Monday, July 28, 2008

Controlling both price and quantity 

A few weeks ago I read a story on air (it's at the end of this podcast) that the idea of the gas tax holiday had not only foundered in Congress but that they were contemplating instead a gas tax increase. Today's Wall Street Journal carries a headline, "Americans Cut Back Driving, Straining Highway Funding". The problem is you are doing too much conserving, you nasty driver you.
A report to be released Monday by the Transportation Department shows that over the past seven months, Americans have reduced their driving by more than 40 billion miles. Because of high gasoline prices, they drove 3.7% fewer miles in May than they did a year earlier, the report says, more than double the 1.8% drop-off seen in April.

The cutback furthers many U.S. policy goals, such as reducing oil consumption and curbing emissions. But, coupled with a rapid shift away from gas-guzzling vehicles, it also means consumers are paying less in federal fuel taxes, which go largely to help finance highway and mass-transit systems. As a result, many such projects may have to be pared down or eliminated.
Remember when we joked "light up for the Twins" when it appeared a cigarette tax would help fund a new stadium? So at the same time you are advertising that driving big SUVs are harming your mother earth, you have to compensate for the effect of the advertising by increasing taxes to fund highway and bridge construction. This is supported by folks in the highway construction industry and the union leaders of those industries.
"We were losing ground to these incredible increases in construction costs, but then to see the erosion in driving -- it's a double whammy," said John Horsley, executive director of the American Association of State Highway and Transportation Officials.
The government has used a tax system that says, in short, the more miles you drive the more you erode roads so you pay more. Thus a tax system that charges you a per-gallon tax. If Americans are driving fewer miles, highways should be eroding more slowly and construction should be able to slow to match this.

But transportation policy now appears to both want to control your price you pay (through taxes that discourage consumption) and the quantity of gas you consume (so that they can collect revenues enough to meet their construction plans.) Controlling both price and quantity is hardly a market solution to roads and bridges. Tolls would be a solution that returns us to a benefit principle for highway financing.

Cross-posted at Outside the Beltway, where I will be guest-posting most of this week.

Labels: ,