Road funding reformed - dedicate fuel taxes to deficit reduction COMMENTARY

November 9, 2012
By Peter Samuel

It's high time highways supported themselves. Gasoline and diesel tax revenues are needed much more urgently for reducing dangerously bloated government deficits.  The federal government should stop spending money on highways or transit. Those needs should be managed by the states. States too should use their fuel taxes for deficit reduction -  devolving most responsibility for highways to metropolitan areas and counties, and encouraging user fee (toll) financing as an optimal and sustainable funding method.

As part of the end of federal-state grants and state grants, they'd of course lift restrictions on how roads are funded and managed.  And they'd end the protracted federal permitting and planning and federal 'records of decision.'

Let counties and metro areas be fully responsible for their roads and transit. State devolution can proceed state by state at their own pace as dictated by their own legislatures.

Federal abandonment of highway and transit spending is most urgent. A deal has to be reached  to control the federal deficit without increasing damaging new taxes. The new Congressional Budget Office report on choices for deficit reduction notes that continuing federal deficits:

- raise interest costs as a proportion of the budget and reduce the spending power of any given level of revenues

- reduce national saving and increase dependence on foreign lending

- limit national options

- increase the likelihood of a fiscal crisis in which investors lose faith in the US Government and require increasing risk premiums to lend to it

Present deficits they say are "ultimately unsustainable."

Fiscal crisis grows more likely

The CBO: "It is impossible to predict with any confidence whether or when a fiscal crisis might occur in the United States; in particular, there is no identifiable level of debt relative to GDP that indicates that a crisis is likely or imminent. At any given time, the risk of such a crisis depends not only on the debt levels and economic conditions in the United States and other countries at the time but also on expectations about budgetary and economic developments in the future. All else being equal, however, the greater the amount of federal debt, the greater the risk of a fiscal crisis."

The immediate "fiscal cliff" built into already legislated tax increases and spending sequesters January 1 is $607b. Ending federal transportation handouts and turning fuel taxes to deficit reduction would help to the extent of $35b.

Local example here in Frederick Co MD


A small local news report in the Frederick Gazette newspaper (11-01 pA7) illustrates everything that is wrong with roads funding in America.  By way of background Frederick county where I live has 233k people, is 7th ranking county of in a 23-county state of 5.8m, and is centered about 40 miles north of the Capitol in Washington DC. It's a bit-o'-everything county - bit urban, bit suburban, bit fringe metro DC, bit Baltimore oriented, bit historic, bit sprawl, bit rural.

The Frederick Board of County Commissioners is asking the state of Maryland for $169 million for improvements in the county, says the Gazette report.  And of course the state will ask the feds to help them help a county project.

There will be favor trading, string pulling,  prioritizing, deals attempted, discussion of different cost-sharing schemes, buck-passing, and temporizing. "We'll support yours, if you support ours" talk between different county delegations or heavies in Annapolis. Maybe they'll start the permitting and get the money to do some design. But of course "We don't have the money," everyone says. The county blames the state. The state blames the Feds. Or they say higher taxes are needed at some other level of government.

Everyone will look to present themselves as keen to advance the projects while blaming others for the inaction. Projects that should take a year take a decade. Projects that should be done in two years take a quarter century. Costs are grossly inflated.

It's a dysfunctional dopey system, and needs to be dumped ASAP.

Back to our Frederick County example.

First up the county commissioners are posturing. All three of the projects they claim to be taking an initiative on are projects that have been around for years. And they are already on the State Highway Administration's list of nine Major Projects in Frederick County.

http://apps.roads.maryland.gov/WebProjectLifeCycle/countyProjects.aspx?county=10

These are old stalled projects.

But they have been around so long the county politicians know that many newspaper readers will be fooled into thinking this is a new initiative - either because they have forgotten about them or moved into the county since they were last in the news.

Lets look at the biggest of the three:

1. US15 interchange at Monocacy Boulevard: first adopted as part of the  I-270/US 15 Multi-Modal Corridor Study which began in the mid-1990s, endorsed as a diamond interchange in a 2002 Draft Environmental Impact Statement, presented in public hearings ten years ago, got FHWA approval Nov 2005 to be studied separately from the I-270/US15 Corridor study. Seven years later the general layout has been approved "Alternative 2 Option 1."

This project (see first map on aerial photo) extends by about a mile to the northern outskirts of Frederick full expressway standards that prevail from the Washington Beltway up the length of I-270 and onto its continuation US15.

I-270/US 15 have eight interchanges within the buildup area of Frederick City (population 75k), seven of them local, the other I-70. US15's traffic through Frederick City is about 2/3 local - making use of the only north-south expressway for trips within Frederick City. Much of the rest is county traffic. A small minority of traffic is long distance, between Washington DC suburbs and Harrisburg and central PA.

This proposed extra  interchange on the outskirts of the Frederick City built area is almost entirely for the benefit of Frederick City or Frederick County. Such a project should not be funded by the state, let alone the federal government. It's as good project. It eliminates an at-grade intersection that has been the source of terrible crashes over the years, and daily frustration for locals trying to cross safely in gaps in oncoming traffic.

As planned with federal and state involvement it's horrendously expensive for a rather straightforward diamond interchange - $91.2m. But there shouldn't be an expectation that the state or the feds will pay for a local project like this. Local government representing the people who benefit by the interchange should take full responsibility for permitting, designing, doing public consultation and finding the funds.

It is a local project and should be the responsibility of local government and funded by the people it benefits.  They'll make sure it gets built when they are prepared to pay for it. The I-15/Monocacy Avenue IC could be paid for by a mix of tolls and payments by real-estate interests who benefit from it.

