No pain at pumps, no gain on roads
America has halved infrastructure spending from 4% to 2% since the 1960s but economists argue if gas taxes were increased, it would raise funds to pay for much-needed infrastructure.
It is election season, and taxes are a filthy word. We like having government services, but not paying for them. As Louisiana politician Russell B. Long once summarised: “Don’t tax you, don’t tax me, tax that fellow behind the tree.” It is even harder to raise fuel price taxes in a sluggish economy, or when oil is relatively expensive. In February 2001, gas cost about $1.45 a gallon, whereas now it dances about $4.00.
We missed that opportunity. So goodbye to any political will for higher American petrol taxes, despite urgent need for road and infrastructure upkeep.
What politicians must do now is convey “a clear transportation vision”, says Alison Premo Black, the chief economist at the American Road and Transportation Builders Association. In the 1950s, President Eisenhower communicated such a vision for the Interstate Highway System, which revolutionised the nation’s economy and society.
It may take political courage, but the broader benefits of instituting a higher gas will compensate for public distaste. Some of these “reduced externalities,” to use economospeak, include reduced congestion, decreased pollution and carbon emissions. Less traffic has direct economic benefits, in terms of time saved, and makes for more livable conditions. (Stateside continues below)
Traffic-related pollution takes a sizeable toll in public health, exacting up to $80 billion (£50 billion) a year in healthcare and premature deaths, according to data from the Carnegie Endowment. Carbon dioxide is associated with greenhouse effects, and road safety is an indisputable “good.”
Americans pay relatively little in federal tax for driving. Only two countries, Kuwait and Saudi Arabia, impose less. (State levies are a separate story, with rates ranging from 8 cents a gallon in Alaska, to 49 cents in New York.) Europeans, curb your jealousy: current American federal tax rates are a mere 18.4 cents for gas and 24.4 cents for diesel. Gas taxes have not been hiked since 1993.
While 71% of federal receipts now goes to transportation, uses of the funds are somewhat “fractured,” says Deborah Gordon, a senior associate at Carnegie Endowment, with 16% of gas tax revenues and 12% of diesel accruing to public trains and buses. State taxes maintain local roads, while federal levies primarily support interstate highways. “For truckers, interstates are their connection across the country,” Gordon adds.
Spread over 300m cars, gas taxes bring in generous revenues. Each cent from gas taxes produces $1.4 billion a year, and from diesel, $400m annually. Yet even those amounts are inadequate to fund the Highway Trust, which must tap the US General Fund to meet shortfalls. “The Department of Transportation’s 2010 US Status of the Nation’s Highways, Bridges and Transit: Conditions and Performance report estimates an annual funding gap from all sources of $10 billion, just to maintain current conditions and performance,” says Black.
She adds: “An annual funding gap of over $40 billion is needed for intermediate improvements to the system over the next 20 years.”
Here is one last uncomfortable statistic: unlike all other OECD nations, whose revenues cover 100% of transport costs, America’s taxes meet only 62% of outlays.
While endorsing higher taxes to pay for needed infrastructure, some economists see the petrol pump as only the second-best solution.
Scott Drenkard and Mark Robyn, at the non-partisan Tax Foundation, contend that tolls are the fairest way to allocate resources by aligning costs and driving preferences. Those two economists note with interest the successful effects of congestion zones in London.
”Americans pay relatively little in federal tax for driving. Only two countries, Kuwait and Saudi Arabia, impose less”
Robyn says: “The weakness of gas taxes is that they are not a good approximation of what it costs the government when people use roads.”
For instance, cars have different mileage efficiencies, and heavier cars cause more damage to the system. Besides, after consumers have paid their gas tax, they are free to drive where they please. They may head for crowded streets, creating pollution and congestion after all.
While improved infrastructure is central to the argument, an additional case can be made for oil security and energy independence. America spends about $1 billion a day on importing oil, and risks economic harm and distortions though price spikes, panics and volatility. Could higher American gas taxes or tolls induce downward demand shift pressures on fuel prices? Possibly, although adjustments are dynamic, and Chinese and emerging market demand have been the key drivers.
Yes, energy prices are set in global markets, but America can nevertheless take action to stabilise domestic fuel price fluctuations. For example, researchers at Carnegie are proposing a 5% ad valorem floating levy on upstream oil revenues, which would kick in when prices were high; as they fell, the tax would be directed downstream to retail consumers like you, me and the fellow behind the tree.
Ideally, this formula would keep overall prices within a range near $3.50 a gallon (assuming, say a $100 per barrel price), still far below the $6.00 OECD average. Drivers, being able to predict gas prices better, could make more efficient travel choices, like when to buy fewer gas guzzling vehicles. “Until now, vagaries in fits and starts have confused the market,” says Gordon.
Remarkably, stunning efficiencies have contained American oil consumption, at just 300m barrels more in 2010 that 1970s levels, despite a 30% population increase. Drenkard notes: “There have been some ebbs and flows (the early 1980s were the lowest point) but even with wild advancements in technology and growth in population, we aren’t using oil at breakneck speeds in the US.”
The ancient Romans once understood the critical importance of topnotch roads. America, likewise, needs the resources to pay for the movement of goods and services with the best possible cost, speed and reliability, to preserve its global competitiveness.
Deferred maintenance on routes and bridges is already boosting the eventual bill by $100 billion a year, per Carnegie. The country has halved infrastructure spending from 4% to 2% since the 1960s, while China pays out almost 12%. Caesar would never have jeopardised his own roads.
Will Dale Nicholls do a better job than Anthony Bolton running the Fidelity China Special Situations trust?