Thoughts on income tax as a source of transportation funding

How we're going to pay for transportation infrastructure in the face of falling gas tax revenues has been a hot topic lately, with ideas ranging from pretty good to ridiculously bad. The concept that transportation should be primarily funded by user fees (gas taxes, licensing fees, tolls, and other costs that fall specifically on those who use the roads) is fairly unique to government spending and has a lot of merit, but one significant drawback of getting most of your money from drivers is that it tends to overemphasize road capacity expenditures over transit, pedestrian, and bicycling infrastructure--no one likes the idea that they're subsidizing someone else's lifestyle, after all.

Many people note that the federal Highway Trust Fund has been reliant on tens of billions of dollars in general fund revenue for years, effectively resulting in subsidy of drivers' infrastructure by those who drive little or not at all. This is portrayed as a bad thing--a case where drivers' hypocrisy is laid bare--and as a justification for public transit and active transportation subsidies. Using federal income tax revenue (the main source of general fund monies) to shore up the transportation fund has been somewhat demonized when compared to user fees, but perhaps there's something to it.

Technically, we already pay income tax into the Highway Trust Fund.

Structured correctly, such a tax could be very progressive and begin to reduce the maintenance backlog we fall further behind on each year. It could move us toward a less car-centric transportation system, and even be enough to catch us up to the many nations currently ahead of us in building a 21st-century infrastructure.

Now, even a very small tax could be devastating to someone with very low income, at or around the poverty line for example. Say we make it a 1.0% tax on all income over $20,000. Most people make over $20k a year, and many of those that don't are students who will make more in the future, and retired seniors who have already paid their dues. Those that earn less than that don't need any additional burdens, and they're a very small share of the income pie anyway, so exempting them wouldn't have much impact.

Per capita income in the US was slightly above $40,000 in 2011--this includes children, infants, retired persons, the unemployed, etc., so obviously the per capita income of the working population is considerably higher. Total personal income in the US was about $13 trillion for 2011. To account for the first $20k of everyone's income being exempt, we'll pretend everyone earns $40k a year and say the tax is assessed on half of total personal income, or $6.5 trillion dollars. (In reality this would be higher, of course, but there are too many variables for me to know exactly how much.) A one percent tax on this amount would bring in $65 billion a year, more than the federal government spends total on transportation each year ($53.5 billion). Add this to the ever-declining federal fuel tax revenues of $34 billion and we're at almost $100 billion per year. (And remember, there's no reason to get rid of the existing fuel tax.)

One appeal of an income tax for transportation is that it's sensible in regard to how people value their time. Even with a flat percentage on all income, people who earn more will pay more money into the transportation fund, and this makes sense: a person earning $100k a year has more to lose (from a financial standpoint) by wasting time in traffic than a person earning $30k a year, so it's fair that they would pay more for a transportation system that actually works. We need to actually a working network if we're going to collect more taxes though--our transportation network is so degraded and ill-suited to our needs that almost no one feels like their money is being put to good use. An extra $60+ billion a year might just get us there--at the very least it'd make a dent in some of that $2.2 trillion infrastructure backlog we've been ignoring.

Aside from the first-$20,000 exemption, this also solves the problem of "free-loading," the perception by people on all sides of the transportation debate that the other guy isn't paying the full cost of his or her mode of travel. Everyone pays something, so everyone gets a seat at the table when it comes to decision-making.

Of course, a bunch of extra money to spend on infrastructure doesn't do us any good if it's all just frivolously wasted on new capacity, and that's where things could get really interesting. How do we spend this new revenue responsibly? Imagine if, for example 80% of the new revenue had to be spent on maintenance and repair. Poor roads cost the average vehicle owner $355 a year, not to mention the injury and loss of life that can result from a crumbling, unsafe infrastructure. Or consider that it can cost 6 to 14 times more to repair roads in the last years of their life than in the first fifteen:

With an extra $65 billion a year we could literally erase this maintenance backlog. Once a state had caught up with their repairs--a process that would no doubt take decades, but without additional spending will worsen rather than improve--they could begin to use this money on other projects, assuming they kept things in a good state of repair. It's unfortunate that states can't be trusted to operate with a "fix-it-first" mentality, but when it's costing us all money in the long term and lives in the short term, it's appropriate for the federal government to step in and demand changes. As more roads fall to poor and very poor condition the costs will only accelerate, and we're so far behind at this point that only a significant increase on transportation maintenance spending can get us caught up.

