Transport Funding – taxes, fees and fairness

This post first appeared at Nick Lovett’s blog and is republished with permission. Transport funding is very poorly understood in NZ, certainly by the general public but also by people who work in the field. It is quite a complex ecosystem, and this article helps frame the picture a little.

I’ve heard many people argue that as motorists, the fuel taxes consumed give them a pre-eminent right to use the roads — after all, cars use fuel, and fuel taxes pay for roads. On the surface this might seem intuitive, but digging a bit deeper, it becomes apparent that this transactional outlook is overly simplistic. The distinction between taxes and user fees is an important one because at its essence, we need to ask a fundamental question about who and what transport investment is for. Is it to make driving easier and cheaper? Or is it to build healthier, greener, more productive and inclusive societies? When thinking about the latter, we might wonder if status quo transport funding system is the best we can do. Perhaps there are fairer ways to price and fund transport.

Defining equity and fairness in transport terms can be difficult. Equity in transportation is not an absolute but rather a matter of degree — something can be more or less equitable, never 100%. With that in mind, it is important to consider three main dimensions when discussing transport fairness:

Who Decides?

What is the process to determine what projects to fund (Process Equity)? How do we know that allocating funds is proportionate to need (Social Equity)?

Who Pays/Benefits?

Are those that are paying the same ones receiving the benefits (Market Equity)? Are there exacerbators causing the need for an activity and not paying (Justice)? Are the gains and losses for an investment distributed to future, or present generations (Intergenerational Equity)?

How, and how much to pay?

Are those at similar income levels/circumstances treated consistently and paying similar amounts (Horizontal Equity)? Are those with means paying more (Vertical Equity)? How burdensome is the payment method, is there any dead-weight loss(Efficiency)?

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When the town of Springfield decided to build a monorail, it satirically highlighted issues of Process Equity and Social Equity. Are catchy show tunes the best process to determine transport investment? Was the allocation of funds towards a mass transit system proportionate to the needs of a town of 30,000 people?

Fuel taxes are only one part of a larger transport funding and economic equation. While the majority of New Zealand’s land transport system is funded from central government from the National Land Transport Fund (NLTF), the remainder is spent by local and regional authorities from funds raised from rates revenue, debt, developer contributions and dividends from investments.

While state highways are 100% funded and operated through the NLTF, they make up less than 12% of the national road network by length, and less than half the national network by volume. Urban centres in particular carry the highest density of traffic per lane kilometre and most of their transport funding comes from property rates — not the NLTF. Furthermore, increasing vehicle volumes at the local level places demand for associated infrastructure that is not NLTF funded such as parking facilities and management. While this isn’t a problem per se, it can create some distortions about how we perceive the fairness and value of transport investments. In turn these misplaced vales create a negative feedback loop.

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Firstly,at the local level, there is an issue of horizontal equity because property rates fund the majority of local transport budgets. Households that frequently travel in private vehicles will receive a greater benefit than identical households that don’t – relative to how much they pay in rates. Conversely, those who live centrally tend to have higher housing costs, but lower transport costs as they and walk and cycle for more of their transport. They end up subsidising the traffic infrastructure to support those living on the urban fringe who have cheaper houses but tend to rely on single occupant vehicle trips for mobility.

Secondly, we don’t really know what the willingness to pay is for the true cost of our unfettered automobility. Decades of public policy has heavily subsidised the cost of personal mobility to the point where the willingness to pay is less than the cost to build and maintain the infrastructure. Often we might assess the feasability of a new road by part funding it with a toll. But modelling might indicate that tolls would simply discourage use of the new route instead opting for existing, untolled alternatives. This brings into question the value of travel time savings if the real-world willingness to pay for those savings is lower than their ascribed value. The result is that public funds continue to be deployed towards modes that we assume people have preferences for.

Finally, by pricing personal journeys below the true cost of provision, people travel unnecessarily at the expense of everyone else. Congestion is probably the most visible example of this, and could be alleviated by pricing-in the costs of traffic delays by location, occupancy or time of day. Nevertheless, the case for internalising the externalities of motor vehicle travel goes far beyond just managing congestion. The external cost of crashes, air quality and physical health ammount to more than six billion dollars annually.

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Car and motorcycle, with side car, at a toll gate (in Waitara?) circa 1920s. Photograph taken by Sydney Charles Smith. Alexander Turnbull Library Reference: 1/2–048419; G

Decision makers tend to focus on the tangible effects of congestion over less visible issues of safety, pollution and health. In this regard, road and highway improvements become popular, but they also artificially lower the cost of travel, which creates more externalities and keeps the vicious cycle turning. In the early part of the twentieth century (when motoring was for the wealthy few), a greater proportion of transport funds were raised from user fees. However as motorists grew to comprise a substantial proportion of the electorate, tolls became increasingly political. Consequently, the distinction between the motorist and the general public became highly conflated in public discourse, even to this day.

Something needs to fundamentally change, and a key part of breaking the cycle would be ridding ourselves of this idea that transport funds raised by road users need to strictly be deployed to benefit road users. The economist Ed Glaeser summarised this in the closing pages of his book — Triumph of the City:

Basic economics tells us that if drivers increase pollution and congestion, they should be charged for those costs. But if the gas taxes they pay are then plowed back into highways, thereby subsidizing more driving, then the benefits of the gas tax largely vanish. To give cities a level playing field, drivers should be charged for the pollution their gas usage causes, and importantly, they shouldn’t get that money back in the form of new roads.

Our transport funding tools are primarily designed to efficiently raise revenue — they are not intended to reflect a marginal cost for accessing a service. The sooner we accept that, the sooner we can start building a more sustainable, equitable and inclusive transport system. A range of of transport pricing mechanisms already exist and are likely to have major advantages to the status quo funding regime.

  • Comprehensive electronic road pricing systems (by time, location and vehicle type), is likely the best alternative to fuel excise duties, although technical and implementation issues mean this could be several years away.
  • Targeted Parking Taxes and Levies, in the interim, appear to be a viable way to manage demand while simultaneously funding transport initiatives.

We also need to acknowledge that any new set of funding tools is likely to create winners and losers. Understanding and targeting these groups will be critical if we are to address inherent inequities in the transport system. Redistributing revenues progressively, to those most in need, is likely to be the most effective way to improve overall social welfare. While this all sounds like a lot of work, our existing transport funding system is simply not designed to address the mounting challenges of climate change, housing affordability, road safety, and public health. We can no longer afford to accept the status quo as the best we can do and we must start advocating for better alternatives.

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