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Tuesday, April 30, 2019

Highway Funding Part III: How to Get It Right

In my last installment on highway funding I explain how to actually get it right. My idea is compliant with standard economic theory, avoids government privacy intrusions and creates a funding model that is both fiscally transparent and practical. 


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In my second installment in this series I explained the ridiculous economic theory that has led economists to proposing a miles-based, congestion-fee tax model for funding our highways. The combination of invasion of privacy and economic theory so bad it might just as well assume the Earth is flat, should scare anyone in his right mind away from even considering it.

Yet some people do, including Adrian Moore, Vice President of Policy at the Reason Foundation. It is baffling how a libertarian organization like Reason can get behind an idea that mandates deep government invasion of privacy and a government funding model that requires people to adapt to government - not the other way around. However, that is ultimately a question between Adrian Moore's conscience and the donors that keep Reason's doors open; as far as I am concerned, what matters is to define policy solutions that combine fiscal sustainability of government with an advance in economic and individual freedom.

Moore's idea for a miles-tax, congestion-fee model for our highways does neither. The fiscal sustainability component is absent for two reasons: the tax he proposes discourages highway travel, eroding the very revenue that he claims to want to secure; and there is no incentive in the tax for investing in future highways. All a miles-based tax can do is fund maintenance of highways; since tax revenue fluctuates with traffic, it is difficult to set aside a meaningful amount for future investments. 

There is a better alternative here, as we will see in a moment. 

As for economic freedom, the miles-tax model locks in a funding model suitable to government ownership, operation and maintenance of highways. Any contracting out of operation and maintenance would require the freedom for the operator to alter pricing to their business model, but since all drivers will be forced into the GPS-based tax-per-mile model, there is really no flexibility for contractors to do anything more than deliver highway maintenance on a strict, government-planned schedule. 

Public-private partnerships are de facto excluded.

The GPS-mandated miles-tax model is particularly bad for individual freedom. According to this model, endorsed by allegedly libertarian Reason Foundation, every one of us will have to have a GPS in our cars that sends government constant updates on our whereabouts. This is a wet dream for totalitarian regimes across the globe, and a system that will certainly be used by government agencies in the future when they want to inquire about our lives on a nothing-to-hide basis.

So what is the alternative? Let us start with the good old question: what is a highway? Some people laugh at this question, but the answer to it actually guides our entire reasoning toward the right funding model. 

A highway is what is known in economic theory as a "public good". That does not mean it is a government-provided good - simply that it has different properties from so-called private goods. The private good is a product where, as economic theory puts it, there is exclusion in consumption: every Big Mac can only be eaten by one person. If I buy a Big Mac, nobody else can buy that particular one. They will have to wait for the restaurant to produce a new one. 

The same applies to services. Only one person can get a haircut from one hairdresser at any point in time. A plumber can only fix the clogged pipes in one house at a time.

A public good, on the other hand, has no exclusion in consumption. The classic example of a street light illustrates this point: two or more people can walk along a sidewalk enjoying the illumination provided by one and the same street light, without each one of them diminishing the experience for the others. Fire and rescue services provide a similarly public good: a person on the west side of town can take comfort in the availability of fire and rescue without diminishing the same experience for someone over on the east side of town.

It is often pointed out, correctly, that once the fire crew goes out on a call, the service they provide changes character from public to private; they cannot put out two fires in two locations at the same time. This is a good point, but since fire crews spend most of their time on standby, when it comes to determining how we should pay for their service, they fall into the public-good category.

The same holds true for police. We all enjoy the safety of having police on standby, until they reach capacity and are all called out to somewhere else. In both their case and the case with fire and rescue, the transformation from public to private good is, again, an exception to the rule.

Which brings us to the funding model for public goods. Which includes the funding of highways. 

The default nature of a public good is, again, to provide a capacity that can be used by one more person without crowding out anyone else. This is the normal state of a public good. Therefore, it is not possible to set a free-market price for individual use; it does not cost the provider of that public good anything extra because one person consumes it. One more person can walk under the street light without the producer having to produce more light; one more person can enjoy the security of police on standby without an increase to the cost of providing that police force.