It would also be true under this system that those who don't drive often, or at all, would be contributing more money directly to the transportation fund. As such, we could expect drastic changes to how money is apportioned, and cities and states could make serious progress on their public transportation, walkability, and bicycling goals--something that wouldn't just improve mobility, but also health, the local economy, and the environment. A growing share of trips is already being made on foot, bike, or transit, so the existing 20% of the Highway Trust Fund devoted to transit would have to increase, especially since much more of its funding would be coming from lite- or non-drivers. This would in turn lead to better options for those who would like to use their car less, and greater support for more investment in alternative transportation.

One last benefit of such a system, when compared to other revenue mechanisms like mileage fees and tolls (which certainly have many benefits themselves), is that it wouldn't cost any additional money to administer. Unlike a vehicle-miles traveled system, which requires GPS or mileage tracking hardware in every car, as well as monitoring of all of this data, an income tax is something we're very familiar with in this country and would be very simple to tack on to existing federal income taxes at little or no cost. Tolls and congestion pricing could be retained in dense urban areas for purposes of traffic control of course, but if generating revenue as efficiently as possible is the goal, an income tax is hard to beat.

There would be upsides and downsides for any income-tax based funding mechanism, but I think there's value in at least giving it consideration and discussing how we might make it as equitable as possible. I still believe strongly in user fees, and I generally favor taxing things that produce negative externalities, like gasoline consumption, alcohol, or cigarettes, over taxing positive things like employment. This isn't what I would choose if my goal were to maximize fairness and social justice, but when the scale of the infrastructure problem is so massive and the cost of waiting is so great, maybe the best solution is just the one that actually solves it, and solves it quickly.

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Property tax deductions, like mortgage interest deductions, are unfair to renters

This is a fairly minor follow-up to the post I wrote a few months ago about the pointlessness of the mortgage interest tax deduction. This is about the property tax deduction. Like the MITD, the PTD does a poor job of achieving its supposed policy goals, and in some cases actually works at cross-purposes to those goals.

Just as with mortgage interest, property owners are able to deduct state and local property taxes from their taxable income. Rental property, like owner-occupied housing, is also subject to this exemption. The goal of mortgage interest and property tax deductions is nominally to encourage homeownership, but by it's very nature this can't happen with rental property. Instead, all we end up doing is taking money out of the pockets of renters and handing it over to the (on average, richer) owners, with no social or economic policy victories to speak of.

Here's why:

Rents will usually be set by landlords at whatever level the market will bear (i.e., the highest level at which they can still rent all of their units). Unless competition for renters is extremely fierce, these property owners will be charging rents that cover their costs--not just their mortgage, but also repairs, landscaping, cleaning, taxes, and hopefully some profit. Renters, although they don't receive the actual bill, are the ones paying the property tax as part of their rent checks. Despite this fact, however, the property owner is the one who gets to write it off.

This means that if the property tax bill on my rental unit is $2,000 every year, I end up sending that money to my landlord (who then forwards it along to the city and state) and he deducts it from his taxable income, saving him upwards of $500. That's a pretty steep middleman's fee. The deduction is very clearly not succeeding at its goal of "encouraging homeownership". After all, I'm still renting. Maybe if I got to keep that extra $500 myself I'd be a little closer to owning a home. At the very least, we're clearly operating under an unfair system when only homeowners can deduct their property taxes even though both renters and owners pay them.

This isn't the fault of the property owners and I am not writing this with some kind of vengeance in mind for them, but if the deduction isn't helping to encourage homeownership* then why does it exist? From a government policy perspective, property and mortgage interest tax deductions are already of very questionable value for owner-occupied housing; in this case it's nothing more than a giveaway to rental property owners with nothing in return for the renter or society more broadly. No good is achieved.

As I wrote in November, there's no need for any additional incentive to purchase a home. Unless we want to find some way to ensure that the deduction finds its way into the hands of the person who actually paid the tax, we're better off getting rid of it entirely.


