Patrick McSweeney


 

Tolls Versus Taxes

Tolls beat taxes as a funding mechanism for transportation projects because those with money at risk have reason to make realistic assumptions about costs and traffic.


 

It should come as no surprise that several members of the Commonwealth Transportation Board have been calling for a tax increase to fund construction of new roads and other transportation projects.

 

The CTB is one of the most powerful bodies in state government principally because it dispenses billions in tax funds every year.

 

One alternative to raising taxes for new transportation projects is to issue toll-backed revenue bonds, but heavy reliance on toll financing would weaken the CTB’s political clout and limit its discretion.  No public official relishes such erosion of power.

 

From the consumer's perspective, tolls are preferable to taxes as a funding source for new transportation facilities for a number of reasons. The two key ones are that toll financing promotes greater fairness and efficiency.

 

When tolls are charged, those who use the facility, including out-of-state drivers, pay the cost of construction, maintenance and operation. By contrast, when taxes fund the project, all who pay the taxes — even those who never use the project — pay the tab. Users of tax-funded projects are subsidized by those who don’t use them.

 

But doesn’t all of this balance out in the long run because tax revenues that are earmarked for transportation eventually get distributed throughout the Commonwealth? That is precisely the shortcoming of the tax-funding approach.

 

Whenever projects are funded by taxes, decisions about how the revenues are distributed tend to be based on politics rather than on professional judgment. Every taxpayer, every locality and every region demand funding from those tax revenues at least equal to what they contribute, regardless of the merits of those demands.

 

Such pork-barrel politics is incompatible with financial discipline and efficiency. Projects that would not be funded if the users had to pay the actual cost are often funded under the tax-funding approach because of political pressure to spread the revenues around.  The discipline involved in determining whether and when to construct a toll facility is simply not present in deciding whether and when to construct a tax-funded facility.

 

Toll financing generally involves pricing a benefit to recover its actual cost. Those who put their money at risk in a toll facility have a strong incentive to anticipate all of the project’s costs and to project its future use realistically. No such care is taken when tax revenues fund the project. There is no direct linkage between user benefit and cost. It is easy to understand that a facility that would never be undertaken as a toll facility might be constructed if tax revenues are available to fund it.

 

There is another reason why charging users directly amounts to good public policy. It makes both our transportation system as a whole and our settlement patterns more efficient and rational. We expect user fees to be charged for public transit. Charging user fees for all modes of transportation in a particular region, including highways, makes economic sense if for no other reason than it allows for effective congestion pricing in that region and imposes a fair burden on out-of-state users.

 

Roads compete with transit. As more freeways are constructed, transit alternatives become more expensive and even unworkable. When consumers must pay the actual cost of new highways through tolls, they will incorporate that cost factor in their decisions about where to live and work. We shouldn’t expect this kind of thinking from the CTB. The General Assembly is a different matter.

 

-- July 25, 2005

 

 

 

 

 
 

 

Contact Information

 

McSweeney & Crump

11 South Twelfth Street
Richmond, VA 23219
(804) 783-6802

pmcsweeney@

   mcbump.com

 

Read his profile here.