Our paper comparing state and local revenues from gas taxes, tolls, and other user-related revenue against road construction and maintenance spending has generated some strong interest since it was released yesterday! Some wrote in asking for more detail about proposed vehicle miles traveled (VMT) taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. systems. Others asked for greater detail on expanding toll roads. These are great suggestions for future research topics. Others asked for what the picture would look like if you expanded the table to include the federal gas taxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline. : we did that here, and while the percentages go up, the overall conclusion does not change.
We received a detailed critique from Randal O’Toole, a transportation expert who has a reputation for opposing transit systems and city planning policies. We actually spoke together at an event a few weeks ago, and he was gracious enough to sign a copy of his new book that I purchased. O’Toole has long argued that revenue dedicated to roads exceeds the spending, using that as the basis for his argument that government highway programs are good policy but government mass transit programs are bad policy. I’ll respond in depth to each of his points below, but first two general criticisms of his approach.
First, O’Toole conflates taxes and fees. Taxes are revenues collected for general government purposes, while fees are paid by a beneficiary to compensate government for a particularized service to that beneficiary. Gasoline taxes are not fees, as the revenue is used for roads generally, not the specific use of a particular road by a particular person. Now, gasoline taxes are a pretty good proxy for use, which is why we included them in our study with fees (things like tolls paid, reimbursements by beneficiaries to the government for street repairs or construction, and maintenance assessments for snow plowing and street lighting, etc.). But O’Toole calls a lot of things fees that are, in fact, taxes. His readers therefore might conclude a stronger fee-benefiting-specific-user connection than actually exists.
Second, O’Toole’s technique is to include anything potentially road-related on the revenue side, but leave out a lot of stuff on the spending side. Our study compares apples to apples: user feeA user fee is a charge imposed by the government for the primary purpose of covering the cost of providing a service, directly raising funds from the people who benefit from the particular public good or service being provided. A user fee is not a tax, though some taxes may be labeled as user fees or closely resemble them. s and gasoline taxes on the revenue side, and related construction and maintenance expenses on the spending side. O’Toole, for example, includes motor vehicle licensing tax revenue ($22.5 billion in 2010, according to the U.S. Census Bureau), but he does not add the associated costs to the spending side ($33.1 billion of administration and law enforcement and safety costs in 2010, according to the Federal Highway Administration). We didn’t include any of it because those expenses are for general benefit, not for the benefit of the particular person paying the charge. But if you did include them, and accounted for the increased expenses, it would actually reduce the percentage of road spending funded by taxes.
Now, to address O’Toole’s specific critiques:
- O’Toole suggests we include federal gasoline tax collections in state-local revenue. That is not appropriate for a state-local revenue and expenses table, as the federal gasoline tax is federal. Additionally, federal aid is not a “user charge”: it’s dispensed to the states at the mercy of the federal government, unconnected to user activity (aside from the federal formula, which can change). However, there was great interest in a federal-state-local table, so we posted that yesterday. The percentages move up for each state, and some states jump around a bit (since the table would now include the federal road funding formula, in addition to user payments in each state), but still no state covers its costs. However, our original state-local table remains the most telling since it compares state-local user revenue sources with state-local expenses.
- O’Toole suggests that we include motor vehicle registration taxes and fees, but not the associated expenses. As I explain above, these were excluded as they are too attenuated to the maintenance and construction of the roads (they compensate government for DMV operations, and pay for highway patrol, highway safety, etc.). However, if you were to include $22.5 billion in such taxes and fees, you would also need to include an additional $33.1 billion in associated administrative and highway law enforcement and safety expenses. O’Toole did not mention but perhaps might also want to include sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. es on cars and gasoline, property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es on motor vehicles, income taxes paid by trucking companies, severance taxes on oil, etc., as these are at some level road-related. But our standard is not just road-related, it’s use-related.
- O’Toole suggests that we include state and local bond sales for road construction, which would double-count revenue. In 2010, state and local governments issued $33.7 billion in new bonds for highway purposes, which we excluded from user-related revenue. O’Toole argues that since “the vast majority of these bonds will be repaid out” user-related revenue, they should be included. There are two reasons why this would be problematic. First, sorting out the revenue backing for each bond issued in 2010 is no easy task, and since repayment hasn’t occurred yet, it’s jumping the gun to assume what we know about the revenue backing now will be true in twenty or thirty years. Second, O’Toole’s method double-counts revenue, since it counts both bond proceeds and revenue used to repay past bonds. He should count only one or the other, as we did. Alternatively, he can count both, but should exclude debt redemption payments even though they are user-related revenue (this totaled $16.4 billion). Since we set out to compare user-related revenue with expenses, we did not want to take an approach that would require subtracting out user-related revenue while adding in bond sales that are not necessarily connected to user revenue.
- O’Toole suggests that we include $13 billion in “investment income” on state-local gasoline tax and user fee revenue, but that is not a net interest figure. When people pay taxes and fees to governments, the money is not always spent right away. Sometimes it sits in an account accruing interest until it is spent. We did not include interest for four reasons. First, it is general government revenue from all receipts, not specific to user-related road revenue. Second, the federal government is running a considerable budget deficit, so we would have to subtract significant interest expense associated with large borrowing the federal government is doing to finance its transportation expenses (some $30 billion in revenue against some $70 billion in expense, for a $40 billion deficit). Third, the U.S. Census Bureau reports only all state-local interest earnings, which in 2010 was $60.7 billion ($34.5 billion by states and $26.2 billion by local governments). Exactly which interest is attributable to gasoline tax collections is a post-hoc calculation rather than actual revenues, but it’s hard to imagine gasoline taxes, tolls, and fees making up 21 percent of state interest earnings when they comprise only 1.5 percent of state-local revenue collections. (Applying that 1.5 percent figure means road-related interest earnings were only $0.9 billion, not $13 billion.) Fourth, if one includes road-related interest earnings on the revenue side, one should also include road-related interest payments on the expense side, which at the state-local level alone totaled $9.7 billion in 2010. If O’Toole were to add his $0.9 billion in revenue, he should also subtract $9.7 billion in interest expense. (This makes sense intuitively: government road programs are not investment vehicles, but expenses.)
- O’Toole suggests that we use Federal Highway Administration data rather than U.S. Census Bureau data. We have no evidence that the U.S. Census Bureau is unreliable in this area, and in fact, we have strong experience that the U.S. Census Bureau is the best source for state and local tax collection and expense data. In any event, the difference is minimal. For 2010, the U.S. Census Bureau says that state and local governments collected $37.879 billion in motor fuel taxes; the FHWA says it was $37.939 billion.
We thank Mr. O’Toole for his comments and suggestions. But including his numbers would evaluate road finances rather than the share of expenses borne by users. Additionally, after including associated expenses or avoiding double-counting, the overall picture is unchanged: user-related road revenue does not come close to covering road construction and maintenance.Share