The case for (and against) public subsidy for roads

This post is co-authored with David King (a displaced Minneapolitan who lives in New York, and who blogs at Getting from here to there)

In recent weeks we have thought about public subsidy for transit and university subsidy for parking.

But what about roads? Are roads worthy of public subsidy?

Let’s think about our framework of excludability vs. rivalry. The Transportation Economics wikibook says:

Roads exist largely to serve two purposes: movement and access (specifically, access to property). Different types of roads have characteristics of different types of goods based on their functional classification. In other words, there is a correspondence between the functional classification of a road and the type of good it represents. What types of roads are which type of goods?

 

Limited access highways (freeways) and some arterials with signalized intersections and few access points, could be considered private goods, since it is possible to identify and exclude users with appropriate toll technologies. These roads are also rivalrous since, in the absence of pricing or other measures to limit demand, an additional user can affect the use of the road by others.

It is very clear that users could pay for private goods directly. The most obvious way is a toll, a bit less obvious is a gas tax. Nefarious politicians in a few states have come to realize that a wholesale tax on gas is more hidden than a retail gas tax, even if the incidence is essentially the same. The gas tax collected on users of freeways at the state and federal levels would more than pay for freeways (even if some is diverted to transit and other uses).

Local roads lie on the other end of the spectrum in terms of functional classification, since they exist primarily to provide property access. Local streets can be excludable if access to them is restricted. Access restrictions may take many forms, ranging from the simple posting of signs indicating that access is restricted to residents to actual physical restrictions, such as gates. The latter type of restriction is typically associated with gated communities or other forms of private residential development. Local streets are also generally non-rivalrous in that their low levels of traffic tend to preclude problems with congestion. This combination of characteristics (excludability and non-rivalry) indicates that some local streets may be considered club goods. The oldest such example in the United States is that of Benton Place in St. Louis, Missouri, where adjoining property owners were required to join a private association which was responsible for road maintenance, with assessments being levied on each association member.

These kinds of local roads are essentially club goods. The ideal club might be the homeowners association, the downside is diseconomies of local management of roads and potential interruptions in the local road network (e.g. more cul de sacs and fewer gridded blocks). Division of labor is a good thing, but requires scale. So the club is usually the local municipality rather than the homeowners association. The revenue that is collected for this tends to be a property tax, paid for by everyone. Tolls are impractical for local streets because the cost of collection outweighs the benefits. A local option gas tax may also be impractical because the purchase area of gasoline exceeds the size of the municipality (e.g. our most used gas station might be in St. Paul, even if we live in Minneapolis). Any jurisdiction that tried to raise too much from this fee would see more out-of-municipality purchases, and the gas station (or the landowner of the gas station, if they differ) would bear much of the incidence of the charge.

An additional challenge associated with fuel taxes for roads is that some local roads, when privatized or used as a club, restrict auto traffic. In the Seward neighborhood Milwaukee Avenue is essentially a club good for bikes and pedestrians. In such cases property taxes are much easier and effective for financing the roads. St. Louis, MO, has long featured private local streets in all types of communities.

 

Local streets are typically provided by local governments with no restrictions on access. In the absence of access restrictions local streets may be both non-rivalrous and non-excludable, leading them to take on more of the character of a public good. Note the term “public good” in this case is defined by the economic characteristics of the good, and not simply by the fact that it is supplied by the public sector.

 

Some local streets are not excludable because of their functional design connecting places (one of the drawbacks of a connected network is that it is used to connect people who are not local). So design of the network greatly affects how it is best managed and funded.

 

Between limited-access highways and local streets are a middle level of road, collectors, that link local streets with limited-access highways. These “linking collectors” serve both access and mobility functions, since they may also provide access to some adjacent properties. These roads may be considered “congesting” or common goods.

The characterization of roads in terms of functional classification may also inform decisions about which level of government should be responsible for providing a given road (assuming the decision is made to provide the road publicly). Local units of government seem best suited to providing local streets, since they are closest to the problem. Roads that provide for a higher level of movement, such as limited-access highways, ought to be provided by higher-level jurisdictions, such as states. Of course, there are tradeoffs involved in each of these decisions. Smaller jurisdictions may not be able to fully realize scale economies, while larger jurisdictions may encounter problems with span of control. Between these extremes there is some optimal mix of expenditures between different levels of government that minimizes capital and operating costs.

 

The larger jurisdiction (the state) could set a higher fuel tax to redistribute back locally by some formula, but there still remains different preferences in different municipalities for different levels of service, which require some locally different levels of funding. How is that to be collected if not a property tax?

The property tax can be thought of as a charge for having the option to access roads and receive public services such as police and fire. There are other types for local tax that can be used; a variety of land value capture mechanisms, from the land value tax or split rate tax, to transportation utility fees change the basis of collection, but even TUFs are still not strictly proportional to use. If a mileage-based usage fee were already widely deployed, it could be varied by municipality to collect more revenue, but that ideal revenues collection scheme is not worthwhile to implement if the only user were local governments, and would require standardization and enforcement to enact.

