Externalities and subsidies

At first glance, this article, about the sorry shape that many suburban roads are in and how cities are having trouble paying for repairs, may not have much to do with broader discussions of tax policy. However, this saga is a perfect illustration of the fact that license tab fees and the gas tax do not come close to paying for the full cost of cars and other vehicles, meaning that there are subsidies involved, subsidies that distort the market for vehicular transportation.

I'm sure that many people believe that every road in the state, from I-94 to their cul-de-sac, is paid for by a combination of gas taxes and license tab renewal fees. Some people may believe that the sales tax they pay on vehicle purchases is also used for road construction and maintenance. However, this not the whole story. A sidebar describes how different cities pay for repairs, and there is a wide array of funding sources, from property taxes to individual assessments on property owners to even a franchise fee on gas and electric bills. In many cases, however, property taxes are a big source of funding for the construction and maintenance of local roads.

I am not a fan of property taxes for many reasons, and this is one of them. While there are many definitions of what good tax policy means, one criteria that many people use is that a tax, or more likely a user fee, should be linked to the services and goods it is trying to provide. For example, a gas tax is used to pay for roads; thus, people who use roads more (and therefore more gas) are paying for more of the road than somebody who never drives, which most people would agree is fair to a certain degree. Using property taxes to pay for local roads goes against this theory.

To be sure, there is a benefit to having roads that all people enjoy, regardless of whether they even own a vehicle. Providing roads so that police, fire, postal workers, sanitary workers, and visitors can reach every dwelling in a city is a definite benefit provided to all people, and so there is nothing wrong with using property taxes to provide for some portion of road funding. How much is too much, though? I think that 100% funding from property taxes for road repair is excessive. Assessing property owners for repairs seems like an even less fair manner of paying, since it is hard to argue how much more of a benefit a property owner receives from a road simply because he or she has twice the frontage on a road than his or her neighbor, or, heaven help you, a corner lot (this goes for systems that assess based on the linear length of the property abutting the road).

Many people argue, such as myself, that gas taxes need to be increased to better reflect the true costs of providing roads. Some of those who argue against this view say that taxes already reflect the true cost of providing these services, denying that there are any subsidies from any other funding source. As the article demonstrates, however, this is simply not the case, and the article just talks about funding actual repair costs; the cost to the environment of providing roads and vehicles is not dealt with even in a remote manner.

Our tax system is not strictly a user-fee system, nor should it be. A progressive income tax that puts resources into community goods like education, parks and environmental protection, and even roads in some situations, is a must. This does not mean that a more direct linkage between revenue and spending for certain services like roads is not a bad thing, though. In this case, where cities are having to rely more and more on property taxes to pay for a crumbling road infrastructure during a time of cuts to Local Government Aid, increasing the gas tax or license fees to more fairly charge users for the upkeep of our roads is a good idea.