RALEIGH – I hope that the debate about North Carolina’s transportation woes will draw lots of attention during the 2008 campaign season. But I fear that the debate will feature lots of familiar misunderstandings about government’s role in transportation.
Transportation in the U.S. is overwhelmingly provided and paid for by customers within private markets. And even in most cases where governments own and operate transportation infrastructure, customers pay the bills in rough proportion to their use. Indeed, understood correctly, transportation is not a public good, with one key exception to be discussed below.
Remember, in political economy the term “public good” has a specific meaning. It doesn’t simply refer to any program or expenditure that might be good for the public. It refers to a good with two characteristics: 1) it is impossible or prohibitively costly to exclude non-payers from consuming it, and 2) the fact that one person consumes it does not reduce the amount available for another to consume. If these conditions aren’t met, then the good will be provided most efficiently through voluntary market exchanges.
How can I say that transportation is overwhelmingly a private-sector enterprise? Because I don’t leave out what many policy analysts mistakenly do – the massive private expenditures dedicated to owning, operating, maintaining, insuring, and fueling the private cars, trucks, ships, and planes that carry the vast majority of passengers and freight.
Let’s do a comparison using federal data for 2005. The nation’s gross domestic product was $12.5 trillion. Transportation accounted for $1.3 trillion of that, or 10.6 percent. Within the transportation category, household spending on vehicles, fuel, and transportation services was a little over $1 trillion, or 80 percent. Government expenditures for highways, airports, transit, and the like was $241 billion, or 18 percent. (The remainder was the difference between total business investment in vehicles and facilities and the net import of transportation goods.)
Now, when you delve into the $241 billion in government transportation expenditures, you will find that most of them are really more like fee-for-service business transactions than government expenditures on, say, law enforcement or public schools. They break out this way: about 60 percent for roads and streets, 18 percent for transit, 15 percent for air travel, 6 percent for water-borne travel, and 1 percent for piped freight and administration. Only in the case of transit is there a large degree of subsidy from general tax revenues. Most airports and seaports may be under government ownership, but they pay virtually all their bills from fees and taxes charged directly to passenger and freight customers according to use.
The same is true for private use of roads and streets, though here I must stop and explain that unlike ports, rail lines, and toll roads, unlimited-access roads do meet one of the tests of a public-good: at least until recently, it has been problematic to charge customers directly per use. The advent of the automobile, fueled by gasoline or diesel, allowed a practical if imperfect solution to the problem. Taxes on motor fuels, supplemented by state and local taxes on vehicles themselves, allowed governments to finance roads with a rough approximation of a user fee. The more households or businesses made use of the road system, the more they paid.
Unfortunately, at least two factors have worked to unravel effective customer financing of roads. First, governments at all levels found it expedient to swipe some of these user fees and spend them on non-highway functions. Second, increases in fuel efficiency eroded the connection between miles traveled and revenue generated. Without constant increases in the tax charged per gallon of fuel, the system increasingly could not maintain a constant expenditure per mile even in nominal dollars, much less keep up with inflation. And constant increases in gas taxes are, understandably, unpopular – particularly given the first problem, the misuse of those taxes.
Look again at some 2005 data. Of $115 billion collected from highway users in fuel taxes, car taxes, and tolls, 21 percent got diverted to non-highway expenditures. If the entire amount had been dedicated to the construction and operation of highways, it would have paid for everything except some administrative and law-enforcement costs.
There are some general-revenue expenditures for roads and city streets, financed mostly by property and sales taxes. They ought to be minimized for efficiency reasons. But don’t be fooled into thinking that this means both highway users and non-highway users are subsidized. By definition, these two groups add up to 100 percent of the population. There is no magic fairyland whence come government subsidies. The net transfer is clearly from highway users to non-highway users (and actually some general-revenue support for city street grids is reasonable, since they are used not just by motor vehicles but also by pedestrians).
So, now you are better prepared to interpret the comments you’ll hear from participants in the coming political debate about North Carolina transportation. It is mostly a market-driven sector of our economy. Let’s make it more so.
Tomorrow: Why North Carolinians get a particularly raw deal for their transportation dollars.
Hood is president of the John Locke Foundation.