Rational Road Pricing

Back in the 80’s I worked at Transport Canada doing strategic planning and policy advice. A big study back then was on Rational Road Pricing, by Zeiss Haritos. My memory of the study is this: the basic principle was to take the gas tax, subtract the portion that was equivalent to the general sales tax rates (since fuel should not be exempt from general tax revenue) and attribute the rest as revenue required to build and maintain the road network. From there, compare what all levels of governments spend annually on roads with revenues earned. Of course, there are many complicating factors, like whether some of  the gas tax revenues should be attributed to “externalities” – costs of health care or remediating environmental damage caused by motoring.

If I recall correctly (and this memory is 25 years old) the conclusion was that roads paid for themselves.

Now there is a study out of Texas, reported below, that offers another view. It concludes that roads pay for less than 50% of their construction and operating costs. Without accessing the whole study, and understanding what is covered and more importantly, not covered, it should be taken with a grain of salt, another info bite.

Texas is frequently looked down upon by Ontarians as redneck homeland to the Bush league. It is easy to disdain what is far away and little understood. But Texas, in my view,  is home of an inquiring engineering mentality that can be quite interesting. Recall that it was Texas, under Bush, that implemented the first trials of “pay as you go” car insurance that used  GPS to track low income car usage and charged for insurance by time of day and route risk. The biggest change was that participants modified their behaviour to combine trips, reduce risk and exposure, and reduced their insurance cost, thus increasing car affordability so that they could enhance their own employment prospects.

I think the problem in Ontario whereby the province and feds collect the gas tax and the municipalities supply many of the roads should be solved not by transfering gas tax revenues to the municipalities but by putting GPS in every car and charging users for every foot driven, with revenues going to the providing level of government. (This would reduce or eliminate the need for gas taxes beyond the PST-GST and environmental levies). And of course one would have to account for all the “tricks” governments use to hide subsidies – my favorite in Ottawa today is how many items can be burried in your water bill that are really road reconstruction and landscaping improvements that should be attributed to general taxes (which are somewhat scrutinized) rather than the water rates (which go unnoticed).

Why did car users pay for roads in the 80’s and not today? Some of the difference may be what was measured in the studies. A big chunk is that the US gas tax has been frozen for decades while road costs have soared. Urban areas are less and less dense as most growth occurs in suburban and exurban areas (downtown renaissances may get the publicity, but the overall American growth is suburban) so mileage driven increases. Cars are astonishingly more fuel efficient than before, so they travel over twice as much road as before but pay the same uninflated taxes. Our standards for roads are much higher too – we want them wider, flatter, with gentler curves and safer verges and sound barriers and landscaping. Increasing capacity on older highways in built-up areas is very expensive.

Here is the Texas report, from http://www.txdot.gov/KeepTexasMovingNewsletter/11202006.html#Cost. Link provided by Bicycle Fixation Blog via Tom Trottier .

(and how I wish we could get Ottawa Council and The Citizen to pay as much attention to road expenditures and subsidies as they do trying to paint transit as a tax hog):

A major feature in the public debate about toll roads has been the issue of when or whether a road has been “paid for.” To better understand this discussion, it is helpful to ask two questions:

1. What is a traveler paying for when he or she pays state gas tax at the pump?

State motor fuel tax is collected from all over the state and goes into a single pool of revenue—about one quarter of which goes to fund education, and about three-quarters of which goes to the state’s highway fund, where it is spent on transportation uses and some non-transportation functions of government.

Then the state receives federal funds as the state’s share of the federal fuel tax; about 70 cents of every gas tax dollar Texans send to Washington comes back for road use.

The significant point here is that historically the fuel tax paid in any locality of the state is unrelated to the road projects in that locality. Every fuel taxpayer in the state paid something for any given road—which leads to the next issue.

2. When is a given road actually “paid for?”

Just like your car, it never is. You may have paid the note, but maintenance and fuel costs go on as long as you own the vehicle. Once a road is built, maintenance and rehabilitation costs last its entire life, generally about 40 years.

The decision to build a road is a permanent commitment to the traveling public. Not only will a road be built, but it must also be routinely maintained and reconstructed when necessary, meaning no road is ever truly “paid for.”

Until recently, when TxDOT built or expanded a road, no methodology existed to determine the extent to which this work would be paid off through revenues.

The Asset Value Index, was developed to compare the full 40-year life-cycle costs to the revenues attributable to a given road corridor or section. The shorthand version calculates how much gasoline is consumed on a roadway and how much gas tax revenue that generates.

The Asset Value Index is the ratio of the total expected revenues divided by the total expected costs. If the ratio is 0.60, the road will produce revenues to meet 60 percent of its costs; it would be “paid for” only if the ratio were 1.00, when the revenues met 100 percent of costs. Another way of describing this is to do a “tax gap” analysis, which shows how much the state fuel tax would have to be on that given corridor for the ratio for revenues to match costs.

Applying this methodology, revealed that no road pays for itself in gas taxes and fees. For example, in Houston, the 15 miles of SH 99 from I-10 to US 290 will cost $1 billion to build and maintain over its lifetime, while only generating $162 million in gas taxes. That gives a tax gap ratio of .16, which means that the real gas tax rate people would need to pay on this segment of road to completely pay for it would be $2.22 per gallon.

This is just one example, but there is not one road in Texas that pays for itself based on the tax system of today. Some roads pay for about half their true cost, but most roads we have analyzed pay for considerably less.

To conclude, in the SH 99 example, since the traffic volume for that road doesn’t generate enough fuel tax revenue to pay for it, revenues from other parts of the state must be used to build and maintain this corridor segment. The same is true across the state, meaning that, as revealed by the tax gap analysis, overall revenues are not sufficient to meet the state’s transportation needs.