Everyone pays taxes — sales, property, income or FICA — in money. But nearly everyone also pays taxes in kind.
That’s an economist’s reaction to the news that a narrow, winding street that is one of the few routes in and out of the topographically isolated neighborhood where I live in St. Paul, Minn., will be closed for months while being rebuilt. Taxpayers will bear the money cost of grading, asphalt and concrete. But anyone who wants to get in or out of the neighborhood will pay an in-kind tax in the form of wasted time and extra mileage.
This cost is substantial, as nearly 8,000 people live in the neighborhood and more work or study at its university campus and a large Lutheran seminary. The street just reopened after being closed eight weeks for the first phase of the revamp.
“Boo-hoo,” many readers will say. “Into every life a little rain must fall.”
They are right. This happens to everyone sooner or later. Minnesotans say there are only two seasons here, winter and road closures. But people in Boise and Bismarck and myriad other locales say the same thing. Moreover, we remain very well off compared to many others in terms of roads and streets.
Nevertheless, such a detour or lane closing anywhere illustrates the public finance principal that there are implicit taxes as well as explicit ones.
My neighbors’ frustration, wasted time and marginally higher gas use are an “external cost” of this protracted project.
Basic microeconomic theory shows that whenever external costs occur, economic inefficiency results and resources are wasted. This doesn’t mean households should never be inconvenienced by infrastructure improvements or that we should spend inordinate amounts to ameliorate them. Achieving an optimal situation for society always involves balancing some marginal cost to society with the marginal benefit of doing so. And this never would result in reducing the costs of detours to zero or anywhere near it.
It is not that engineers and project managers are indifferent to the external costs construction places on people. But the only practical way these costs are expressed is through the local political process. People call their city council members or county commissioners to express their dissatisfaction.
In such communication, higher-income, higher-education folk who know whom to call tend to get better hearings than do poorer, less-well-informed citizens who don’t know how to work the system. So the relatively well-off may get their detours lifted faster than the poor. This was evident in the construction a local light-rail line, when some property owners with political clout apparently got faster relief from construction problems than others.
The broader problem, however, remains that there is no accurate system in which the external costs of construction are quantified and included as true economic costs in project planning.
A further practical complication is that, while residents object to infrastructure construction disrupting their lives and imposing costs, as voters, they are loathe to support levels of taxation high enough to pay the cash costs that would be needed to reduce the duration of closings.
If there already are more needed infrastructure projects pending than tax dollars to accomplish them all, government officials are not going to further limit total work accomplished by spending large amounts to speed construction and reduce delays for citizens. If explicit taxes don’t raise enough money to do the job, then impose the implicit taxes of time- and gas-consuming detours or lane closures.
Something similar occurs with inadequate maintenance of roads. Bad pavement and inadequate capacity also impose external costs on society in the form of damaged tires and suspensions and hours spent creeping along in stop-and-go commutes. The direct dollar cost to taxpayers is lower, but the explicit and implicit external costs to drivers is higher.
We commonly complain about bad roads, and over my lifetime, at least, Minnesota has lost the road capacity and quality edge it once had over some neighboring states like Iowa. But we are better off than some other states and most other countries.
If you don’t think your own state or local transportation or highway department is effective, go to Pakistan, Paraguay or any other poor country.
Some years ago, I worked on a development project in Peru that required frequent drives on the Carretera Central up the intermountain valley from La Oroya, elevation 12,300 feet, to Cerro de Pasco, elevation 14,300. With 365 freeze-thaw cycles a year, it is hard to maintain any road, paved or not. Yet much fruit and other produce from the eastern slope of the Andes must get to Lima.
One heavy truck follows another, dodging mammoth potholes. And every village has signs for muelleros, or spring repairers. Forge welding and then re-heat-treating rear springs from huge Volvo trucks requires a level of blacksmithing skill that awes me. But literally dozens of such craftsmen make their living repairing the damage caused by only 85 miles of bad road.
Two Peruvian researchers, an economist and a civil engineer, estimated the external cost to the private sector of this bad stretch of road. Annually, it was about five times the cost of maintaining it with periodic passes of a road grader, the way any rural U.S. county would do with its graveled roads. But the political system did not function to rectify the problem. In Peru, as in many other places, there is greater political benefit from dedicating new projects than in maintaining existing ones.
There is no simple solution to the near-universal phenomenon of people paying in implicit taxes what they do not pay in explicit ones. Some countries and states have more effective politics and public administration. Switzerland’s is more effective than Romania’s, and Oregon’s is better than Alabama’s.
Public education helps. So do leaders with vision, like a great GOP governor of Minnesota 50 years ago or President Dwight Eisenhower at the national level. But external costs of inadequate infrastructure, or of its ill-planned revamping, will always be with us at some level.
Economist and writer Edward Lotterman can be reached at email@example.com