David King and I compose a sequel to our recent post on public transit, arguing: The case for (and against) public subsidy for roads @ streets.mn:
Road pricing has been unsuccessful because it is framed wrong. I say it is unsuccessful because it is not widely adopted, despite being a policy proposal on the table for decades, despite its widespread support among transport economists. Unfortunately, it is perceived (by drivers) as punitive.
Pricing has two complementary objectives, raising funds and allocating resources. We already raise funds for roads, with gas taxes. Gas taxes are in the present (non-EV) world almost perfect as a fund raising mechanism, as they don’t have much in the way of administrative costs, but they are poor at allocating resources. See Marty Wachs’ paper on this.
We of course might want more funds, but I believe we cannot raise revenue and switch methods at the same time. If we want to switch methods (to better allocate roadspace) we need to be revenue neutral. If want to raise revenue, we should raise rates under whatever system is adopted. These two debates should not be conflated.
The primary objective of any new road pricing strategy should be to better balance loads, i.e. manage the use of a scarce resource, roadspace, during the peak hours. Basically we want to move some drivers from the peak to the shoulders of the peak or the off-peak to reduce congestion.
Because it is costlier to provide extra capacity to support travel in the peak, and because of congestion externalities, travelers in the peak should pay more than travelers in the off-peak to satisfy both equity and efficiency arguments. Currently most federal and state road funding is from a gas tax that is proportional to fuel consumed, more or less proportional to miles traveled, but almost entirely independent of when that travel takes place (more fuel may be consumed per mile in the peak than the off-peak because of additional braking events in stop-and-go traffic, but this is too small to affect people’s behavior).
The critical aspect of urban travel is its peak by time of day. We have morning and evening rush hours, corresponding to when most people go to and from work. However, there is a lot of non-work travel in these periods as well, people going shopping, to the gym, or eating out, which may have more sensitivity to price than work travel. We can see peaking in the attached figures. Demand for work travel peaks in the morning and evening (non-work trips are flatter, but not flat). Speeds drop in the morning and afternoon peaks. If we balanced the load more evenly, average speeds would rise in the peak and drop in the off-peak. But the net should be an overall gain, since there is excess off-peak capacity.
Figures from Parthasarathi, Pavithra, Anupam Srivastava, Nikolas Geroliminis, and David Levinson (2011) The Importance of Being Early. Transportation 38(2) pp. 227-247
Just as we want to balance trips across time of day, we might want to balance trips across the network. While during the peak, some links are congested, others have spare capacity. Perhaps we can move travelers around?
Work in our labs with computer models of the Twin Cities road networks is that moving from a user equilibrium solution, where each driver selfishly chooses his or her own route, to a system optimal solution where each driver chooses a route that is best for society, reduces total Vehicle Hours Traveled by less than 5 percent. This suggests there is not much to gain for all of the complexity involved in getting travelers to switch routes, but keep their time of day.
A strategy that respects privacy.
A concern that arises with most road pricing proposals is government tracking. While I am personally of the belief we don’t really have privacy anymore, I can understand the desire to at least make it more difficult to track you. Installing devices in vehicles as a government mandate is not reassuring to anyone, tin-foil hat wearing or not. To be adopted, policy has to respect that.
Suppose we increase the gas tax to the desired peak hour rate. [This is the politically difficult part.] We then offer a discount for off-peak travel. This discount requires voluntarily installing in your vehicle a device which tracks when your car is in operation, and the odometer reading. (Not where, just when). For each hour of travel during the peak, you have already paid the peak rate. For each hour of travel in the off-peak, you get an off-peak discount.
So for instance, let’s assume you consume 500 gallons of fuel per year (@20 MPG, this would be 10000 miles). Let’s assume half of your time is in the peak and half is in the off peak, as measured by the clock. Assume previously, the gas tax was 35 cents a gallon, all the time. You would have paid $175 a year.