Regardless of whether one favors or opposes subsidy for roads, distributional considerations of how the subsidy monies are generated are important. We discussed fuel taxes, tolls and property taxes, but many cities and states turn to sales taxes to pay for roads (and transit. For instance, the Minnesota Legislature is considering an increase in sales taxes dedicated to transit. Sales taxes are a shift away from direct user fees and impose the burden of subsidy broadly. Sales taxes also tend to be regressive in that households who end up paying the largest share of their income in sales taxes receive less than proportionate value in return. So subsidy is an issue of distributional fairness depending on how the money is raised as well as how it is spent. At the very least money used for subsidy should not rely on regressive tax policy.

Rationales for subsidizing roads:

  1. Universality: Everyone uses roads, everyone should pay.

    Midwest Energy News quotes succinctly: “There isn’t a person in the United States who doesn’t get some use out of the roads,” says Levinson, who also writes the Transportationist blog. Even people who don’t drive still benefit from things like fire protection, ambulance services, and mail delivery — all of which depend on roads. “I suppose you could be Ted Kaczynski, but even he had to use the U.S. Postal Service to mail his bombs.”

    Even if you don’t drive, or bike, you still use roads. We had roads before cars and bicycles, and will continue to have them even when we have flying cars in the future. Their nature will of course vary, but at least some of the costs are communal. We collectively want the option to be accessed by ambulance should the need arise, or fire or other emergency services. We all make use of ground delivery for things like the mail or packages. We all partake of public utilities running along public rights-of-way. Even bus riders use roads. We also like to have things delivered. When we order a pizza we use the roads, but we have substituted our travel to the restaurant for the delivery person’s. When we order things online, FedEx, UPS and other carriers use the roads to deliver our stuff. It is impossible to “opt out” of using the road network.

  2. Democracy: Most people drive, therefore it is a subsidy from everyone to almost everyone else, which is more democratic than a subsidy from everyone to the very few.
  3. Administrative efficiency: Paying for roads out of general funds, or with imperfect gas taxes, is a lot easier to administer than trying to enforce specific payments for specific roads at specific times of day. Tolls are costly.
  4. Cost structure: Uncongested roads are on the left-side of the U-shaped cost curve, and charging for them leads to suboptimal levels of use.
  5. Non-excludability: There is not a good non-governmental finance mechanism for signalized arterials, roads which are rivalrous but not excludable. One could establish a congestion charging zone, but those are very expensive, and have yet to be tried outside a few center cities.
  6. Agglomeration benefits: Accessibility leads to positive spillovers for the urban economy and increase total development.
  7. Network spillovers: A better connected network makes all other roads more valuable. Much like the temporal Mohring effect in transit, there is a similar spatial for roads effect, each additional road reduces travel costs between places, increasing demand on other roads (and raising overall usefulness of the transportation network still more). Like the Mohring effect, this too reaches diminishing returns, but it is important when networks are sparse.
  8. Mutually assured subsidy: Transit is subsidized, therefore roads should be subsidized.
  9. Off-mode effects: More roads reduce congestion on other modes (transit, rail, air). Subsidizing roads can help support car-free roads, since bikes and pedestrians currently don’t directly pay for their infrastructure. However, relying on drivers to pay for roads used primarily by non-drivers may lead to principal-agent problems.

Rationales against subsidizing roads:

  1. Overproduction: Subsidies induce overproduction of roads. The lack of pricing signals implies that supply conditions are out-of-whack with demand. In addition, the heavy use of subsidy leads to building roads in the wrong places. We cannot afford to maintain what we have already built, we should not build more. Many states (such as Michigan) are de-paving roads to reduce rural road maintenance costs. Even Minnesota is considering de-paving. North Carolina allocates roads subsidy by county, so lightly populated rural counties are paving every road they can find. Neither system is optimal.
  2. Overconsumption: Subsidies induce overuse. This can lead to congestion.
  3. Negative externalities: Roads, and in particular cars, generate negative externalities which we cannot properly price. At least we shouldn’t subsidize their production.
  4. Off-mode effects: Reducing demand for transit (by subsidizing roads) worsens the strong positive feedback system that drives transit, lowering congestion on transit is seldom the critical problem, encouraging demand is more likely to be important.
  5. Mutually assured subsidy: A key point is that just because we subsidize roads does not mean we should subsidize transit, and vice versa. The economics of the technologies differ significantly. One bad subsidy does not deserve another. Just because transit is subsidized is not a reason to subsidize roads. It may be an argument to remove the subsidies that exist. Mutually assured subsidy is the “fairness” logic of a 4 year old complaining about a sibling.
  6. Obsolescence: Following the Great Gretzky, “Skate to where the puck will be.” Roads will be made obsolete by upcoming technologies, we should cut our losses now.

