RALEIGH – For years now, there’s been a good case for changing the way we pay for transportation infrastructure. But the recent jumps in gas prices, and corresponding changes in consumer behavior, show that it’s now become a great case. We desperately need to replace the gas tax, an indirect charge for using the transportation system, with more direct fees or charges.
A front-page report in Monday’s Wall Street Journal updated a trend that many have been observing for months. Motorists have responded to higher pump prices by driving less. And as the automobile fleet continues its normal turnover, many buyers are placing increasing emphasis on fuel economy, which often means purchasing smaller vehicles with lower sticker prices. These two factors are slowing the growth in gas and vehicle-tax revenues into states and the federal government, thus reducing the money available to build and maintain roads as well as subsidize transit service.
Before proceeding, it’s worth revisiting a couple of key public-finance concepts.
First, one of the three rules of sound tax policy is the benefit principle. To the extent practicable, taxpayers ought to pay into government in rough proportion to the benefits they derive from existence of that government. The benefit principle is the proper definition of “tax fairness,” an often-misused term.
Applying the benefit principle, however, requires that you consider government services in particular, not just in general. Water and sewer service, for example, is a form of government-franchised enterprise. It’s not too difficult to conceive of what the benefit principle tells us to do here: charge according to use. Law enforcement and public education, on the other hand, are entitlements. Under the state constitution, North Carolinians are entitled to both by right, so it would be improper to charge according to use. For entitlements, as I have previously argued, the best way to apply the benefit principle is to apportion the cost to all taxpayers according to their “stake” in the society.
In general, the benefit principle argues against a regressive tax system, which takes a higher share of income from lower-income households than from middle- or upper-income households. It also argues against a progressive tax system, which takes a higher share of income from upper-income households than from the lower- or middle-income groups. The benefit principle fixes proportionality as the proper goal.
In the area of transportation, the government’s role is closer to enterprise than to entitlement. No one has a natural or civil right to traverse highways, or to receive goods that have been transported by highway. As much as possible, one ought to pay according to how much one derives benefits from the existence of the highway, either as a direct rider or a purchaser of goods and services from businesses that pay for their highway use and then pass along at least some of that cost in the price of their merchandise.
Payment systems based on tolls and paid permits have existed as long as roads have, but there were historically strong incentives for users to cheat the system. Once personal surface transportation became truly practical, through the widespread adoption of the internal-combustion engine, governments ended up building and owning most of the road network, charging a rough approximation of a user fee, in the form of taxes per gallon of fuel and on the sale of vehicles. The result was a transportation system that remained mostly private and market-driven, contrary to popular belief.
Increases in fuel economy have rendered this user-fee approximation increasingly rough. Motorists are paying less per mile to use the roadways than they used to. Now, with the prospect of plug-in hybrids and other alternatives displacing part of the gasoline and diesel fleet in the future, the system appears unsustainable. We need to move away from gas taxes towards direct charges for use – tolls, for limited-access highways, and odometer-based charges for other driving – so that the benefit principle is maintained and governments can derive sufficient revenue for highway infrastructure without distorting market choices.
Any transit subsidies we want to extend, by the way, ought to be funded via general revenues, not transportation charges. It’s a public-assistance function. But that’s a topic for another day.
Hood is president of the John Locke Foundation.