Tolls: Road testing free market ideas to drive better roads with less traffic

By Ryan Murphy March 2013

I. Executive Summary Since colonial times, turnpikes have represented a guiding principle of public finance: Let those who benefit bear the costs. Its been 30 years since a horrific accident at the Stratford toll station prompted Connecticut to eliminate tolls. Since then, Connecticut has made no significant changes to its transportation system or funding mechanism, relying on the eighth-highest gas tax in the nation and the highest tax on diesel fuel. Infrastructure needs have lagged funding, and congestion has worsened. Meanwhile, most of our neighboring states have adopted technology, such as EZ Pass, to establish modern, efficient and safe tolling. Before Connecticut creates a new revenue source in the form of tolls to fund transportation projects, it should first stop siphoning off $146 million a year in oil company taxes which are diverted to the general fund. The state should also reduce or eliminate the $269 million used to subsidize rail and bus service. And if Connecticut does implement tolls, it should come with a corresponding reduction in the state gas tax to ensure tolls dont become just another tax siphoned off to feed bigger government unrelated to roads. If Connecticut were to re-institute tolls, it should also consider congestion pricing charging higher prices during times of peak use, and lower or perhaps zero tolls during off-peak times to help reduce traffic delays.

Done right, re-instituting tolls has the potential to ease congestion, raise revenue for infrastructure improvements, increase economic efficiency, cut pollution, and bolster public transportation. A: The situation now Connecticut is struggling to meet its funding needs for both maintaining existing roads and building the new infrastructure necessary to keep the state competitive. Its tax on gasoline, intended to provide this funding, has fallen significantly in recent years, as the states motor vehicle consumption of gasoline has fallen from a peak of 523 gallons per capita in 2004 to 421 in 2010.1 Raising tax rates on gasoline does not look like a desirable option; its consumer rate is already the eighth highest in the nation.2 Its tax on diesel fuel is the highest the nation.3 Many have floated the idea of returning to charging tolls on certain key roads in the state, in hopes of counteracting this fall in revenue. Such an idea has many potential positive attributes, including the potential to increase economic efficiency. Tolls can make the functioning of publicly-governed roads

U.S. Energy Information Administration, Table CT1. Energy Consumption Estimates for Major Energy Sources in Physical Units, 1960-2010, Connecticut, http://www.eia.gov/beta/state/seds/data.cfm?incfile=/state/seds/sep_use/total/use_tot_CTa.html&sid=CT th (accessed March 19 , 2013). 2 ConnecticutGasPrices.com, Total US Fuel Taxes by State (2013), http://www.connecticutgasprices.com/tax_info.aspx (accessed January 15th, 2013). 3 Connecticuts tax on diesel fuel is so high that cutting this tax would likely increase revenue. It is not out of the ordinary for large commercial trucks to purchase one hundred gallons of gasoline at a time, meaning drivers save over $30 in tax buy filling up in New Jersey. Cutting Connecticuts tax to more reasonable levels should see an increase in the number of diesel fuel buyers outweigh the cuts in the tax.

more market-like.
A Selection of State Gasoline Taxes i n the United States Rank 1 2 3 7 8 10 17 28 36 37 41 48 49 50 State California North Carolina Washington Rhode Island Connecticut Maine New York Massachusetts Vermont New Hampshire New Jersey Wyoming Alaska Georgia Tax on Gasoline Per Tax on Diesel Per Gallon Gallon 36.0 10.0 37.5 37.5 37.5 37.5 32.0 32.0 25.0 51.2 30.0 31.2 25.8 24.9 21.0 21.0 19.0 28.0 18.0 18.0 14.5 17.5 13.0 13.0 8.0 8.0 7.5 7.5 Other Applicable Taxes 2.0 0.3 0.1 1.1 7.3 1.5 0.4 2.6 1.0 1.6 4.1 1.0 0.1 0.5 Total Tax for Consumer 38.0 37.8 37.6 33.1 32.3 31.5 26.2 23.6 20.0 19.6 18.6 14.0 8.1 8.0 Total Tax for Diesel 12.0 37.8 37.6 33.1 58.5 32.7 25.2 23.6 29.0 19.6 21.6 14.0 8.1 8.0