One more car can drive down a highway without increasing the cost of providing that highway. 

Right here, advocates of miles-based taxes will protest. The wear-and-tear cost for the highway will increase for every car that utilizes it. This is a fair point, but how many pennies do I add to the maintenance of I-25 when I use five miles of it on my daily commute? How do we determine the cost of my consumption of that stretch of highway? 

It is fairly simple to determine the cost of one more person buying a new Honda Accord: the cost of building the car. The reason, again, is that the car is a private good: once I bought a gorgeous new Accord Sport with a six-speed manual, nobody else could buy it. I paid the price that the manufacturer suggested in order to cover their costs of producing one unit.

Me buying that car kept someone else from getting it, but me driving it home on the interstate did not keep anyone else from driving up the same stretch of highway. The marginal cost of me driving there is negligible compared to the total cost of maintaining the highway. 

This creates a problem. If we are going to use the pricing model from the theory that prescribes congestion pricing - which I explained in detail in Part II - then the congestion fee, as well as the miles tax, would be insignificant, especially when there is no real crowding out through congestion. 

What is even more interesting is that the price would have to vary by car, depending on:
  • the speed the car drives - all other things equal, higher speed means more wear and tear;
  • the weight and load of the vehicle - more load means more impact on the surface;
  • the type of tires used - smooth summer tires are more lenient on the highway than rough all-terrain tires; and
  • the temperature of the road surface at the time you drive.
Since the marginal cost from one more car is negligible in the first place, a pricing model compliant with welfare-economics theory is going to be so costly to implement that it is a pure fantasy to even try it. At the same time, any miles-based tax that does not factor in all these specifics of the vehicle and the weather, will impose unfair prices that distort the very economic optimum that the theory seeks to establish.

The alternative, therefore, is to treat the highway as a capacity. As such, it comes with a fixed cost for maintenance based on average traffic. Not individual use, but average traffic. This is comparable to establishing the capacity of a fire or police department based on the average number of calls they get over, say, a year. We then fund those services based on that average capacity.

Highway funding should work the same way. The funds, of course, should be provided in a similar fashion. If we fund police and fire out of property taxes, we should fund highways based on the property that utilizes it: the vehicles that are built to travel on highways. A fixed, annual registration fee provides the funding needed for maintenance.

Some will protest and say "I never use the interstate, why should I pay for it?" That, however, is the same argument as saying "I have never called the police, why should I pay for it?" Or "I have never been the victim of an invasion into America by a foreign power - why should I pay for our military?" Admittedly, the use of a highway is a voluntary act, where we make the choice to travel, as opposed to having to call the police because someone is trying to break in to our house. However, it is not the voluntary part of the product that makes the difference - it is the fact that the facility is there at our disposal.

When someone grouses about having to pay for highways they don't use, they should also consider the fact that this funding model protects their privacy. There is no element in it where government can track your whereabouts. It would be a toll-free solution where anonymity in travel is guaranteed.

Besides, if aunt Mildred in Knucklebleed, California were to die next week and you couldn't find a suitable flight, you would be mighty happy you paid for those highways over the years, right?

The good thing about a fixed, non-individualized fee is that it can also include a portion that funds investments in highways. In fact, Robert Poole, one of Adrian Moore's buddies over at Reason, has an interesting idea for highway investment funding: use government bonds, then pay the interest on those bonds with a portion of whatever funding model we use for highways. That money can easily come out of the fixed registration fee.

To further secure highway funding, this model could be designed so that it fed into the federal highway fund, or an independent highway fund for each state. Since interstate travel is often an issue for individual states (very much so in Wyoming) the best solution is probably a federal model, at least for the interstates. 

At any rate, this model protects privacy, is based on sound economic theory and allows for long-term stability in funding both maintenance and investments. It is entirely in compliance with libertarian theory and good economics. 

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