MBUFs and Value Capture asTransportation Financing Tools

focus_area_oneby 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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11 responses to “MBUFs and Value Capture asTransportation Financing Tools”

  1. And how does increasing the tolls on DTR drivers to build Dulles Rail fit the principle of having the cost causers and beneficiaries pay?

    BTW, here are a couple documents of interest. The first is the VDOT press release from 2005 saying a 20 cent toll increase will fund the rest of Phase 1 of the Silver Line. https://docs.google.com/file/d/0B2BSw8ftUMm-bVNPU3EyNkJGZmc/edit

    The second is a CTB resolution indicating a similar increase may be needed to fund Phase 2. https://docs.google.com/file/d/0B64IfZTFiYIAQXA5ZEdxeTl5Y3c/edit

    Now the hard stuff. Why isn’t this actionable fraud? Why was no grand jury convened to investigate these lies? Why didn’t the US or Virginia Justice Departments take any action? Both Parties closed their eyes to one of the biggest frauds in Virginia history and a huge transfer of wealth from ordinary people to the Tysons landowners and Bechtel.

  2. Property owners are shrewd enough to buy property near proposed transportation improvements because their country club politician buddies front run the information. The property owners are then shrewd enough to get their country club legislators to exempt them from value capture type schemes.

    1. If we don’t pillage the taxpayers to pay for mass transit, where else is the money going to come from? It’ll have to come from property owner.

  3. You know what happens when the aggravation component of salary fails to compensate the individual for the daily aggravation of working at a given job? They move someplace else for less aggravation. Which is why companies used to offer benefits, and is a prime reason Southern states have gained immigrants from the North East. Now while having people move out would certainly help the congestion factor of transportation, it does nothing to address the insatiable hunger of the state for more money. Your plan would remove a legislatively constrained tax and replace it with what is essentially an administrative fee slush fund subject to yearly increases with little oversight. Just another underhanded scheme which should be immediately constitutionally challenged if even a single brick of new construction was paid for by this USER FEE.

    1. “Your plan would remove a legislatively constrained tax and replace it with what is essentially an administrative fee slush fund subject to yearly increases with little oversight. ”

      How do you see that? VDOT figures out what it needs to pay for maintenance, it creates a budget, it calculates a per-mile tax rate that will cover the cost, and if the tax is any different from the previous year, VDOT has to take it to the General Assembly for approval.

      Do you really have a problem paying for your share of maintaining the roads? Sure, road construction is highly political… but road maintenance? That’s the very *first* thing that we should be funding. All the rest is extra.

      1. I have no problem paying my share. It’s when developers and their country club political cronies rig the system that I have problems with.

        Mileage Based User Fee
        What is a Fee? Isn’t it a charge for a service? Isn’t that why we are saying it’s for maintenance only? Who decides what the fee will be? Isn’t that decided by the entity imposing the fee? If it’s a fee then what existing tax will it replace? If the tax is replaced then what will pay for new roads? How do you track travel on locally maintained roads vs. state maintained? Do the locals get their share? What happens when you don’t pay the fee? Why do we need a whole new bunch of cops just to hunt down scofflaws? Or do we contract it out to a collection agency?

        See, we already have something here in Virginia that most other states don’t. It’s called the Car Tax. Then we added in new sales taxes and tolls. But now the brilliant plan is to not only keep paying all that, but also more tolls and fees, and salaries for all those people to dictate, monitor, enforce and constantly track us little peons. Then we will have to have another new tax to pay for the roads that the old new taxes don’t have enough money for.

        Aggravation. Increased outflow in a job that cost thousands more to learn than it pays in a salary squeezed between living wage minimum wage and outsourced downsizing. Eventually people lose all interest in outdated ideas about employment, flip the overseers the bird and opt for a simpler life without user fees or paying their fair share.

  4. http://i95coalition.org/i95/Portals/0/Public_Files/pm/reports/I-95CC%20ConOps%20for%20Administration%20of%20MBUF%20in%20a%20Multistate%20Environment%202012_04.pdf

    Here is how our government envisions user fees to play out. Big Brother is never going to stop unless we just say no more. Are these people even living on the same planet?

    1. Interesting document. I hadn’t seen it. A quick scan suggests that this is different in one fundamental way from my proposal. The document discusses MBUFs as a revenue-raising measure. It doesn’t say *what* it will raise the revenue for. It probably includes construction. My idea is to use MBUF revenues to cover *maintenance only*, which accounts for about 40% of VDOT’s budget. Revenue for new construction needs to come from other sources — primarily Value Capture schemes or tolls. If you can’t find the money from those two sources, there is no economic justification for building/expanding a road. You’re destroying economic value, not creating it.

  5. same concerns as Darrell.. MBUF for maintenance morphs in MBUF for maintenance and construction so easy it’ll make your head spin but no matter.. if you think the NSA kerfuffle is much ado about nothing then you probably think govt tolling by the mile is okay also but I’m betting that “get the govt out of our cars” become the rallying cry quicker than you can say ” get the govt out of health care”!

    something might be amiss on the money… 2.6 per mile = 26 cents for 10 = 2.60 per hundred = 26.00 per thousand = $260 per ten thousands or almost 400.00 a year for 15,000 miles … compare than to 15,000 at 20 mpg = 750 gallons of fuel at 17 cents a gallon = about $127…

    where am I going wrong on the math?

    finally… how do you calculate economic value for a new road to primarily serve commuters..????

    but let’s say you recapture money from the commuters by taxing businesses at interchanges. Why not let any company make a proposal to build a new road – if the company could own the land around the interchanges? Sort of like how the govt gave land to the railroads to build tracks.. eh?

    just let companies scan the state for road/interchange opportunities.. then make a proposal to VDOT to split the profits..?

    so then VDOT just gets out of the construction business all together and it becomes solely a free market endeavor.

    If a private company can find more Dulles Toll Road cash cows.. build the road for free… and split the profits with VDOT …. why not?

  6. re: the car tax.

    across Virginia – people’s cars are taxed and since Gilmore.. the state has seen fit to take general revenues to “reimburse” auto owners for the taxes on their cars.

    Keep in mind the “reimbursement” is provided by taxing the income of the car owners and charging them sales taxes – the two primary revenue sources for the state.

    Now.. the question is – why do counties like Fairfax and Henrico (and spotsylvania) tax the bejesus out of owners of automobiles – and then spend the money on things besides transportation – THEN they blame the state for not funding their transportation “needs”.

    I think the transit folks HAD a strong argument before when they were (rightly) pointing out the subsidies for transportation that were essentially replacing what should have been auto tax revenues – with income and sales tax revenues and at the same time letting the locality take the balance and spend it on things besides transportation.

    If folks were really serious about any of this – they’d pass a simple law that said if the county taxes autos – it money has to be spent on transportation.

    then you would not need more state revenues or “devolution” or any of that stuff AND the transit advocates would not have had a leg to stand on.

    Instead, McDonnell – and to be honest – the General Assembly – all of them, doubled down and instead of insisting that roads be funds from true user fees and taxes – they just botched the whole thing even worse by solving their transpo funding quandary – with general sales taxes.

    Not heard too many complaints about this .. the most upset are those on the right – who are not concerned with the destruction of the user fee – but instead a general tax increase.

    So basically not a whimper across the commonwealth about the GA voting to move even further away from user fees .. much less require locality auto taxes go for transportation.

  7. […] created by adopting a Mileage Based User Fee (MBUF) for funding road maintenance (as described here) along with PAYD. For a typical driver, PAYD premiums would amount to about 6.5 cents per mile. In […]

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