Project 2 (second map) on the local list forwarded to the state for funding is I-70 at Meadow Road - a pair of missing ramps on an existing interchange. Estimated cost of $30.9m.

Project 3 is for widening of MD85 Buckeystown Pike at a cost of $46.9m - 1.3 miles of an extra 2 lanes on a local distributor in an area of some growth.

None of the these projects is of the slightest importance outside Frederick County. And the costs of state construction are horrendous - $91m for a simple diamond interchange with just one bridge, $31m for a couple of missing ramps on another interchange and $47m for a short section of local distributor widened from 2x1 lanes to 2x2 lanes - a few drains but curbs and gutters and paving.

But heck if the state's paying, who cares. And a local construction company might pick up some of these inflated  contracts.

Under a sensible governance the state of Maryland would get completely out of such local benefit road projects and tell counties and cities that they are responsible. And hopefully at lower levels of government they would make these self-financing projects, dictated by the market not by government.

"The fantasy that the democratic act of centralizing and concentrating decision-making authority and responsibility in the state ensures that decisions are made better and more wisely and more 'scientifically' and in ways likely to promote greater human flourishing is the most absurd and dangerous - yet widespread - fantasy that afflicts modern humanity," wrote economist Milton Friedman.

Interstates are NOT interstates

Similarly with Interstate highways. As a descriptor of the actual function of these roads it's such an absurd term that only governments could embrace it. Interstate highways carry predominantly intra-metropolitan traffic. Or intra-state traffic in the sense of traffic moving within the state. Except in the tiniest states like Rhode Island and Delaware the vast majority of traffic using so-called Interstate highways is intra-state.

In short interstate traffic on misnamed Interstate highways is trivial.

There is no justification or rationale for the federal government to take financial responsibility for these highways.

Maybe there was at some point in the past - there was a certain charm to the idea of a national government stitching diverse states together. Or emulating the Nazis national  'autobahn' network was held to support national defense. That provided a justification for federal funding of interstates.

However all this is history now. Nostalgia and inertia is all that keeps the federal government financing highways.

In a rational scheme of governance local and metropolitan government would work out a framework for charging for roads. It's unlikely the locals would do much tax financing because obviously taxes fall only on local people and businesses and don't charge visitors and passers-through.

So there would be lots of tolling.

Now that gantries over a road can collect tolls at highway speed it's feasible to toll surface arterials as well as expressways. Major road improvements could be financed in part by assessments made of increased property values where those property owners agree to opt in to an improvement scheme. Strictly local streets could be funded by property taxes.

Separate segments of highways should be self-contained business operations, charging what the traffic will bear in competition with others, and making improvements where the risk takers make the judgment that users will subsequently pay for those improvements in tolls.

No VMT charges please

What we do NOT need is some centrally collected vehicle miles traveled charge.

Milleage based fees would perpetuate the dysfunctionality of centralized fuel taxes in which funds are allocated by politicians according a mix of ideology and favor trading. Central government management of roads and political management of funds is a disaster - improper pricing and lack of incentives to provide service produces chronic congestion, totally unnecessary congestion, high cost, neglect of high return projects and wasteful investment in unnecessary ones.

Proper pricing would manage traffic for freer flow and provide strong incentives to invest where there is a need for extra capacity and where that extra capacity can be provided profitably. But that requires highways to be privatized into many separate businesses. Or at least run as county or city owned businesses. The important thing is that their revenues derive from customers they serve.

They could get economies of scale by banding together to contract for joint services. But we need highways to be a diversity of different business units each managing its investments and operating expenditures based on what users will pay and where profits (the excess of consumer value over cost) lead them.

UK Institute of Economic Affairs argues privatization

Britain's Institute of Economic Affairs in a new study ("Which Road Ahead" by Oliver Knipping and Richard Welling)  argue that there is an overwhelming case for privatizing roads, and privatizing them fully, not leaving users at the mercy of government regulators with investors as mere contractors to government. (British spelling left unchanged)

"Across the world, state-owned roads are characterised by endemic congestion, high accident rates, poor maintenance and wasteful investment.... both empirical evidence and economic theory support the contention that private ownership would bring significant efficiency gains and deliver infrastructure that was far better suited to the preferences of road users. Current systems of government control are highly inefficient and unresponsive to consumer demand.

"Government roads also impose significant costs on taxpayers to fund both new construction and maintenance... These large sums of money are not spent efficiently. Investment has tended to
be directed according to political priorities rather than according to consumer demand...

"Suboptimal road networks have other profound economic implications. If transport costs are artificially raised by congestion, poor maintenance or the prohibition of new road capacity, the costs of exchange are also increased. The division of labour, competition, economies of scale and associated productivity gains are hampered. The pattern of economic activity is compressed into smaller, more localised markets. Conversely, if governments subsidise road schemes that would not be commercially viable, the spatial pattern of economic activity may be artificially extended, unfairly favouring large companies and creating diseconomies of scale.

The  tax increases needed to fund such infrastructure has negative consequences too.

"As well as distorting patterns of trade, state ownership hampers innovation. The continual problem-solving, experimentation and discovery that characterise entrepreneurial free markets are stifled by government control..."

"The full benefits of private ownership will arise only when the role of government is greatly
diminished - in other words when private owners are free to negotiate routes, set toll rates, control access and determine rules for users." - editor.

http://www.cbo.gov/sites/default/files/cbofiles/attachments/11-08-12-DeficitReduction.pdf

http://www.iea.org.uk/in-the-media/press-release/denationalising-britain's-roads-would-raise-more-150bn-new-research-show

TOLLROADSnews 2012-11-09


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