Now the “peak” gas tax is 50 cents a gallon, so you paid $250. The off-peak gas tax is 20 cents a gallon. If you install the device, you would get an annual off-peak travel rebate of $250-$175 = $75 (500 gallons * 50% of time * $0.50/gallon peak + 500 gallons * 50% of time * $0.20/gallon off-peak = $175). If you wanted to keep your privacy, you would not install the device. Privacy is not costless.
The device of course makes the system somewhat more complicated than existing, but is hopefully inexpensive in large numbers (my insurance company issues one to me, it can’t be that expensive), and the rates make the system slightly more complicated. Altogether, that is unavoidable if you want to add a time dimension to the prices charged to travelers.
As the saying goes YMMV (Your Mileage May Vary), so while this example was revenue neutral in a world of static demand, it might lose money if everyone installed the device and people respond to incentives and change behavior. Based on experience with changes in gas prices, we expect those changes are relatively small (the elasticity of demand with respect to gas price changes is pretty low). Further, not everyone will install the device. But changes don’t have to be large to have an effect, and we don’t want them to be too large (otherwise the peak is uncongested and the off-peak is congested). We could come up with schedules that would be appropriate, and might have different rates at different times (e.g. peak of the peak, shoulder, mid-day, and off-peak).
Another objection is out-of-state travel. Here, we are simply computing when you travel and assuming all fuel is purchased in the home state. If every state has such a system, this probably has very small boundary effects. If one small state adopts this, and its neighbors don’t some residents might travel out of state to purchase fuel (leading them to not adopt this). Again, I suspect the losses will be small, though they may be measurable. There could either be a federal mandate for such a system (which I would not like), or agreement among the various states to coordinate the pricing mechanism. If the rates differences (peak vs. off-peak) are small, they will not distort behavior much, and that might be the best way to implement, and then the differences can be increased over time (peak prices increasing, off-peak decreasing, until the desired load balance was achieved).
“The survey results show that a majority of Americans would support higher taxes for transportation—under certain conditions. For example, a gas tax increase of 10¢ per gallon to improve road maintenance was supported by 58 percent of respondents, whereas support levels dropped to just 20 percent if the revenues were to be used more generally to maintain and improve the transportation system. For tax options where the revenues were to be spent for undefined transportation purposes, support levels varied considerably by what kind of tax would be imposed, with a sales tax much more popular than either a gas tax increase or a new mileage tax.
I got quoted last weekend in the Oregonian about peak travel: Columbia River Crossing needs $900 million from Washington and Oregon, but how to raise it remains elusive:
“David Levinson, a University of Minnesota professor who studies transportation issues, argues that the trend is long-term and is as much cultural as financial.
Teens, historically the most avid drivers, are waiting longer to get their licenses and are driving less, pushed by higher costs and also tougher rules for young drivers, stronger enforcement of drunk driving laws, even technology. Another theory: smart phones and the Internet have supplanted the car as a central platform of young people’s social lives.
Cars themselves have also changed. Some don’t burn a drop of gas or pay a penny in gas taxes. Others use less, due in part to tougher federal mileage standards. ‘It’s official government policy to drive down gas tax revenue,’ Levinson said. “
The 2012 proposal by David Cameron to “privatize” UK roads, by contracting out management of the roads in exchange for a stipend of taxes (but notably not tolling existing roads, only new construction) (Watt, 2012) is interesting, and promises a short-term revenue fix (and possibly better managed roads) in exchange for less funds downstream. In Great Britain, after World War II public corporations managed most utilities (electricity, gas, water, and rail) while others remained within the public sector (post and telecommunications, roads). The Thatcher administration successfully privatized British Telecom in 1984 and other public utilities in subsequent years, including bus transit and some rail transit, but not roads. The government retained the power to regulate these natural monopoly industries.
In many countries, freeways are operated by private sector firms under a franchise or concession agreement with the government, which usually retains underlying ownership of the road (Daniels and Trebilcock, 1996; Poole, 1997; Poole Jr and Fixler Jr, 1987). As of 2004, more than 37 percent of motorway length in the EU25 plus Norway and Switzerland was under concession, and 75 percent of that was privately operated (Albalate et al., 2009).