(I'd be interested in anyone's thoughts on how we might pass along the property tax directly to renters, or more likely give them the option of doing so. At first glance it seems too complicated to be worthwhile, and just getting rid of the deduction seems like a more realistic solution. But maybe there are some good ideas out there.)

*Other than in some perverse "force renters to overpay on their taxes until they wise up and buy a house" fashion.

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Mileage fees are a great idea -- in addition to gas taxes, not in place of them

Vehicle mileage fees have become a popular topic of conversation for those concerned with keeping our transportation system fully funded, and rightly so. Gas tax revenues are being eaten away at by inflation on the one hand and increasingly fuel-efficient cars on the other, and the Highway Trust Fund has been dependent on general fund transfers for the past 5 years. Mileage fees provide a way to increase revenues while more fairly distributing the cost of road-building and maintenance: the more you drive, the more you pay. 

The pro-VMT (vehicle-miles traveled) fee camp got another boost last month with the release of a Government Accountability Office report detailing the benefits of this system of transportation funding. Right off the bat they came out with a strong endorsement: “Mileage-­based user fee initiatives in the United States and abroad show that such fees can lead to more equitable and efficient use of roadways by charging drivers based on their actual road use and by providing pricing incentives to reduce road use.” (Streetsblog summed up the report's key points here.)

The report's authors, however, seem to be operating under the assumption that a VMT fee would be adopted as a replacement to the 18.4 cent per gallon gas tax, not as a supplementary source of revenue. If so, that's a mistake we need to avoid. 

The fairest and most efficient solution would be to retain the gas tax and index it to inflation, then set a mileage fee (also indexed to inflation) at a level that gets our total transportation funding to whatever target we choose. While either a gas tax or VMT fee by itself could be set at a level to achieve our transportation revenue goals, combining them has a unique and important benefit: it disentangles two distinct externalities of driving, pollution from gasoline and the cost of building and maintaining roads. 

Currently our gas-tax-only system only taxes drivers for the amount of pollution they release into the air, not the amount they actually use our road and highway network. It's nice that Prius drivers get a break for polluting our environment less per mile than SUV drivers, but building roads is expensive and it's clearly unfair for some to pay much more than others for the privilege of using them (assuming equal miles driven). The Prius driver also contributes just as much to congestion, and to the opportunity cost of dedicating large amounts of urban space to car travel and subsidized parking.

By adding a mileage fee to our funding mix we are able to preserve the benefits of taxing pollution (specifically, encouraging people to choose more environmentally-friendly transportation) while finally doing something to assess the other societal and financial costs of driving.

Unlike the mileage-fee-only system the GAO seems to be suggesting, this combination would also ensure that drivers of higher-mpg vehicles aren't punished. Take a look at the following chart from the GAO report:

From GAO.

The three bars under "baseline" are the estimated mileage fees paid by the average driver if we wanted to collect 1) the same amount of revenue as gas taxes currently do, 2) the amount we actually spend on transportation, and 3) the amount we would need to collect to maintain our current transportation network, respectively. As you can see, the SUV driver actually pays less under the "current revenue levels" system than under the baseline scenario, while the hybrid driver pays double. In the highest revenue system the Prius driver's tax bill increases almost four-fold, while the SUV pays slightly less than double. Everyone pays the same amount regardless of the gas mileage of their vehicle.

Clearly though, the costs imposed by a 16 mpg SUV are not the same as those of a 40 mpg hybrid (or a 100 mpg electric vehicle for that matter). Not only is the SUV producing much more pollution, carbon dioxide and otherwise, but due to its weight it's also more damaging to the road surface and more destructive to any people or property it crashes into. To ignore these differences would be blatantly unfair, and in many ways a worse solution than simply increasing the gas tax to appropriate levels. 

Large, low-mileage vehicles have a greater impact on our roads, our economy, and our health than do smaller, higher-mileage vehicles, and our federal policy should reflect that. If we want more equitable and financially solvent transportation funding, adopting a mileage fee is the way to go--but not at the cost of ignoring the real and significant costs of gasoline consumption. We can have both, and we should.

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Governor of Virginia offers worst transportation funding proposal in modern memory

Sometimes, in order to better appreciate our current policy and the options before us for improving it, you've got to get an idea for how much worse things could be. You've got to hear an idea so bad, so backwards and wrongheaded, so utterly devoid of merit, that it can't help but bring people together in united opposition. In the spirit of such bipartisan cooperation/condemnation, Virginia Governor Bob McDonnell has proposed the what is possibly the worst transportation funding plan that you're ever likely to see from a serious politician. Really, it's that bad.