The bulk of funding available for the Department of Transportation comes from the tax on gasoline, which amounts to $493 million per year, and the tax on oil companies, which amounts to $227 million and is passed on to consumers. Altogether, the DOTs budget is $1.23 billion for Fiscal Year Ending June 2012.4

Kevin Lembo and Martha Carlson, Monthly Letter to the Governor, dated September 4 , 2012, th http://www.osc.ct.gov/reports/monthly/2012/sept042012rev.pdf (accessed February 4 , 2013).

th

State of Connecticut Transportation Fund Revenues Motor Fuels Tax Motor V ehicle Registration Fees Tax on Oil Companies License, Permits, and Fees Transfer from Other Funds Sales Tax at DMV Federal Grants Interest Income Payment Refunds Transfer to Emissions Enterprise Fund Tax Refunds Transfer to TSB Account $492,794,802 $235,446,219 $226,900,000 $135,974,435 $81,550,000 $76,617,579 $12,914,777 $2,208,273 ($2,979,401) ($6,500,000) ($7,006,094) ($15,000,000)

State of Connecticut Transportation Fund Expenditures Debt Services Personal Services Rail Operations Bus Operations Employees Retirement Contribution Department of Motor V ehicles Other Expenses State Employees Health Service Cost Town and Road Grants ADA-Para-Transit Program Pay-As-You Go Transportation Employers Social Security Tax Highway & Bridge Renewal Equipment Workers' Compensation Department of Administrative Services Highway Planning and Research Tweed-New Haven Airport Program Equipment Non-ADA-Dial-A-Ride Program Unemployment Compensation Group Life Insurance Minor Capitol Projects Bureau of Rehabilitative Services Highway and Bridge Renewal TOTAL $439,965,712 $140,069,901 $137,284,937 $131,794,529 $90,047,045 $54,027,679 $49,129,997 $33,263,330 $30,000,000 $27,674,980 $20,413,055 $12,950,802 $8,780,476 $5,764,186 $5,395,779 $3,082,750 $1,500,000 $1,256,892 $572,248 $396,853 $246,197 $228,637 $139,352 ($577,262) $1,193,408,074

TOTAL

$1,232,920,590

To fund new projects, the state floats Special Tax Obligations Bonds against future revenues and fees. Servicing existing debt constitutes the highest line item on the DOTs budget, at $440 million. These bonds generally receive good ratings; for instance Fitch assigned a high grade rating (AA) to such bonds in 2012.5 In 2011, the state issued $600 million in new bonds, along with $137.7 in refunding bonds to save money in debt service.6

Reuters, TEXT - Fitch rates Connecticut's special tax obligation bonds, posted November 30th, 2012, http://www.reuters.com/article/2012/11/30/idUSWNA030820121130 (accessed March 19th, 2013). 6 Office of State Treasurer Denise L. Nappier, Debt Management Division, http://www.state.ct.us/ott/aboutdebt.htm (accessed March 19th, 2013).

Even before five years of weak economic growth, Connecticuts estimated maintenance shortfall was $3 billion.7 The American Association of State Highway Transportation Officials estimates delayed repairs to cost Connecticut drivers an extra $313 in maintenance costs due to the roughness of the roads alone.8 But a good portion of the DOTs $1.23 billion in expenditures does not go towards paying for the roads. Subsidizing rail and bus operations make up the third and fourth highest line items in the Transportation budget, amounting to $269 million. Furthermore, some taxes on gasoline collected are instead diverted elsewhere. In the words of Donald Shubert, executive secretary of the Connecticut Road Builders Association, Theyre highjacking the money to pay for other pet projects in the budget. And the drivers of the state are paying for it.9 Taxes on oil companies, are allocated to both the Transportation Fund and the General Fund. In 2011-2012, $146 million went to the General Fund instead of funding infrastructure. What is the least harmful way of raising funds for transportation systems? Increasing tax rates or cutting other government services are suboptimal methods. Tolling, if implemented correctly, has the potential to meet infrastructure revenue needs in a more equitable way through a user fee.