So what is the net?

  1. In the short run, states should raise their gas tax to replace the general (property tax) revenue from a baseline set by lowest common denominator jurisdiction within their domain with user charges. That is, figure out which jurisdiction spends the least per capita on roads, and raise the gas tax to replace the property tax by at least that amount of money for each jurisdiction. In all cases states should be extremely wary of using sales taxes to pay for roads. (States will also need to cover the declining federal gas tax, but that is separate.)
  2. Over time, states should move toward a vehicle mileage fee varying by weight (for trucks and other heavy vehicles), location and time of day to replace the motor fuel tax. This should be phased in with EVs (and Hybrids) which don’t pay (much) motor fuel taxes, and trucks which would be charged for weight and distance, going first. Off-peak discounts would encourage peak-spreading. Rates would vary by area to account for different costs of running networks.
  3. Road networks should be organized and operated like public utilities, managing to generate revenue from users to pay for cost of operations. Restrictions on usage should be allowed in this model, where auto and truck traffic can be limited to specific times of day or excluded altogether. Road design that allows access for emergency services can be regulated.

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7 Responses to The case for (and against) public subsidy for roads

  1. helsinki May 6, 2013 at 5:15 am #

    Square the circle of flying cars and walkable urbanism, and I’m sold.

  2. Jeb May 6, 2013 at 10:14 am #

    Re: Point #3 for the opposition: “Negative externalities: Roads, and in particular cars, generate negative externalities which we cannot properly price. At least we shouldn’t subsidize their production.”

    What if those negative externalities are less than the subsidy we give to roads from the general fund? Certainly cul-de-sacs and freeways are very frustrating for anyone but a car driver (and I’d argue cul-de-sacs are frustrating even for a car driver!), but a solid street grid is needed for all modes of transportation, and I don’t think that even the negative externalities of cars would justify getting rid of a subsidy entirely.

    • Janne May 6, 2013 at 11:20 am #

      You lost me with this one:

      “Off-mode effects: More roads reduce congestion on other modes (transit, rail, air). Subsidizing roads can help support car-free roads, since bikes and pedestrians currently don’t directly pay for their infrastructure. However, relying on drivers to pay for roads used primarily by non-drivers may lead to principal-agent problems.”

      IF/WHEN your three recommendations are implemented, this will be the case. However, currently, property tax is the largest funding source for the local roads bike riders and people who walk use, so bike riders and those who walk DO currently directly pay for their infrastructure.

      Or… what did I miss?

  3. David Levinson
    David Levinson May 6, 2013 at 12:38 pm #

    @Janne, bike riders and walkers pay in part for the local infrastructure that is covered by property taxes. They typically do not pay for the part of infrastructure funded by fuel taxes (state roads, county-state aid highways), including sidewalks and paths on those roads. Cross-subsidies abound.

    • Janne May 6, 2013 at 3:07 pm #

      David – thanks for the clarification. That is clear. I think I was confused because the post as a whole discussed both local (property access) streets as well as those funded by fuel taxes.

      It’s my understanding that fuel taxes don’t *fully* cover the cost of state roads and county-state aid highways, although it may be that currently they do, but an upcoming shortfall is why MN DOT is projecting such huge funding shortfalls for maintenance and future needs..

    • Alex Cecchini
      Alex Cecchini May 6, 2013 at 9:59 pm #

      I would say that in a world of walkable urbanism most people would not be biking or walking on state aid roads or county state aid highways. They would not exist as we imagine them today – stroady environments with sidewalks slapdashed on the side that few unfortunate souls use every now and then. Not to mention the marginal cost of walking infrastructure on a street compared to car traffic requirements, I’d say there’s not that much cross-subsidization in most US cities.

      If the net result is that cycle-tracks or other high-capacity bikeways need to charge registration fees to bike purchases or tolls, so be it.

  4. Jay May 6, 2013 at 11:04 pm #

    All in all an excellent analysis.

    Access to properties provide value to properties so funding a portion of local roads through property taxes seems defensible and is not necessarily a subsidy. Clearly collecting user fees from cyclists and pedestrians is problematic. Perhaps a portion of excises taxes on bicycles and shoes can help fund bikeways and sidewalks.

    My main quibble with the analysis (and it’s minor) is that time of day pricing is not as efficient as pricing only congested network elements which can be done using the on-board controls of modern automobiles (throttle position and brake application recorders) or the accelerometers in smart phones or other devices. This would be a more effective way to differentiate the rivalry of some network elements and reduce privacy concerns since it is not necessary to know precise locations or even times.

    Lost in the usual discussion of negative externalities are the substantial positive externalities of reducing transportation costs captured partially in the discussion of agglomeration effects.