The plan has a several components. First, get rid of the state's 17.5 cent gas tax (the federal tax of 18.4 cents would still be in place, of course). Second, make up for lost gas tax revenue by jacking up the state sales tax by 0.8%, from 5.0 to 5.8. Third, just for funsies, charge drivers of hybrid and electric cars a $100 fee on top of their regular vehicle fees.

Starting from the top: eliminating the gas tax is foolish regardless of what else you intend to do to shore up transportation funding. It's true that fuel tax revenues are declining as vehicle mpg increases and people drive less, and it doesn't help that in most places the taxes aren't indexed to inflation. There are almost certainly better ways to pay for transportation--a vehicle miles traveled (VMT) tax, for example--but this doesn't change the fact that burning gasoline to get around is bad for people and bad for the planet. Anything done to raise additional funds should be in addition to the existing gas taxes.

Independent of the value of raising money with the gas tax, it rightly serves as a mild disincentive to purchasing gasoline. There are other transportation options besides driving a single-occupancy vehicle these days. If people choose to drive, which they are of course free to do, it should be recognized that this is to the detriment of human and environmental health, and that privilege shouldn't cost nothing. Market demand sets the price of gas, government sets the cost of pollution. As far as state fuel taxes go, Virginia already does a worse job of pricing those negative externalities than most states: its gas tax ranks #40 in the country (New York is #1 at 49 cents).

Replacing the gas tax with a sales tax increase is almost as bad as not replacing the revenue at all. Sales taxes are notorious for being one of the most regressive ways of funding government spending. Take Washington as an example, a state that relies more heavily on the sales tax than perhaps any other. In Washington, because there is no income tax and most revenue comes from the sales tax, middle-income, and particularly lower-income people pay a higher share of their income to state and local taxes than the national average, and a much higher percentage of their income than do high earners:

From the Institute on Taxation and Economic Policy.

To be fair, the gas tax is also regressive. It hits poor people harder for exactly the same reasons as the sales tax does. It differs, however, in that people have options for transportation--very few are completely dependent on driving a car (at least not driving by themselves). There are no options when it comes to buying things like clothing, furniture, or kitchen utensils--you just need them, and you'll pay sales tax on them. But perhaps more importantly, those who earn very little are already much more likely to not drive; under McDonnell's plan, a gas tax they didn't need to pay would be replaced by an increase to the sales tax they pay every day. And the money would be used to fund roads that, by and large, they don't ever use. I doubt the governor would admit that his goal is to shift the burden of transportation funding to his lowest-income constituents, but that's the practical effect of this plan.

This would also make driving cheaper at the expense of those who don't drive, or don't drive often. At 17.5 cents, the current state gas tax accounts for about 5% of the cost of gasoline at the pump. Drivers would save this money and be able to spend it elsewhere--like on things that are subject to sales tax. The proposed increase in the gas tax is only 0.8%, however. So where before about 5% of the money drivers spent on gas was going toward transportation funding, now they can take that money and spend it on an extra coffee at Starbucks every week and only 0.8% of that money is going to transportation. This is a blatant shift further away from user fee-funded transportation, but in more ways than are immediately obvious.

Compare this to people who don't drive, who save exactly nothing and pay more on nearly all of their day-to-day purchases. And again, the people who don't drive are already disproportionately lower-income. Those who may have decided to get rid of their car or rely more on public transportation for financial reasons are being punished for that decision, while drivers are encouraged to keep on keepin' on.

Last, and most insane (although least significant overall), is the $100 fee assessed on hybrid and electric vehicles. This has been proposed in many places in response to the fact that these vehicles use the roads but, because they use so much less gasoline, contribute much less to transportation infrastructure funding. (This is also yet another reason to add a VMT tax to our funding mix.) I have reservations about penalizing people for doing right by the environment and their fellow man, but I understand why such fees exist and think they're okay, all things considered. In the case of Virginia, however, there's not supposed to be a gas tax that electric vehicle owners can skip out on--it's just an arbitrary punishment for owning a low-emissions car. This fee doesn't actually serve any purpose.