There is even limited experience in the US with contracting operation of existing roads, which has not been without controversy, the most notable examples are the long-term leases of the Indiana Turnpike and Chicago Skyway (Samuel and Poole, 2005). New toll roads built and operated by private firms are much more widespread, and include the Dulles Greenway and Pocahantas Parkway in Virginia, the Adams Avenue Turnpike in Utah. This experience applies well to toll roads, and variants such as High Occupancy/Toll (HOT) lanes (Poole et al., 1999) and Truck-only Tollways (Samuel et al., 2002). California’s SR-91 median toll lines were privately built on public right-of-way, and later bought out by a public toll agency. Presently, the MnPass HOT lanes in Minnesota manage toll collection under a concession to private organizations. A large share of the few new limited-access roads built in the US have adopted the toll model, and more could follow suit (Fields et al., 2009; Poole and Samuel, 2006; Poole and Sugimoto, 1995; Staley and Moore, 2009).
Yet, most roads, and even most freeways, in the US are not toll roads. Strategies such as mileage-based user fees or vehicle mileage taxes, which replace and improve upon existing motor fuel taxes have been vetted, and may ultimately be implemented. But allocating funds to particular roads, while technologically straight-forward, may face resistance from privacy concerns.
There are technical solutions to privacy issues, but implementing these, in the face of the desire of security agencies to be able to track individuals, will be difficult. It may turn out with cameras, mobile phones, and other devices, we lose privacy about our whereabouts well before road pricing is implemented. The solution may be as Brin (1998) suggests a Transparent Society, where everyone can watch everyone, the state does not have a monopoly on monitoring. Based on historical experience (Levinson, 2002), implementing tolls on existing untolled roads is likely to be politically difficult and unpopular. A 2007 petition in the UK to then Prime Minister Tony Blair beseeched:
“The idea of tracking every vehicle at all times is sinister and wrong. Road pricing is already here with the high level of taxation on fuel. The more you travel the more tax you pay.
It will be an unfair tax on those who live apart from families and poorer people who will not be able to afford the high monthly costs.
Please Mr Blair forget about road pricing and concentrate on improving our roads to reduce congestion.”
– The petition, now closed, could previously be found at: http://petitions.number10.gov.uk/traveltax
This petition to scrap “the planned vehicle tracking and road pricing policy” was signed by more than 1.8 million UK residents by 2007, more than any other petition in history. It clearly has informed Cameron’s proposed policy.
Further the problem of rates differing by route (such as marginal cost prices, the theoretical ideal from a micro-economics perspective), would undoubtedly increase system complexity and distrust, with likely only small gains from system efficiency. Our best estimate from computer models is that moving from a user equilibrium solution, where each driver selfishly chooses his or her own route, to a system optimal solution where each driver chooses a route that is best for society is less than 5 percent reduction in total Vehicle Hours Traveled in the Twin Cities. This suggests the “price of anarchy” (the ratio of user equilibrium to system optimal travel times) is not large on real road networks, despite externalities such as congestion, and imperfect competition among roads. Much larger gains are to be had if travelers shifted to different times of day, but that need not be route-specific.
If the rates were set by private firms in an unregulated manner, monopoly links would have higher prices and be rightly perceived as exploiting their position. In a robust network, monopoly routes are scarce, often there are many viable paths between given origins and destinations, but local monopolies remain, especially on poorly designed, or geographically constrained networks. While there are innovative economic solutions it is likely that a disjoint system of too many road operators, in addition to being complex and unpopular, may be inefficient as economies of scale and network externalities are not fully realized.