TRIP, Preserving Connecticuts Highways and Bridges: The States Challenge in Maintaining its Aging System of Roads, Highways, and Bridges, January 2008. 8 American Association of State Highway and Transportation Officials and TRIP, Rough Roads Ahead, American Association of State Highway and Transportation Officials (2009) http://roughroads.transportation.org/RoughRoads_FullReport.pdf (accessed March 19th, 2013). 9 th David Kocieniewski, Many Failing Roads, Little Repair Money, The New York Times, July 24 , 2009, th http://www.nytimes.com/2009/07/26/nyregion/26roads.html?pagewanted=all (accessed March 19 , 2013).

One option that many states and countries are beginning to experiment with is a type of toll known as congestion pricing. Under this system, when traffic is heavy, especially during rush hour, drivers pay a premium to use the road. In terms of raising revenue on a per dollar basis, this is by far the least harmful; moreover, its purpose is to eliminate traffic and make highways drivable at the speeds they were meant to be driven at. The revenue it generates is the byproduct of a policy that is good for the sake of doing it. B. Congestion as an externality Road congestion is best thought of as an externality.10 Externalities refer to instances where an individuals behavior has consequences for a third party that the individual does not pay for. For example, one negative externality is pollution emitted by factories. If factory owners do not need to take into consideration the harmful effects of pollution on those who live near the factory, they will pollute more. To discourage excessive pollution, it may be desirable to impose a tax on the pollution corresponding to the harm of the pollution. Similarly, each additional car on a highway contributes to the externality of increased congestion.

10

One of the benefits of private roads is that a firm would increase its profit by taking such a concern under consideration when setting the price of the road (i.e. the toll).

Most Connecticut residents have first-hand experienced with Connecticuts traffic congestion hotspots around Hartford on I-84, in lower Fairfield County on I-95 and the Merritt Parkway; and around New Haven on I-95 and I-91.11 Traffic jams are not only frustrating. They create real economic losses. One estimate of the cost of this externality is $100 billion per year for all of the United States.12 Connecticuts commuting time is roughly 6% worse than average,13 and given its population, Connecticuts share of this cost is $1.2 billion per year, or $338 per person. The Census Bureaus 2012 Statistical Abstract estimated the traffic loss in Bridgeport-Stamford as $548 per person, the loss in Hartford $357, and the loss in New Haven $463.14 One solution build more roads would be costly, difficult, and probably selfdefeating. Downs Law of Peak-Hour Traffic Congestion states that Peak-hour congestion rises to meet maximum capacity on urban commuter expressways.15 Build more roads, get the same traffic jams. Gas taxes a tax on driving could provide a partial solution, but gas taxes dont have much effect on congestion because the tax is the same whether traffic volume is high or low. Someone who drives mostly during midday and on weekends does not

11

See INRIX, INC., Congested Corridors (U.S. Only for 2011), th http://scorecard.inrix.com/scorecard/uscorridors.asp (accessed January 7 , 2013). 12 th Randall OToole, Ending Congestion by Refinancing Highways, Cato Institute Policy Analysis, no. 695 (May 15 , 2012), http://www.cato.org/publications/policy-analysis/ending-congestion-refinancing-highways (accessed January 7th, 2013). 13 Estimated using Censuss Travel Time to Work data. 14 U.S. Census Bureau, Table 1099. Roadway Congestion by Urbanized Area: 2009, Statistical Abstract of the United States: 2012, http://www.census.gov/compendia/statab/2012/tables/12s1099.pdf (accessed February 4th, 2013) 15 Anthony Downs, The Law of Peak-Hour Expressway Congestion, Traffic Quarterly 16 (1962): 393-409.

contribute nearly as much to congestion as someone who commutes every weekday during rush hour. The little old lady in Litchfield County who drives mostly local miles ends up subsidizing the Fairfield County commuter. Tolling and congestion pricing offer market-based methods of reducing traffic through a user fee. Those who benefit the most from using the road during rush hour would continue using it, while others who find the road less important will reduce use. C. Tolls, Congestion Pricing, and Value-Priced Lanes Connecticut has in the past investigated Value-Priced lanes. Under this system, drivers have the option of driving in faster HOV lanes (or something similar) for a fee instead of in slower moving traffic. This may be more politically palatable since only those voluntarily paying for the use of the lane would pay the fee. While this may have desirable attributes, it lacks some of the advantages of congestion pricing. Most importantly, it will not raise anywhere close to revenue needed to improve infrastructure. Multiple reports estimate that such projects will end up costing the state money,16 though the state is still investigating the issue.17

