Are toll roads really the “fairest” way to finance infrastructure?
I can’t fault Bloomberg columnists for talking their book. They provide news primarily to investors, and their reporting tends to be in investors’ interests. Thomas Black reported this week that ‘toll roads are the way’ to finance infrastructure in America. He may be right, but he goes on to say that ‘the fairest way to obtain money for many infrastructure projects is to get it directly from the users.’
‘Fair’ is in the eye of the beholder.
When Black says fair, he means that users of a service pay for its use. That does seem fair – why should federal tax-payers based in California pay for roads in Ohio that they will never use? Even if you live in Ohio, why should you pay for that road if you do not drive on it? For that matter, why should anyone have to pay for railways or airports if they do not use trains or flights?
These arguments are not fair, for three reasons.
Firstly, charge-for-use infrastructure is regressive, meaning that it hits low-income people harder. A ‘progressive’ tax charges more if you earn more, like income tax. A ‘regressive’ tax is the same for everyone, for example sales tax (flat percentage of all purchases) or fuel surcharges (flat fee per litre). Road tolls and electricity bills make up more of your total spending if you have a lower income, because the price per kilometre or per kilowatt-hour is the same.
Further, people with higher incomes tend to have lower proportional consumption, and save more. Even though they might pay more in sales tax and fuel charges, or can afford to leave their lights on and and drive laps up and down expensive highways, their spending does not rise linearly with their income.
Secondly, fee-for-service infrastructure discriminates regionally. States with lower incomes and business activity would receive less infrastructure investment, because there are fewer economic incentives to pay. Saving time by paying for a toll-road matters less if your income is lower. Powerhouse economic states like New York, California and Texas would therefore not subsidise development in less well-off regions, cementing their advantage and reducing the “united” power of the States.
Thirdly, this does not account for spillovers and externalities. Roads, airports, and trains all contribute to delivering products to shops or your doorstep. Of course, fees can be priced into the cost of deliveries, but it is a myth that just because you do not personally use a service, it is not of value to the wider economy. Transportation methods that you do not use may be the only way to commute for the person who serves your coffee in the morning, or the cleaner at your office, or the teacher at your child’s school.
The federal government takes on costs on behalf of all taxpayers that they may be unwilling to pay individually. Subsidising clean energy infrastructure via the Inflation Reduction Act is an example of socialising the cost of decarbonisation. Carbon emissions and the climate damage they cause are externalities that are not explicitly priced via US federal tax, but there are many programs to incorporate its pricing into energy markets.
Of course, there are ways to privately fund infrastructure that would address some of these concerns, like taxing carbon emissions. The ‘fast lane’ toll road model mentioned by Black offers free and paid versions of infrastructure, which then price-discriminates based on the value the user places on saving time.
There is a role for private infrastructure, if people are willing to pay and the private sector is willing to fund it. This saves government resources for where they are most needed. Let’s just be clear on what we mean by ‘fair’ when it comes to who is paying for infrastructure, and how much.