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.
Conclusion
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
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Oh, yes, it’s genius! With this system, I’ll get to stop every five miles and pay a toll, just like ye olden dayse in the middle ages! Gosh, I can’t imagine how that plan is flawed! It’s almost like there’s a reason that highways are a socialized service…
Oh, yes, it’s genius! With this system, I’ll get to stop every five miles and pay a toll, just like ye olden dayse in the middle ages! Gosh, I can’t imagine how that plan is flawed! It’s almost like there’s a reason that highways are a socialized service…
Chaos Motor,
I’m glad you brought that up. Yes, as you correctly alluded, the reasoning behind socialized highways (aside from lobbying by the road builders, unions and auto industry) was the high transaction cost involved with collecting a toll. Nonetheless, private turnpikes existed somewhat successfully back in the days.
However, transaction costs are no longer holding up toll collection because of technological innovation. I’m sure you’ve used these EZ-Pass lanes where you can travel full speed through tolls. We have the technology for private operators to implement this throughout the highway system without EVER having to stop drivers to pay a toll. You’ll just get a monthly bill from the road company…
Local roads will take a little more technology than currently available, but if there were profit to be made, innovators would certainly step up to the plate with a solution.
Part of the point of this article is to show that highway socialism isn’t working that well if it drains productive capital from nonusers (via taxes) to make it work. And technology is finally offering superior solutions to socialism when transaction costs had previously stood in the way.
Chaos Motor,
I’m glad you brought that up. Yes, as you correctly alluded, the reasoning behind socialized highways (aside from lobbying by the road builders, unions and auto industry) was the high transaction cost involved with collecting a toll. Nonetheless, private turnpikes existed somewhat successfully back in the days.
However, transaction costs are no longer holding up toll collection because of technological innovation. I’m sure you’ve used these EZ-Pass lanes where you can travel full speed through tolls. We have the technology for private operators to implement this throughout the highway system without EVER having to stop drivers to pay a toll. You’ll just get a monthly bill from the road company…
Local roads will take a little more technology than currently available, but if there were profit to be made, innovators would certainly step up to the plate with a solution.
Part of the point of this article is to show that highway socialism isn’t working that well if it drains productive capital from nonusers (via taxes) to make it work. And technology is finally offering superior solutions to socialism when transaction costs had previously stood in the way.
Perhaps it’s a worthy investment on by the government to invest in roads to open up new areas for living, commerce, industry. It serves a public good to invest in roads at a loss to generate new opportunities for people. Roads are subsidized to make life easier. Anyway, who today, in some form isn’t using a highway? You can go your entire life denying they exist, but that doesn’t mean that people won’t use them to transport things to you.
The technological solution you propose makes life more complex than necessary. If your payment system breaks down, are you barred from driving to your house?
If anything governments should be investing in more train tracks to make transport even cheaper.
Perhaps it’s a worthy investment on by the government to invest in roads to open up new areas for living, commerce, industry. It serves a public good to invest in roads at a loss to generate new opportunities for people. Roads are subsidized to make life easier. Anyway, who today, in some form isn’t using a highway? You can go your entire life denying they exist, but that doesn’t mean that people won’t use them to transport things to you.
The technological solution you propose makes life more complex than necessary. If your payment system breaks down, are you barred from driving to your house?
If anything governments should be investing in more train tracks to make transport even cheaper.
The technological solution you propose makes life more complex than necessary.
The system might be “complex” in that it involves a lot of different interactions, but given that capitalism doesn’t require anyone to know anything more than where they got their inputs and whom they’re selling their outputs too, it’s not too much for any one person to handle. Even though building things (like, say, cars) is an incredibly complex processes, the result in the end is always pretty bearable.
If your payment system breaks down, are you barred from driving to your house?
If your capitalist credit card payment breaks down, are you barred from buying things? If your capitalist mobile phone service goes down, are you barred from making calls? Yes. But just go to somewhere where banking and telecommunications are run by the state, and you’ll see that it’s far less efficient, and shit breaks down a lot more often.
If anything governments should be investing in more train tracks to make transport even cheaper.
But they’re not. Even though they’re more efficient, the government doesn’t invest in them. Because governments cannot know the optimal allocation of goods, end of story. The most efficient systems (think: New York’s subway system, San Francisco’s street cars, or 19th century railroads across the US) were all built by private enterprise, even if today you think of them as government entities.
The technological solution you propose makes life more complex than necessary.
The system might be “complex” in that it involves a lot of different interactions, but given that capitalism doesn’t require anyone to know anything more than where they got their inputs and whom they’re selling their outputs too, it’s not too much for any one person to handle. Even though building things (like, say, cars) is an incredibly complex processes, the result in the end is always pretty bearable.
If your payment system breaks down, are you barred from driving to your house?