16

PARSONS, Feasibility Study: I-95 Corridor Branford to Rhode Island (July 2004), http://www.ct.gov/dot/lib/dot/documents/dpolicy/i95/docs/Feasibility_of_Managed_Lanes.pdf (accessed March 19th, 2013); HVCEO, Interstate 84 Greater Danbury, CT Toll Plaza Impact Study (October 2009), http://www.hvceo.org/transport/i84_toll_plaza_impact_study.pdf (accessed March 19th, 2013). 17 US Department of Transportation Federal Highway Administration, Project CONNECTICUT: Feasibility on Pricing on Interstate 84 (Hartford), http://ops.fhwa.dot.gov/tolling_pricing/value_pricing/projects/involving_tolls/priced_lanes/express_toll_lanes/ct _fpricei84.htm (accessed March 19th, 2013).

D. The Safety Factor Tolls in Connecticut were originally ended in 1983 due to a tragic accident at a toll plaza that claimed seven lives.18 We should not weigh human lives lightly, but we also must take some perspective. In 2009 alone, two hundred and twenty-three traffic fatalities occurred in Connecticut.19 No one argues that we should outlaw roads because of that. Toll roads are safer, not less safe, than other U.S. roads.20

1.50 1.20 0.90 0.60 0.30 0.00

Figure 1: A Comparison of Fatality Rates Toll En99es vs. All Road Fatali9es per 100 Million Vehicle Miles Traveled, 2005

U.S.

All Rural Interstate

All Urban Interstate

All Toll Facilines

Toll Roads Toll Bridges Toll Tunnels

NOTE: Reproduced from Je Campbell,Toll vs. Nontoll: Toll Facilines Are Safer, Tollways (Winter 2008), table 3.

18

Eastern Roads, Connecticut Turnpike Historical Overview, http://www.nycroads.com/roads/ct-turnpike/ th (accessed January 7 , 2013). 19 st U.S. Census Bureau, Statistical Abstract of the United States: 2012, 131 Edition, (Washington, DC, 2011), p. 693, th http://www.census.gov/compendia/statab/2012/tables/12s1104.pdf (accessed January 7 , 2013). 20 Jeff Campbell, Toll vs. Nontoll: Toll Facilities Are Safer, Tollways (Winter 2008): 55-63.

The elimination of tolls in Connecticut exemplifies what behavioral economists call availability bias. It is difficult to calculate the correct odds of something happening (e.g. a deadly accident at a toll plaza), so instead people often act on what they can clearly remember. Recent tragedies often spark changes in behavior that contradict the relative danger of events actually happening. For instance, 9/11 indirectly led to hundreds of deaths by causing travelers to choose driving over flying, despite flying remaining safer.21 E. Additional Benefits for Connecticut of Congestion Pricing The failure to charge for congestion can be thought of as a subsidy for driving during those hours, since those drivers do not compensate those around them. Among other things, commuters pollute, and they pollute more due to congestion. Census estimates this to amount to 13 gallons of fuel per person per year in the Hartford area, 17 in New Haven, and 20 in Bridgeport.22 If Connecticut charged for congestion, the state should expect less pollution. F. Revenue Estimates and possible prices. Economists, transportation planners, politicians, and reasonable minds will disagree on the optimal dollar value of a toll, the placement of tolling stations, what times of day variable congestion pricing should apply, and the extent to which tolls

21

Gerd Gigerenzer, Dread Risk, September 11, and Fatal Traffic Accidents, Psychological Science 15, no. 4 (2004): 286-87. For a brief summary, also see also Trevor Butterworth, How We Calculate Risk: Fear of Flying After 9/11 th Lead to Increase in Auto Deaths, posted January 16 , 2008, http://thestatsblog.wordpress.com/2008/01/16/fear- th of-flying-after-911-led-to-increase-in-auto-deaths/ (accessed January 7 , 2013). 22 US Census Bureau, ibid.

