Fines? Fees? Taxes? Do Virginians See a Difference?

July 24, 2007

A heated discussion has taken place over the past month in the Commonwealth of Virginia. On July 1, a controversial new schedule of civil fees for traffic violations took effect. Governor Tim Kaine (D) had campaigned for them, and Speaker William Howell (R) had helped the governor gain Republican support.

Now a backlash from the public is causing some heartburn on both sides of the aisle, although neither the governor nor the speaker has backtracked yet.

The goal was to raise more money for transportation spending. Democrats supported any mechanism to make that happen, either general tax increases or the so-called abusive driver fees. Their leader Governor Kaine had championed the fees, especially when Republican opposition to general tax increases was strong. Many Republicans also supported transportation spending and any legislation that could make it happen, short of a general tax increase (like the gas tax). Some honestly believed that the fees would be less damaging to the state’s economy than a general tax increase. Some probably calculated that they could vote for the fees and still claim not to have “raised taxes.” There was plenty of cynical calculation on both sides of the aisle, as usual.

A traffic fine is really no different from a tax on a specific product. If society concludes a particular product or activity imposes costs on society (what economists call a negative externality), then a financial penalty is called for, one that should approximately equal the economic damage imposed by the product or activity.

If a tax is too low, then society bears too much of the burden and the individual person not enough. It should be raised regardless of the spending needs of government. In fact, the optimal fine amount really has nothing to do with the revenue it raises. Imagine for a moment a hypothetical world in which government needs no money to exist. There would still be the need for a fine or deterrent effect. We have merely chosen to make the deterrent a choice between a monetary punishment or a very long jail sentence. (If you don’t pay your fine, you eventually go to jail.)

If a fine (tax) is too high, individual violators are paying far more than it costs society to put up with their traffic violations. That is clearly the case with the new schedule of fees, although it’s difficult for politicians to say it because Mothers Against Drunk Driving is one of the major forces behind the legilation, and no politician is going to say anything to them that suggests a $3,000 fee is “too high” for a drunk driver.

But what amount is “too high”? Ask yourself: should there be a $20,000 fine for reckless driving? If you say that’s ridiculous, then you understand that there is such a thing as “too high,” and that there is a socially optimal amount for the fine (tax). We could finance government transportation spending by imposing a $500 tax on jaywalkers, but most would call that outrageous. And they’d be right. In a free society, the answer is that general spending must be financed with general taxes, and if they are already too high, then the answer must be less general spending, not targeted tax hikes on unpopular people.

Finally, with regards to the idea that these fee hikes do not violate the “No New Tax Pledges” promoted by Grover Norquist’s group Americans for Tax Reform, the true tax burden on a people in the long run is merely equivalent to the level of government spending. In other words, a no-new-taxes pledge should really be a “no new spending pledge.” Otherwise, politicians merely seek sources that they call “non-tax,” which may be worse than raising an explicit tax like sales, property, or income. Look no further than Virginia.


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