Paying for the Transportation System We Need

I am taking part in a discussion at National Journal’s Transportation blog about ‘how we’ll pay for the transportation system we need.’

I agree with several others who have suggested that the basic principle should be “user-pays.” But there are quite a few different ways to interpret that principle. I recommend that we distinguish between two different things that users of the transportation system should pay for: the infrastructure they use and the externality effects they impose on unwilling others.

For the former we should have user charges, analogous to the payments we make to other network utility providers—electricity, gas, water, cable, etc. These charges should cover the costs of building, operating, maintaining, and ultimately replacing the infrastructure used. They make it possible for the infrastructure provider to remain solvent as a “going concern,” providing reliable services to its customers. And this should be the case whether the provider is an investor-owned company operating under some kind of long-term franchise or concession, or a public-sector toll authority. Both are businesses, and should operate as businesses.

For externalities, government should play the key role, via taxes on the “bads” produced in the course of people using the infrastructure. In the case of highways and rail systems, those bads include noise, conventional tailpipe emissions, and greenhouse gases (GHGs). For noise, the most efficient solution is probably for the infrastructure provider to be held accountable for mitigating noise externalities (as done today via sound walls, which could be more effective than typical US practice—see Japan for a much better model). Federal regulation has worked pretty well for conventional tailpipe emissions, which continue to decline in importance as the auto and truck fleets turn over. For GHGs, the most economically neutral approach is a carbon tax, which should apply across the board to all forms of energy use.

Making this kind of separation between charges for using infrastructure (utility bills) and taxes (or regulation) to mitigate externalities is far wiser than trying to mix the two into some kind of all-purpose tax on driving, intended (by some) to force dramatic shifts in mode share. It would be foolish, as some are now proposing, to start making transportation funding depend on proceeds from a carbon tax or cap-and-trade system. The purpose of those taxes is to reduce the thing being taxed, ideally eventually to zero. That’s hardly a sustainable basis on which to build 21st-century funding for transportation.

A true charge per vehicle mile traveled (VMT) should vary between cars and heavy trucks, since the latter take up a lot more space per vehicle and do vastly more pavement damage than cars. It should also vary by time and place, as a powerful tool used by the infrastructure provider to ensure high-quality service (just as 21st-century electricity providers will do via differential pricing enabled by smart meters). But a true VMT charge should not vary by engine size or SUV vs. mini-car. Those factors have nothing to do with the infrastructure and everything to do with externalities, the proper domain of taxes and/or regulation.

In a VMT-charge world of the kind I’m suggesting, my guess is that there would be a lot of urban congestion pricing, which would mean a lot of urban driving would be more costly to drivers, at the point of use, than it is today. That would certainly motivate shifts to other modes, shifts of some trips out of peaks, etc. That would make transit relatively more competitive with driving (especially express buses on premium-priced lanes), but it may not, by itself, be enough to make transit self-supporting.

But here’s what might do that. Convert whatever public subsidy is provided to transit operators (today frequently a monopoly provider) into transit vouchers, available to households below a certain income level. Deregulate the provision of transit, so that transit users have more choices, and so that the former transit monopoly must compete for business. Allow transit providers to charge fares based on their costs, to everyone except those using vouchers. This set of changes, I predict, would stimulate considerable innovation in urban transit. I have no idea if it would eventually eliminate the need for taxpayer subsidy; if not, urban-area transit sales taxes would still be needed to close the gap (including paying for the transit vouchers). But I see no reason why the customers of road utilities should be the ones paying for transit subsidies. A measure to help lower-income people travel should be paid for by all the taxpayers in a given metro area. And except for the poor, transit’s users should be the ones paying for transit.