I've heard that the real reason for this fee is to make up for the federal gas taxes that these Virginians aren't paying much of either, but that makes no sense. For one, the fact that the federal government is failing to collect revenue from hybrid and electric vehicle owners is not something that Virginia or any other state needs to worry about. Let the federal government figure that out, the states get their money either way. You should be happy that you get to keep more of your own money--isn't that what every state wants? And I somehow doubt this $100 per car is going to to be sent to the U.S. Highway Trust Fund in lieu of foregone gas taxes. More likely it'll go straight to the state coffers, which means it's just a sneaky, dishonest way of shaking down electric vehicle owners and hoping they don't notice.

So Virginians, don't support this. Your legislature just recently shot down two transportation funding bills, one a mild sales tax increase (without removing the gas tax) and a much better one indexing the the gas tax to inflation. Neither was enough. Now's your chance to do even better and try out a VMT on a larger scale than the pilots going right now, like the one in Oregon. And while you're at it, stop exempting gasoline from the sales tax. And the rest of you states and governors, the low bar has been set. It can only get better from here. Right?

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Drunk driving prevention is difficult, but we already know what it takes

Out of roughly 34,000 traffic-related fatalities in 2009, about one-third involved a driver with a blood-alcohol content of 0.08 or above (the minimum for a DUI offense in every state). Thinking about this I wondered whether this number could be reduced by increasing the penalties for higher BAC levels, since the chances of a collision rise quickly as impairment increases, but fines, suspensions, and jail time do not. After doing some research on the subject, I found instead that this is actually a very complicated issue (surprise!), and my intuition didn't really stand up to scrutiny. Case in point was Wisconsin, a state that already has penalties that scale with BAC but in both 2008 and 2009 had significantly higher rates of alcohol-related fatalities than the national average. Something else is going on here.

Just so you can get a sense for the argument I was making originally, here's the bulk of what I'd written before deciding to add the above disclaimer and what comes afterward:


First idea: drunk driving penalties should be more closely tied to blood-alcohol content

The penalties for a DUI conviction usually include a small amount of jail time, a 30-day to one-year driver's license suspension, and a few hundred to a few thousand dollars in fines--most states also have enhanced penalties which kick in BAC levels of 0.15-0.20. In the case of Washington state, though, the increased penalties for BAC at or above 0.15 don't have much bite: the same maximums for jail time and fines, with barely increased minimums, and a longer license suspension, one year instead of 30 days. Drunk driving of any kind is a serious crime that threatens the lives of the driver, passengers, and anyone else on the streets or sidewalks, but there's a big difference between driving with a 0.08 and a 0.15 BAC. We need to formally recognize this reality, and ensure that the penalty is commensurate with that increased risk.

According to this study by the National Highway Traffic Safety Administration, the risk of a crash is 1.74-2.69 times higher at a BAC of 0.08. At 0.15, crash risk is increased by 8 to 22 times, and at 0.20 the risk is 21 to 82 times higher relative to driving unimpaired. (The ranges represent the difference between the study's observed crash rates and its adjustment for those who refused to participate, were involved in hit-and-runs, etc., so the higher number is theoretically the more accurate risk estimate.) So in Washington, even though you're about 30 times more likely to get into a wreck at a BAC of 0.20 compared to 0.08, the punishment hardly differs at all. In the eyes of the law, the severity of each crime is essentially the same. Below is a graph from the study, illustrating the exponential increase in crash risk as BAC increases:

Crash risk vs. BAC, from NHTSA.

DUI laws in Washington (and many other states, I'm sure) aren't very sensible, but we can look elsewhere for guidance toward a better system. Although I think it still underrates the seriousness of BAC levels much higher than 0.08, Wisconsin has a system that's definitely superior to Washington's. There, penalties double, triple, and finally quadruple as BAC increases. A driver with a >0.25 blood-alcohol content faces penalties four times greater than someone arrested for DUI with a BAC between 0.08 and 0.149, and this includes fines, jail time, and license suspension. Of course, we can see from the above graph that a person with a BAC of 0.25 has a 160-times higher risk of getting into a collision compared to a sober person, and fifty times the risk of a person with a BAC of 0.08, so penalties that are only four times worse (at most) don't really capture the seriousness of driving with a very high BAC.

