How should we fund transport?

The excellent Captain Transit blog has a very interesting post on the fundamental question that all those interested in transport need to have a good think about – what is the best way to fund improvements, maintenance and upgrades to transport infrastructure.

Here’s a part of what he says:

Transportation is a challenge, because it’s a common-pool resource, that benefits everyone but can be hogged by a subgroup. You could fund it from general taxes or conscription, as sidewalks are funded here in New York. But some who don’t walk much object to funding sidewalks; for example, in North Carolina property owners are not required to provide or maintain them, so in many places they are nonexistent. The problem is even clearer if we imagine making all air travel free of charge: we would get people flying from New Jersey to Tahiti every week and using up all the oil.

If you fund transportation as a private good, where the user pays every aspect of transportation including energy, operations, capital construction, capital maintenance and security, then only the very rich will be able to afford it all. The closest example we have to this is in the Dark Ages, when the only people who could safely travel long distances were knights and those under their protection.

If you fund transportation as a club good, then you necessarily exclude the poor from enjoying its benefits, and the members of the club also pay for the economic benefits that are shared by everyone.

Obviously, the solution is some kind of hybrid funding system. You could have transportation security funded out of general taxes, but the construction of highways paid for by vehicle registration fees (club-type funding), and the purchase of vehicles and compensation of operators funded by individuals. The part that’s funded out of general taxes is often controlled by the government, but the parts funded by club taxes or individual resources can either be collected by the government and used to benefit the club or individual. Alternatively, it can be left up to independent organizations to collect the club and individual fees and spend them on transportation.

One problem is that it’s really hard to get the mix right. Should the users pay a single fee, or a fee per unit consumed? If it’s a single fee, that does nothing to encourage conservation. If it’s a fee per unit, that doesn’t take into account the fact that a dollar means a lot less to a rich person than it does to a poor person. This is the classic “regressive” argument against the gas tax or a per-mile tax: why should the government charge a poor person a much larger percentage of their income per unit of energy or road consumed? And why charge a percentage of what someone paid for gas, rather than a fee per unit?

If you ever do get the mix right, it’s not likely to stay right. As cars are becoming more fuel-efficient, people can travel more per gallon of gas, which means that they put more wear and tear on the road than they’re paying for. The cost of asphalt, steel and labor have all varied significantly over the years, not to mention fuel.

In New Zealand different transport projects are funded in different ways. Generally here’s the breakdown:

• State Highways are 100% funded by petrol taxes, road-user charges and vehicle licensing fees (this money goes into the National Land Transport Fund (NLTF)).
• Local roads are funded from a combination of  city/district council rates and NLTF funds.
• Public transport subsidies are funded from a combination of regional council rates and NLTF funds.
• Public transport improvements (like ferry terminals, railway stations, busways etc.) are funded in a variety of ways depending on the situation. Often they are funded through a combination of city council rates, regional council rates and NLTF funds.
• Rail capital projects (like electrification and track upgrades) are funded through KiwiRail, and therefore at the moment out of general central government taxation.
• New local roads are generally built by developers when they subdivide an area, before being vested with council whose job it is to maintain them.
• Public transport fares also help fund public transport operations, improvements and expansion.

So we have the general “mix” of funding options, or the “hybrid funding system” that Captain Transit talks about in his post. This makes sense too, as the benefits of transport are enjoyed both directly by users (whether they be petrol tax paying drivers or fare paying public transport riders) but also indirectly through the wider benefits brought by enabling people to get around towns, cities and country as a whole and be economically productive. The fact that users don’t fully cover the costs of providing the transport network, requiring a top-up (or that dreaded word, a subsidy) is OK, because there are significant indirect benefits from a functioning public transport network: whether those benefits be economic – through enabling economic activity; environmental – by encouraging modeshift to more environmentally friendly transport options; or social – by providing transport options for those unable to drive or unable to afford a full user-pays system.

Where the debate starts getting interesting is if we look at matters such as whether someone driving at peak times should pay more for the privilege than someone driving at 3am – because the extra roadspace they require is much more costly to provide and if that roadspace isn’t there they impact hugely on others trying to get around by contributing to congestion (remember, you’re never just in the traffic jam, you are the traffic jam). I think there is a good argument for a more fine-tuned method of pricing in that respect, although the practicalities of implementing it seem very difficult. Furthermore, petrol tax actually has a number of advantages in that the more you drive, the bigger your car is and the more you pollute the environment, the more you pay. Secondly, collecting petrol tax is extremely easy compared to collecting any other form of road pricing.

The other interesting point of debate is whether road users should contribute to spending on non-roading projects – particularly projects such as rail capital projects. In the May 2009 Government Policy Statement, the government made the decision that rail capital projects should not be funded by road-users through the NLTF and instead would have to be directly funded through general taxation. Oddly enough, they also decided that because road users benefit from people using trains (as they’re not congesting the roads), NLTF funds would still be available for rail operating costs. In my opinion, there is little logic to this argument – as clearly new rail projects such as the CBD rail tunnel will have significant benefits for road users (for example, it is logical that the petrol tax that I pay driving around on below-capacity roads at the weekend go into a project to provide me with a congestion-free way to get to work during the week when the roads are at capacity).

I’m curious to see what others think on this issue. What is the best, fairest, most efficient and most logical way to pay for transport projects? Have we got the mix right? Does “time-based” road pricing have a place in funding transport projects? Do the benefits of time-based road pricing outweigh the benefits of petrol tax? Does it make any sense to exclude rail capital projects from being funded by road-users? What equity issues may arise from all of this?

Overall, I think that one pot of funding for all projects makes the most sense. The funding pool should be contributed to by all the funding sources at the moment: road-users, public transport users, local councils, regional councils, developers and central government. Each project should be analysed in terms of its benefits – how great will they be and who will enjoy those benefits, and then the projects should be prioritised in a logical manner which ensures what I think should be the most fundamental principle of transport policy:

“The most necessary project gets done first, regardless of type”

We may well wish to have wider criteria for determining “necessity” than just the cost-benefit ratio, but the fundamental principle would be that each project competes against every other project for access to funding. You wouldn’t end up with the silly situation where cycling projects compete only against other cycling projects for a tiny share of funding, while motorway projects only have to be better than other motorway projects to get enormous funding. We would be able to stack up the CBD Rail Tunnel against the Puhoi-Wellsford road to really see which project is the best way to spend that $1.5 billion. 

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