The Future of Highway Funding, Part1: The Bad Idea of a Miles-Based Tax

by Wyoming Liberty Group Staff

This blog is the first of two on the future of highway funding, here in Wyoming as well as nationally.

As we have previously shown here at Wyoming Liberty Group, there are different views on how to fund our state's highway system, especially the interstates. We have presented arguments both for tolling the I-80, and against doing it, with both sides highlighting the importance of having a conversation about the idea. In having this conversation we need to:

1. consider government spending in general and how other programs are demanding on the public purse; and
2. understand what a highway actually is.

The last point may seem trivial, but as we will see in Part 2 it is precisely the opposite, especially from the viewpoint of how to fund it.

As for other government spending, it is worthwhile to separate highways from such items as health care, education and law enforcement. If we have learned anything about public finance in the past 100 years, it is that we should not entrust a big pile of cash – we know it as the General Fund – to legislators and bureaucrats. They will spend it in ways that are not necessarily in accordance with the needs and preferences of the general public, or in the long-term interest of our economy.

There are many different models for separating highways from the general government budget. One that has risen to prominence recently is commonly referred to as "miles-based" taxation: we pay a highway tax based on how many miles we drive. This model was promoted during an April 25 event organized by the Information Technology and Innovation Foundation (ITIF). As part of promoting a new report on miles-based highway taxation, the ITIF organized a panel conversation where their president Robert Atkinson and three other participants explained the advantages of miles-based taxation, and also sought to address criticism of the funding model.

One of the arguments against miles-based funding is that it invades privacy, a point that the panelists went to great length to counter. The gist of the privacy argument is that a miles-based tax can only be collected if the collecting agency – government – knows how many miles you drive. For that information, in turn, government needs to know when and where we drive.

The panelists seemed to be in full agreement that this would not happen. In fact, Atkinson dismissed the privacy concerns based on the notion that the GPS device needed for the tax would only transmit data in one direction. Government would only be able to see how much you drive, not where.

However, this is a distortion of the privacy argument, and factually dubious. First and foremost, it is indisputable that the where-and-when information on our driving must be collected for the miles-based tax to work as intended. It is, namely, not just a miles-based tax, but also a congestion fee. The tax rate is supposed to go up during periods of the day with heavy traffic.

It is trivial that a government-mandated GPS device in your car would know what roads you travel – otherwise it could not log the number of miles you drive. What is less often noted is that in order for government to impose the congestion fee, it needs to know both when and where you are, at any point in time. The government-mandated GPS device in your car would have to log your exact driving, in both time and space.

Now, we may dismiss this part of the tax here in Wyoming and say that "our roads are almost never congested, so who cares?" Well, we should care, and there are two reasons why.

First, the tax will hit us as soon as we leave the state. Any time we drive down the I-25 corridor toward Denver, the I-80 to Salt Lake City or the I-25/I-90 up toward Billings, we would be going toward metropolitan areas where congestion fees apply. Obviously, on longer drives, such as to the Lincoln-Omaha area of Nebraska, we would also run into congestion taxes.

Secondly, the definition of "congestion" is entirely open and can be tailored to apply to Wyoming highways as well. All the government needs is the "right" definition of highway congestion.

Conventionally, we think of a highway as being congested when we have to slow down because there is too much traffic. For example, if traffic is moving at 55mph on a 65-limit stretch of highway, we could say that it is congested. If you drive the I-80 down toward Salt Lake City and traffic slows down below the speed limit, you will suddenly be hit by a fee – because government knows where you are, and when.

Another definition of congestion would be based on how many vehicles there are per mile, on a given stretch of highway. If the traffic volume goes up above a certain "density threshold" government starts charging a congestion fee.

This is the definition that could easily be applied in Wyoming. All it takes is that you are going from Rawlins or Cheyenne to a football game in Laramie, together with other Cowboys fans. Traffic volume goes up above average, and next time you get a highway-tax bill you will see a surcharge for the drive to and from the game.

Again, government knew where you were, and when. And you can bet they will store the information, in case you contest the tax and claim you were not where they said you were.

Some economists defend congestion taxation based on economic theory. During the ITIF panel conversation, Adrian Moore of the California-based Reason Foundation opined that congestion taxes contribute to the optimization of economic behavior. This idea, which won French economist Maurice Allais a Nobel Memorial Prize in economics in 1988, is that congestion fees will make us change our behavior for the greater good.

Applied to the football game, the congestion fee is supposed to motivate you to travel to Laramie and the University of Wyoming stadium at a time when not so many others are on the road. In other words, if the game starts at 1PM and you would normally leave at 10AM from Rawlins, the pricing mechanism is there to encourage you to leave at 8AM instead – or better still, wait and leave once the game has started…

This is a perfectly logical application of the congestion tax, based on the theory of optimal economic behavior (welfare theory, in microeconomics parlance), and it is also how it would be applied. The model, of course, is designed for big urban areas and supposed to encourage people to not travel to work when everyone else does it. Instead, all commuters are encouraged to commute at times when nobody else is doing it.

Economists who propose this model expect people to change their office hours after the congestion fee. Some people, they say, will go to work at 6AM instead of 8AM, others at 10AM and a few even at noon. The consequence, of course, is that there would no longer be regular office hours: those who get in at six would leave at two, while the noon arrivals would be there to 8PM.

Meetings with coworkers would be a scheduling challenge, not to mention trying to predict when you can get hold of someone at the IRS, call your insurance agent or schedule a plumber. But such ripple effects are of course desirable, even optimal, according to economic theory.

But we are not done yet. If too many people move their commute from 8AM to 10AM to avoid the congestion fee, the fee will simply kick in for the 10AM commute instead. If too many commuters move their commutes back to 8AM, the fee again applies at that hour. As people move their commute around to find a spot where the congestion fee does to apply, their employers will – obviously – accommodate office hours and gladly absorb all the costs associated with that (including merrily taking calls from frustrated clients who can't figure out when to get hold of someone.)

These are not absurd consequences of the congestion fee. They are perfectly logical effects of a taxation model aimed at doing precisely that: to upset current socio-economic patterns. What is absurd is not its effect, but the tax itself.

Fundamentally, the miles-based tax is built on a flawed idea of what highways actually are. The next part of this blog series will address that point in particular – and suggest an alternative funding model.