Thoughts following the implosion of this idea: if BAC-scaled penalties aren't the solution, what is?

Based on the data from Wisconsin, increasing penalties for more serious drunk-driving infractions is not the whole solution. That doesn't mean it can't be a part of it, but it's not enough by itself. So what else can we do? My next thought was that perhaps part of the problem is that, at least in Washington, we so rarely actually convict people of DUIs. I have several friends who have been arrested for DUIs, and all of them were able to plead down to a "wet reckless" with the help of a lawyer, a much less serious crime, even though they blew over a 0.08 on the breathalyzer. Maybe the problem isn't that DUI penalties are insufficient, but that so few people are actually convicted of the crime they've committed.

Nope. Texas doesn't allow defendants to have their charge reduced to a wet reckless, and yet they had even higher rates of alcohol-related fatalities than Wisconsin did. Again though, things aren't so simple: Texas has extremely lax penalties even for a DUI conviction, with no minimum for fines, and as little as 3 days in jail and a 90-day license suspension.

Like I said, this turned out to be pretty complicated (again--surprise!). The most effective solution I found was actually a program that started in Washington state itself in November 2006, and was followed up in 2010. The study was performed in the three biggest counties in Washington and consisted of adding six--yes, just six--state patrol officers to each county, their primary goal being to crack down on alcohol and drug-impaired drivers. The report can be found at the NHTSA's web site [PDF]; it's only 5 pages and I encourage you to check it out for yourself. The gist of the report is captured by the following graph:

From National Highway Traffic Safety Administration.

The TZTP counties are the three with the extra WSP officers. As you can see, compared to the average over the previous five years, the TZTP counties experienced a 34.4% decline in alcohol- and drug-related fatalities. That's in one year. Compare this to a 28.4% increase in the next two biggest counties (Clark and Spokane), and an 8.5% decline in the rest of the state. It's very possible that the numbers might jump up a bit after people get used to the presence of these extra patrols, but the difference between the pre- and post-TZTP eras is stark and worth investigating further. I have to reiterate once more that this is the result of adding just 18 officers (plus another ten or so support staff) to three counties with a total population of 3.5 million. We could do much more.

During the 10-month window of the study these officers made over 3,000 DUI arrests, 3,000 speeding citations, and 900 seat belt citations. In theory this should mean several million dollars in fines, more than enough to cover the expense of these extra patrols. Due to the leniency of our sentencing, however, I couldn't really guess what we're actually collecting as a result of these arrests. But more importantly than all that, the presence of these officers saved dozens of lives, possibly including the innocent drivers, bicyclists, and pedestrians these drunk drivers might have struck with their vehicles. The fact that it was at essentially zero cost to the state is just icing on the cake.

One way to ensure that we can capture that revenue and keep our drunk-driving patrols funded is to follow in Texas' footsteps (never thought I'd say that) and stop allowing offenders to plea down to wet reckless. Instead of punishing drunk drivers through the justice system's fines and suspensions, we're basically just redirecting that money to DUI lawyers--the people I know that were arrested for DUIs each paid about $5,000 through the whole process, but most of that money went to their lawyers. And for what? What do the lawyers contribute? No one is disputing the fact that these people were driving with a BAC at or above 0.08. The state should collect that money itself in the form of the DUI fines it rarely seems to collect, and use it to fund more patrols instead of enriching a few unnecessary lawyers.

I started this post planning to make a strong argument for increasing drunk-driving penalties, but after starting to write I realized there isn't evidence to back up my claims. Not without controls that don't yet exist, at least. And that's fine. Perhaps not surprisingly, I learned that enforcement seems to be the most effective way to prevent drunk driving and save peoples' lives. These two arguments intersect, however, at funding. If we want to be able to pay for extra patrols, the money needs to come from somewhere, and more strict penalties--or consistent sentencing, at least--could be part of the solution. And as we work to increase enforcement and seek to provide further evidence for its efficacy, let's keep finding new ways to prevent drunk driving, whether that means harsher penalties, more accessible alcohol and drug treatment programs, better transportation options, or all of the above. Even the most incremental improvement can mean hundreds of lives saved over the next few decades, and safer roads for everyone.

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