Policy Study

Using Revenues From Congestion Pricing

A Southern California Case Study

Executive Summary

Congestion pricing has many goals and benefits, but one thing is clear: its success depends on wise use of the revenues. The economic theory behind the concept relies on these revenues to help compensate for the payments required of highway users. Practical and ethical considerations similarly dictate that those who would otherwise be harmed by the fees receive tangible benefits from the revenues.

This paper investigates the possibilities for designing a package of congestion prices and revenue uses that can attract wide support. The suggested approach returns twothirds of the revenues to travelers through travel allowances and tax reductions, and uses the rest to improve transportation throughout the area, including affected business centers. By replacing regressive sales and fuel taxes, this approach offsets the tendency of the prices alone to have a regressive distributional impact. By lowering taxes, funding new highways, improving transit, and upgrading streets and pedestrian facilities in business centers, the package provides inducements for support from several key interest groups.

The specific proposal is quantified for a scenario, previously developed by the Environmental Defense Fund and the Regional Institute of Southern California, in which congestion pricing is applied throughout the Los Angeles region. With peakperiod prices averaging 15 cents per vehicle-mile in congested regions, revenues in the Los Angeles scenario would be about $3 billion annually after collection costs. The suggested allocation includes $700 million, funneled through employers, to provide a travel allowance of $10 per month for every employee in the region, regardless of mode of travel to work. It also funds a reduction of 5 cents per gallon in the fuel tax, replaces half the dedicated sales-tax surcharge now in place in four counties in the region, and rebates $460 million in local property-tax revenues now going to subsidize highways. Nearly $1 billion annually is left over to fund transportation improvements.

Illustrative calculations of the effects on various individuals suggest that the combination of travel-time savings, travel allowance, and tax reductions are sufficient to compensate most commuters. The net benefits are especially large to high-income auto drivers, carpoolers, and users of public transit regardless of income. When the value of newly funded transportation facilities and services is added in, even lowincome “captive” drivers are likely to be better off.