Just about every Washington-based transportation group has rushed to denounce a small provision of the new cap-and-trade bill proposed by Senators John Kerry (D, MA) and Joe Lieberman (I, CT). The American Power Act would auction off carbon emission permits to three major industries-oil companies, electricity producers, and industrial facilities. The idea is to raise the cost of emitting greenhouse gases (GHGs), thereby creating incentives to reduce the use of carbon-based energy.
A provision of the bill dealing specifically with the transportation sector led 27 transportation organizations (everyone from American Association of State Highway and Transportation Officials and the American Road and Transportation Builders Association to the New Starts Working Group and the League of American Bicyclists) to issue a joint letter of protest. A small portion of the auction revenues would be allocated to transportation-up to $6.25 billion per year, split up one-third for an expanded Transportation Investment Generating Economic Recovery (TIGER) grant program, one-third for discretionary grants to metropolitan planning organizations (MPOs) for smart-growth transportation/land-use planning efforts, and one-third to the Highway Trust Fund (to be used to improve the “safety, effectiveness, and efficiency” of transportation).
ARTBA denounced the legislation as a “diversion of transportation revenues,” apparently on grounds that the likely increased cost of motor fuel due to the carbon permits bought by oil companies would be far more than either the $6.25 billion allocated to transportation or especially the one-third of that put into the Highway Trust Fund.
The letter, signed by all 27 groups, claimed that the American Power Act “significantly undermines the user fee principle for financing federal transportation improvements that has served our nation and our economy well for more than 50 years.” And it said that the American Power Act (APA) “diverts user fees from motor fuels while our roads, bridges, and transit systems are neglected.”
A column in Better Roads claimed that the measure would “raise money from new fuel taxes without a guarantee that the money would be used exclusively for transport projects.”
Now I happen to be as strong a proponent of the users-pay/users-benefit principle as you will find, but this characterization of the Kerry-Lieberman bill is sophistry. There is no new “fuel tax” involved in this bill. This is a regulatory measure, applied across most of the economy, to increase the cost of carbon-based energy. It has nothing to do with highway user taxes, which up until this debate my friends at AASHTO, ARTBA, and ATA routinely referred to as highway user fees, which are properly deposited into the Highway Trust Fund and used (mostly) for highway purposes.
And this gets us to the heart of the question: the difference between taxes and fees.
In the proposed APA, the required carbon permits are equivalent to a carbon tax, which is a regulatory measure aimed at reducing the extent of something society has decided is a bad thing. By raising the price of carbon, it is intended to lead users of carbon-based energy to economize on its use. As such, it is an alternative to sector-specific regulations and controls, in which government agencies (aided, of course, by lobbyists) attempt to micromanage outcomes and pick winners and losers. Economists are in widespread agreement that such economy-wide measures are far less economically harmful than sector-specific regulations (which took up nearly 1,500 pages in last year’s Waxman-Markey cap and trade measure, now fortunately abandoned).
Yet any such carbon tax, by raising the price of electricity, manufactured products, and transportation, could significantly increase the cost of living for American households. That’s why economists are also in widespread agreement that the best thing to do with the potentially very large annual proceeds from a carbon tax is to return them to households. Because different products and services will be affected to a greater or lesser extent by the carbon tax, consumers will still make choices among goods and services in response to the new, higher prices of some of them. But the negative effect on overall consumer welfare will be minimized.
Apparently the Kerry-Lieberman bill does call for rebating most of the revenues to households, apart from the well-intentioned but misguided transportation portion. Had they left this section out, there would be no excuse for transportation groups to be misleadingly portraying an environmental tax as involving “transportation revenues.”
In the context of a Highway Trust Fund that spends $35-40 billion per year, a couple of billion dollars a year is a relatively small sum to be expending all this energy on. The real concern, according to some observers, is that this additional dollop for the Highway Trust Fund might further dampen any interest in Congress in tackling a serious, six-year reauthorization of the surface transportation program. But this is too small an amount to have that kind of impact.
Far more important for the longer term is for highway advocates to think more clearly about the difference between taxes and user fees. That distinction is crucially important as we look beyond the current reauthorization and contemplate the needed shift from fuel taxes to mileage charges as the principal source of highway funding. Already, that debate seems to involve two very different notions of what a mileage charge might be. One concept sees tolls as the basic model, in which the charge would be based on things like miles driven, time of day (if urban), type of road, and type of vehicle (e.g., heavy truck vs. car). In this version, the mileage charge would be a true user fee, paid to the road provider and used for the capital and operating costs of the road system.
The other concept aims to implement a mileage tax, which would factor in social policies such as fuel efficiency, number of occupants, motive power, etc. in addition to the toll-like factors. Those promoting the mileage tax version want the proceeds to be used for all modes of surface transportation, rather than just highways.
If we move toward the true (toll-like) user charge for highways, there could still be externality taxes, levied by government to discourage “bad” things such as greenhouse gas emissions. But that would be like a city putting a tax on electric utility bills. The basic electric bill is a user charge, paid to the electric company and used by them for the capital and operating costs of the electricity system. The tax is a tax, levied by the city for its own purposes, whether wise or foolish.
The long-term health of America’s highway system depends on getting clear on the distinction between taxes and user charges. If we replace the current fuel tax-which is now only a partial user fee-with a vehicle miles traveled (VMT) tax, then highway users (and only highway users) will end up footing the bill for anything and everything remotely related to surface transportation. But if we develop true VMT charges, analogous to electric utility bills, we will lay the basis for a robust, user-friendly highway system for the 21st century.
Robert Poole is director of transportation studies and Searle Freedom Trust Transportation Fellow at Reason Foundation. This column first appeared in Public Works Financing.