Business Columns & Blogs

Ed Lotterman: Weighing a key ‘public good’ like better highways

In evaluating many fiscal policy issues, it is important to understand that there often is a difference between the cost to individuals, be they taxpayers or citizens, to government and to society as a whole.

Sometimes, “savings” to government are indeed a true reduction in resource costs or usage. But at other times, such savings are merely a shift in costs from one group of citizens to another. Ongoing federal and state debates about government spending on transportation bring up two good examples -- one about the costs and benefits of increasing the gasoline tax, the other on the direct and indirect benefits of public transportation.

An example of the first came in an email from a reader motivated by news stories about a controversy in my home state of Minnesota about whether to increase the state motor fuels tax. Similar fights have been going on in several other states, including Idaho, whose gas tax will go up 7 cents on July 1.

The story he read quoted an approving suburban citizen suburb who wondered why, in the face of lower gasoline prices, government would want to snatch that improvement for households back in the form of higher taxes. Another was quoted to the effect that it was hard for most people to make ends meet and that a gas tax increase would make that monthly struggle even harder. The email posed a key question: “Just how much would the higher tax have cost these people versus what they might have gained?”

The answer, of course, is that the cost of the higher tax would vary directly in proportion to how much they drive and the fuel economy of their vehicles. But they also would enjoy the nonmonetary benefits from improved roads, again in some proportion to how much they drive.

Most people overestimate the dollar impact of the gas tax. My wife and I have two vehicles, a heavy farm pickup and an imported crossover for getting around town. We drive a total of 20,000 miles a year using about 1,100 gallons of gasoline. Many other households drive more and some less. A few might consume more than two or three times as much gasoline as we do.

The proposed tax increase was for 5 cents a gallon. That would have cost our family an additional $55 per year. That isn’t pennies, but we spend more than that when we go out to our favorite steak house on a Friday night, at least if I get a beer and we share an artichoke dip appetizer. Again, many families would pay somewhat more in tax than us and some would pay less.

Would we get any benefit to offset this siphoning of funds from our billfolds? I think yes, but it would take some detailed analysis to quantify this.

A nickel increase would boost the current gas tax in my state, which is in the middle of the pack among states, by 17.5 percent. Assuming a very slight decline in driving in response to the increased cost, state fuel tax revenue would grow by at least a sixth. That isn’t chump change. Based on past experience, a one-sixth increase in fuel tax funds could fix a lot of potholes and help reduce congestion -- potentially lowering gas consumption.

That gets to a question of implicit versus explicit costs. Say most of us will not have to pay an additional $50 to $100 a year in explicit tax costs from the decision not to raise taxes. But many of us could hence pay more in the implicit costs of time idling in rush-hour traffic or in getting a front-end alignment after hitting too many potholes.

Any state or city needs transportation infrastructure to be economically efficient and meet the needs of households. We can pay for that infrastructure through taxes, or through tolls paid to private operators of roads and bridges or, using emerging technology, through fees assessed on actual driving. Or we can pay through people’s time wasted, damage to vehicles and sacrificed economic efficiency because a key “public good” has diminished.

This last rubric is the least visible to the average person, but probably the greatest one in terms of its monetary cost.

Of course, we don’t know for sure if the commuter from an outer-ring suburb of a major metropolitan area would save enough in time and gas wasted idling during rush hour or in reduced car repairs to offset the $50 to $150 she might have to pay had the gas tax gone up 5 cents a gallon. But reliable studies show that, at the point we are at now, the rate of return to additional money spent on road maintenance and improvement is high.

The political question is whether that money should be reallocated from other areas or raised via a fuel tax increase. But if we don’t pay through government, we are going to pay some other way. The cost to society of inadequate roads and bridges won’t disappear.

Society faces costs that must be paid somehow. We can avoid paying taxes explicitly, but we are going to bear some economic cost nevertheless.