If your capitalist credit card payment breaks down, are you barred from buying things? If your capitalist mobile phone service goes down, are you barred from making calls? Yes. But just go to somewhere where banking and telecommunications are run by the state, and you’ll see that it’s far less efficient, and shit breaks down a lot more often.
If anything governments should be investing in more train tracks to make transport even cheaper.
But they’re not. Even though they’re more efficient, the government doesn’t invest in them. Because governments cannot know the optimal allocation of goods, end of story. The most efficient systems (think: New York’s subway system, San Francisco’s street cars, or 19th century railroads across the US) were all built by private enterprise, even if today you think of them as government entities.
Great response rationalitate.
I’d also like to point out that, private highways may make payment slightly more complex. However, what if I told you optimal-flow tolling (that maximizes profit by charging more for busier times) will almost completely eliminate congestion? The only time you will ever have congestion is if there is an accident. Since the private operator looses revenue for every second the highway is not at peak flow, it has greater incentive to keep the road safer, clean accidents quickly, and keep construction disturbances to a minimal.
Congestion will be so rare, you may forget what the word means. Wouldn’t that make your life less complex overall?
Great response rationalitate.
I’d also like to point out that, private highways may make payment slightly more complex. However, what if I told you optimal-flow tolling (that maximizes profit by charging more for busier times) will almost completely eliminate congestion? The only time you will ever have congestion is if there is an accident. Since the private operator looses revenue for every second the highway is not at peak flow, it has greater incentive to keep the road safer, clean accidents quickly, and keep construction disturbances to a minimal.
Congestion will be so rare, you may forget what the word means. Wouldn’t that make your life less complex overall?
I'm all for more market oriented transportation, but is there any evidence or calculations that show roads to be the least subsidized form of transportation? This doesn't mean we shouldn't use more market mechanisms, merely that we shouldn't be surprised if the results in a more market based world were at least as car-centric as those in the current one.
With respect to a couple of specific points:
First, you raise some interesting negative externalities of highways that are not included in cost discussions, but there are also positive externalities (e.g. more commerce). Is there any strong reason to believe either of these effects dominates?
Second, your use of opportunity costs with respect to tax revenue is one that as best is not unique to transportation, but rather is an argument that the economic cost of taxes always exceeds the nominal amount of such taxes– even apart from any efficiency losses with respect to the activity/item being taxed. It is probably correct, but it is hard to measure the effect of this loss because the subsidzied project might generate value in excess of the nominal cost. This is unlikely to be true overall given all of the ways in which government resource allocation is inferior to private resource allocation, but I think your post overstates the negative effect rhetorically by not mentioning the value that projects might have in excess of their costs.
Given that this seems like a hard area in which to make calculations, I guess I am nore inclined than you to cut Randal O'Toole some slack.
DWAnderson:
Well, I think that's a pretty easy question to answer without vast compilations of data. Overall, the total dollars that have gone to subsidize roads is certainly many times greater than the total for other forms of transportation, while on a percentage of total dollars spent, other forms probably far exceed the percent of road subsidy per total spending.
I wouldn't be surprised either. But, I also wouldn't be surprised if the transaction costs associated with private roads in a free society encouraged innovations that would have made the car obsolete. But, all other variables held constant, I think it's safe to bet that development patterns would be more compact and diverse without the heavy subsidies to transportation since the progressive era.
Please don't mistake me for someone who is advocating one form of transportation over another. This is where I think O'Toole and I diverge. He says, “let's not criticize roads because transit it more subsidized.” I say, “I don't care what type of transportation it is, it's all heavily subsidized.” So, my overall objective isn't to advocate one form of transportation over another, but to show that present land use patterns are a reflection of the vast subsidies to transportation, in general.
I tried to be careful not to push the externalities angle to hard, but if I wrote it over I think I would downplay the externalities even further since the case can be pretty clearly made with explicit and implicit costs. It's too hard to quantify externalities and I find the concept of “costs to society” highly subjective. So, you could be right – you could be wrong.
My main point here (perhaps the wording could be improved) is that a private road owner/operator would face the additional burden of taxes on revenue, land, and financing. Whereas the public sector can ignore this. So, to claim something “pays for itself” that benefits from reliefs that private businesses cannot take advantage of, significantly distorts the truth. Either we should examine all private businesses on a pre-tax basis, or we should apply a comparative burden when analyzing public endeavors to see if they “pay for themselves.”
Slack for what? OK, let's completely ignore externalities. I think that it's quite clear that roads don't even pay for themselves when only looking at explicit costs. Throw in implicit costs, which is necessary and proper when asking “does x pay for itself?”, and roads don't even come close to paying for themselves except maybe a few cases. If they paid for themselves, we would have a vastly competitive private road market – and we don't.
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Good article, very thorough points