanta’s traffic congestion has to focus on roads, not transit or land use. In a more interesting twist, he takes local policy makers to task for approving higher density zoning without making the commitment to improving the road network to support it.

Hmmm… Interesting point of view from a so called free-market organization that claims to support individual property rights over government planning. I think I’ll remove them from the blogroll. click, click, done

Add Staley to the list of Free-Market Impostors.