Albalate et al. (2009) describe recent toll road privatizations as indicating a change in government intervention which sees “transitions from internal control on processes and inputs to external control on performance outputs.” Toll privatization results in an increase in price regulation. In Europe, privatization entails transfer of management and operation (through concessions) for a time period, while underlying asset ownership is retained by the government. It is widely observed in the public management literature that found that more agency autonomy is accompanied by an increase in external controls. Still focusing on the outputs (the performance measures) rather than on how those measures are achieved should, by decentralizing decision-making, produce a more efficient outcome.
Economic solutions to the monopoly problem include auctions for the privilege for operating routes which would allow the public to recover these monopoly profits, or reverse auctions where firms would bid to charge the lowest rate to operate the route. Future franchising such as Present-Value of Revenue (PVR) auctions may entice government agencies to reconsider the toll finance mechanism. The PVR auctions are similar to the so called Demsetz auctions (used in the Build-Operate-Transfer (BOT) approach) with the exception that private firms compete through bidding for the present value of toll revenue they want to obtain from the project. In this way, the consequences of these auction are: no renegotiations (franchise terms are lengthened or shortened to meet bid PVR); no special clauses such as competition (the governments may build additional competing infrastructure projects because of previous consequence); incorporated buyout option (private firms receive their PVR bid, and governments acquire the infrastructure without bargaining behavior); and others. However, disadvantages of PVR auctions include: no incentives to increase demand (if demand increases it shortens the franchise term), and thus projects that require higher service quality may not be appropriate for PVR auctions (Engel et al., 2006).
A model that has been insufficiently explored in the US is that of public utilities. Many utilities share with transportation systems the characteristic of having a networked structure. Most, if not all, of these utilities are operated on the basis of a payment-for-use system. Utility pricing varies regionally, some locales vary prices by time of day, and users often have the option of choosing different rate plans. These models are never strict marginal cost pricing, but they may improve upon average cost pricing. There are strong parallels between public utilities and transportation services, though some differences exist in the nature of the services consumed, the role of technology, and the structure of institutions and decision making (Hillsman, 1995).
Water faces similar difficulties to transportation in the ambiguity of appropriate property rights. Institutional reforms began in the 20th century to better allocate water resources and to improve the efficiency of water use. The perspective of water changed from being perceived as a free good to a scarce economic good took place around the world (Saleth and Dinar, 2004). Institutional reforms differ by political setting and social environment (Saleth and Dinar, 1999), who observed that decentralization (from central to state and municipal governments) took place in Mexico, Brazil, while corporatization and privatization occurred in Chile, Brazil, France, United Kingdom, Australia, and New Zealand, among others.
Hillsman (1995) suggests four categories in which utilities have developed to manage demand:
- Altering infrastructure,
- Packaging services,
- Substituting technologies, and
- Changing the price of service.
Transportation agencies have considered all of these, but implemented them weakly. In reverse order: Prices are largely invariant, technological (modal substitutions) are not viable for most passenger or freight users, bundling and packaging of services is not considered when looking at pricing, and infrastructure is hidebound to engineering standards, and difficult to modify. One could easily imagine more creativity on the part of road providers in all of these aspects. The constraints on the application of creativity are due to the engineering culture in a public agency, where risk-taking is discouraged if not punished, and certainly never rewarded.
With some modification, it seems possible to transfer the utility model of governance to road transportation. This model separates the organization delivering the service from the client, is subject to rate regulation, and implements a more direct, user-pays system of financing. This model could depoliticize management of the existing transportation system. Whether rate regulation is in fact economically necessary is the subject of debate; for instance Stigler and Friedland (1962) argue there is no difference in prices in the electrical sector due to regulation, because electricity is competitive with other energy sources in the long run. One expects from experience with other utilities, toll roads, and road concessions in other countries that it would be politically necessary to have some public guarantee of an upper bound on the rates a road utility could charge, as provided by a regulatory agency. The risk is that an upper bound on revenue would be too tight, resulting in financial losses (and one of the causes of municipal takeover), as occurred in the then private mass transit sector throughout in the US in the early to mid 20th century.