could push traffic onto other local roads. The Yankee Institute makes no specific recommendations about these questions. We do know that 361,000 vehicles travel north on I-95 from the New York state line to Fairfield each day. 23 Another 132,000 vehicles travel northbound on the Merritt Parkway from Stamford to Fairfield each day.24 From Orange to New Haven, 188,000 vehicles pass on I-95 each day. Assuming round trips made 5 days a week, a $3 toll would generate $1.06 billion in revenue per year. Incentives matter, of course, and adopting congestion pricing would reduce usage and revenue. Based on the experience of other states, electronic and open road tolling systems keep collection costs between 712 percent of revenue, including capital costs25 and do so at a similar cost to collecting gas taxes.26 It may not make sense to charge at all outside of peak usage, if part of the purpose of the toll is to reduce congestion. Assume that tolls are only collected during peaks hours to offset traffic. If this is the case, they may still raise a great deal of revenue. On the low end, suppose that 40% of all vehicles pass through while congestion pricing is in effect. Suppose also that the congestion pricing causes the number of vehicles passing through during that time to fall by 40 percent. The proposed

23

Division of Systems Information, Bureau of Policy and Planning, 2011 Traffic Volumes State Maintained Highway Network (Traffic Log), State of Connecticut Department of Transportation, available online at nd http://www.ct.gov/dot/lib/dot/documents/dpolicy/traflog/trafficlog11.pdf (accessed February 2 , 2013) 24 Because the data is in terms of one direction of traffic, it is only capturing the full effect of one commute. 25 The costs of tolling are now not necessarily any higher than the costs of collecting fuel taxes. Daryl S. See Fleming, with Thomas L. McDaniel, Ramon L. Grijalva, and Luis Alberto Sanchez-Ruiz, Dispelling the Myths: Toll st and Fuel Tax Collection Costs in the 21 Century, Reason Foundation Policy Study no. 409 (2012). 26 Fleming et al, ibid.

tolls would then raise $358 million, minus collection costs. On the other end of the spectrum, suppose that 60% of the traffic for the day passes through while congestion pricing is in effect and traffic only falls by 20%. This corresponds to $715 million, minus collection costs.

Scenario 1 Total Number of V ehicles Per Day (One Way) Toll Return Trip % of V ehicles During Rush Hour % Fall i n V ehicles In Reponse to Tolls Days Revenue 680,500 $3.00 2 60% 20% 365 $715,341,600

Scenario 2 680,500 $3.00 2 40% 40% 365 $357,670,800

Other areas have implemented or are considering implementing congestion pricing. The Bay Bridge in San Francisco varies its price, peaking at $6.27 Proposed prices in Chicago amounted to $2.76 for one corridor and $3.41 for the other.28 A proposed congestion pricing plan in New York would be $5 for several bridges.29 While one analysis specific to Connecticut has suggested that tolls must be prohibitively high

27

Metropolitan Transportation Commission, Frequently Asked Questions about July 2010 Bridge Toll Increase, th http://www.mtc.ca.gov/tolls/faq.htm#2 (accessed March 19 , 2013). 28 Jon Hilkevitch, Getting Around: How Much Are You Willing to Pay to Avoid Traffic? Chicago Tribune, October th 15 , 2012, http://articles.chicagotribune.com/2012-10-15/classified/ct-met-getting-around-1015- 20121015_1_congestion-chicago-metropolitan-agency-cmap (accessed March 19th, 2013). 29 Katie Hinds, Congestion Pricing Is Back And the NY Times Former Editor Really Likes It, Transportation th Nation, March 5 , 2012, http://transportationnation.org/2012/03/05/congestion-pricing-its-back-and-the-ny- th times-former-editor-really-likes-it/ (accessed March 19 , 2013).

in order to make a dent in traffic,30 this has not been the experience in the United States. Another analysis for Connecticut has suggested that tolls of this magnitude would lead to a significant increase in ridership of trains.31

30

Cambridge Systematics, Inc., Connecticut Electronic and Congestion Pricing Study (April 2009), http://www.ct.gov/opm/lib/opm/tsb/reports_tsb/final_report_-_tolling_study.pdf (accessed March 19th, 2013). 31 Norman Garrick, Wesley Marshall, and Eric Jackson, Value Pricing in Connecticut (September 2008), http://www.ct.gov/dot/LIB/dot/documents/dresearch/CT-JHR_08-313_JH_05-6.pdf (accessed March 19th, 2013).