by James A. Bacon
A common challenge for every state is finding the funds to expand the transportation system to serve a growing population and economy. Virginia endured a grueling debate last year over former Governor Bob McDonnell’s proposal to shift much of the burden to the state sales tax. Other states have made a similar choice.
The problem with taxing retail sales to pay for transportation is that it demolishes the user-pays principle, with the consequence that there is no longer an objective criteria for allocating funds. Predictably, the pot of transportation dollars is now up for grabs, as evidenced by a slew of bills in the General Assembly that would have the effect, directly or indirectly, of limiting the flow of dollars to mass transit. Greater Greater Washington, which has a round-up of the bills here, framed the issue this way: “Was last year’s transportation bill a bait and switch?”
Anti-transit proponents can rightfully claim that mass transit is uneconomical and totally dependent upon subsidies. Of course, transit advocates can advance the identical argument about roads. Virginia’s system is so riddled with subsidies and cross-subsidies that virtually nothing pays its own way and every funding decision becomes a political slugfest because no mechanism exists (a) to prevent transfers of wealth from one constituency to another or (b) to ensure that transportation dollars are funneled to projects that offer the greatest economic payoff.
That’s why Smart Growth America’s new publication, “The Innovative DOT: a handbook of policy and practice,” is so welcome. In the first of eight focus areas, the handbook explores new mechanisms for funding transportation projects. If we can figure out how to make different transportation modes pay their own way in Virginia, we can dispense with a lot of politics and focus on putting money to work where it will do the most good.
While the handbook points to several states that have tapped sales tax revenue to fund transportation, I find two other alternatives preferable. One is Value Capture. The other is the Vehicle Miles Traveled tax.
Value capture. The premise behind Value Capture is that transportation improvements create economic value and represent a windfall gain to property owners lucky (or shrewd) enough to own land in the right location. Those landowners should help pay for the value created.
New transportation improvements such as transit stations, roadway networks, or interchanges add value to nearby properties, but while anyone can use those new facilities, all users do not share equally in the added value they produce. …Value capture offers and equitable means of recouping value from the private sector in proportion to the benefit received from transportation improvements. Applied correctly, value capture is narrow and targeted. It is generally not only palatable to, but often supported by, private property owners because they receive a direct and tangible benefit from their investment.
Value capture techniques take many forms, any one of which may be the most advantageous for a particular situation. Generally speaking, the one that makes the most sense to me is the Transportation Benefit District (or Special Assessment District). Property owners benefiting from a transportation improvement create a special tax district to generate revenue to pay off the bonds that finance construction of the asset. Property owners willingly accept the tax surcharge because they know the new transportation asset will create more than enough value in the form of higher rents and leases to pay for it. If property owners balk because insufficient value is created, that’s a good sign that the project is economically unjustifiable and should not be built in the first place.
Mileage Based User Fee (MBUF). One can debate around and around who should pay for new construction, but a bedrock principle of transportation financing is that drivers should pay to maintain roads and highways in direct proportion to which they cause wear and tear on roads and highways. With virtually all cars equipped with GPS positioning devices, there is no technological barrier to capturing how many miles a car travels in between trips to the gas station and collecting the tax at the pump.
The Virginia Department of Transportation has allocated $1.86 billion in its Fiscal 2014 budget for the maintenance of all roads, highways and bridges in Virginia. A tax equivalent to 2.6 cents per mile would cover that entire cost plus the six percent-of-revenue that SGA says it would cost to administer the tax. Two-and-a-half cents is a trivial percentage of the 56 cents per mile that the Internal Revenue Service estimates it costs to operate a vehicle. Moreover, adopting an MBUF would allow the state to eliminate the $600 million it anticipates collecting from motor fuels taxes, $639 million from the retail sales tax, $233 million from motor vehicle licenses and $131 million from insurance premiums, with more than $250 million left over to cut the motor vehicle sales tax by one third.
An MBUF would provide considerable flexibility. The tax paid could be adjusted for the weight of the vehicle to account for the fact that heavier vehicles cause more damage to roads. Similarly, the tax could be adjusted for cleaner-burning cars. Hybrid vehicles would be rewarded for their low emission of pollutants but still pay their fair share of maintenance.
Additionally, an MBUF would have budgeting advantages. VDOT’s current budget is subject to volatility depending upon the wholesale price of gasoline and the volume of vehicle sales, which are not correlated with how much people drive and how much they fatigue the roads. A mileage-based fee, by contrast, is directly tied to how much people drive. If MBUF revenues fall, the need for maintenance likewise falls, reducing the likelihood of a cash crunch and the need to siphon funds from construction projects.
The states of Oregon, Washington and Minnesota have already conducted test trials of a mileage-based tax. According to the SGA manual, Oregon found that raising the charge during peak-travel hours reduced the amount of travel during those times. Likewise, participants who were charged more for entering congestion zones also reduced their miles driven in those areas. In other words, MBUFs make an excellent demand management tool for attacking congestion without spending mroe money on new infrastructure.
By tapping these two sources of revenue, Virginia could create a much more equitable, more adaptable system for raising transportation revenues.
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