Such a system would transform but not replace public highway or transportation authorities as the party responsible for providing and maintaining roads. One example of a transportation system that has transitioned to more of a utility-based model is the road authority in New Zealand (Starkie, 1988). This system was designed to be self-financing, with what was originally called the National Roads Board allocating charges among users on the basis of costs incurred. Three types of costs were identified: load-related costs, capacity-related costs, and driver-related costs (covering signing and other costs not related directly to road use).
There are other elements of costs not included, such as access costs (the cost of accessing the network from land and the cost of a connected network, which can be separated from capacity costs (related to the width of the roadway), and load costs (related to the thickness of the roadway), and environmental costs (both how the system deteriorates due to weathering independent of use, and how the environment is degraded due to use).
Vehicles are split into two classes on the basis of weight, with vehicles less than 3.5 tonnes paying a charge in the form of a fuel tax. In the US, Oregon has a weight-mile tax for heavy trucks. Heavier vehicles pay a distance license fee, which is essentially a form of weight-distance tax. Such a system is relatively straightforward and requires minimal new technology, leading to low collection costs compared with most proposed road pricing systems. (Newbery and Santos, 1999) have also estimated the costs and relevant charges for a similar, though hypothetical, system of user charges for the UK.
These types of road user charging schemes contrast with user charges based on a mileage tax concept utilizing GPS systems (Forkenbrock, 2008). There are a variety of potential technologies for assessing mileage taxes, most use GPS (or an equivalent such as cellphone triangulation) to identify location, since one of the advantages of these types of systems is the ability to charge different rates for different locations (city vs. country, freeway vs. local street, congested vs. uncongested road). GPS receivers do not normally transmit information. GPS-equipped vehicles can log the vehicle location internal to the vehicle. Some additional communication technology, which might report a reduced form of information (e.g. total amount owed) would be used to complete the transaction. For instance, a pilot study in Oregon (Zhang et al., 2009) had a chip in the vehicle log distance traveled by zone (an aggregated version of location) and time of day, without storing the precise location. The chip only reported to the external source the total charge owed, calculated by an onboard algorithm. So no detailed tracking information was shared. Simpler technologies such as a mileage based user fee would simply record the odometer reading, but this would not allow differentiation by time of day or location.
While the road user charging concept remains an attractive prospect, its application may still be many years away due to a combination of privacy concerns, implementation and transaction cost issues (Levinson and Odlyzko, 2008), and technological development issues. Some of these concerns might be obviated under a different governance structure, where it was neither the legislative nor executive branch of government making these decisions. Public utilities have a “mean level of trust” of 42%, (Jenkins-Smith and Herron, 2004), which is much higher than the trust in the federal government, which hovers in the 20% range (Pew Research Center for the People and the Press, 2010). Dynamic pricing, as suggested for toll roads, significantly reduces consumer’s trust in an organization (Garbarino and Lee, 2003), as prices are no longer predictable and feelings of price gouging take place. Other US surveys suggest that the public feels dedicating the gas tax to transportation (hypothecation in the British jargon) would be a good idea. Of course this already occurs in most states and at the federal level, the public just does not realize it, and the political debate does not help. Hypothecation does not occur in localities, where roads are in fact funded out of general revenue, typically property taxes.
The discussions of road pricing for financing and congestion management in the US are still largely under the guise of existing institutions doing the pricing. To date, this has essentially been a non-starter. Perhaps with institutional reforms, reconfiguring state and local DOTs as public utilities rather than departments of state and local government, the logic the public applies to roads will change, from one of a public service paid by the pot of general revenue to a fee-for-service proposition paid for by direct user charges.
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I was interviewed by Dan Haugen of Midwest Energy News:
“It’s true that local property taxes, not gas taxes, pay for building and maintaining most roads, says David Levinson, an associate professor of civil engineering at the University of Minnesota, but whether or not that’s a subsidy for drivers is debatable.
“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.””
A new report is out from Institute on Taxation and Economic Policy Building a Better Gas Tax: How to Fix One of State Government’s Least Sustainable Revenue Sources.
I like the report and generally agree that increasing the gas tax, and building a better one, is appropriate as a short-term fix (until vehicle electrification and better fuel economy overtake it), so long as the funds are not spent on system expansion until the existing system is properly maintained (or abandoned where appropriate). I have some quibbles:
“As Figure 4 indicates, even a twenty cent per gallon tax increase would cost the average driver under $9.00 per month, and at least some of that cost would undoubtedly be offset through lower vehicle repair costs and less wasted gasoline burnt while stuck in traffic.” – If raising the gas tax is a socially good thing, all of it should be offset by private gains on average. The average driver should save time and money (or achieve value and avoid losses) which exceeds the additional tax (over the long term). If they don’t, why should they support such a thing?
Equity of Evolving Transportation Finance Mechanisms
TRB Special Report 303: Equity of Evolving Transportation Finance Mechanisms addresses the equity of alternatives to current transportation finance mechanisms, notably mechanisms based on tolling and road use metering (i.e., road pricing). The committee that developed the report concluded that broad generalizations about the fairness of high-occupancy toll lanes, cordon tolls, and other evolving mechanisms oversimplify the reality and are misleading. The fairness of a given type of finance mechanism depends on how it is structured, what transportation alternatives are offered to users, and which aspects of equity are deemed most important.
The committee identified the various dimensions of equity important for public policy debates about evolving finance mechanisms, proposed specific issues for policy makers to consider when evolving mechanisms are proposed, and identified areas where future research is needed for a better understanding of the equity implications of such mechanisms.
To move beyond superficial analysis, the report calls on policy makers to insist on well-designed studies of transportation finance that yield reliable information about the likely distribution of burdens and benefits, and that facilitate comparison of a given finance strategy with alternatives. In addition, public policy makers who wish to promote equity should engage their constituents and other stakeholders early and often when considering the use of new or unfamiliar transportation finance mechanisms.
The report calls on researchers to explore further how people modify their use of the transportation system in response to changes in prices and services and the consequences of these responses. It also recommends the development of a handbook for state and local governments describing procedures for conducting equity analyses of transportation finance policies.
To inform the development of its report, the committee commissioned four papers. Links to the papers are below:
• The Incidence of Public Finance Schemes
• The Empirical Research on the Social Equity of Gas Taxes, Emissions Fees, and Congestion Charges
• Remediating Inequity in Transportation Finance
• Equity, Pricing, and Surface Transportation Politics
I served on the committee that helped TRB draft the report and learned a lot from colleagues and those who presented to us. Online now is the pre-publication version of the report.
This seems improbable. It is because non HTF funds are being redistributed to the states from the Treasury. That is, the money comes from general revenue. That is, it comes from the people and the states. Figure 6 (shown to the right) is probably a more accurate portrayal than the headline quote. The States rich in Senators per capita get an “equity bonus”.
I noted yesterday in Linklist that “A bill was recently introduced by Senate Republicans that would allow states to opt out of the federal highway program.”
So what happens. Let’s assume half the states are donor states and half are donee states.
Day 1: All (25) the donor states opt out.
There are now 25 states in the gas tax pool. Half the states are donor states, half are donee. The funds had to be recalibrated based on the smaller pool.
Day 2: All (say 13) the donor states opt out.
There are now (let’s say 12) states left in the pool. Half the states are donor states, half are donee. The HTF allocation again had to be recalibrated based on the smaller pool.
Day 3: All (6) the donor states opt out.
There are now 6 states left in the pool. Rinse and repeat.
Day 4: All (3) the donor states opt out.
There are now 3 states left in the pool. One more time.
Day 5: All (1) the donor states opt out.
There are now 2 states left in the pool. One last time.
Day 6: All (1) donor states opt out.
There is only 1 state left in the pool. The federal government eliminates the gas tax program.
Opt-out of cross-subsidies leads inevitably to elimination of cross-subsidies.