Market Reforms

Comprehensive Transportation Market Reforms

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TDM Encyclopedia

Victoria Transport Policy Institute

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Updated 22 July 2008


This chapter describes various transportation price and market reforms that encourage more efficient transportation and support TDM objectives.

 

 

Wit and Humor

The mode of taxation is, in fact, quite as important as the amount. As a small burden badly placed may distress a horse that could carry with ease a much larger one properly adjusted, so a people may be impoverished and their power of producing wealth destroyed by taxation, which, if levied in another way, could be borne with ease.   -Henry George

 

 

Description

Transportation Market Reforms include various policy changes that result in more efficient and fair transportation pricing (Market Principles). Specific Market Reforms are described below.

 

Optimal Pricing

Full cost pricing (also called marginal cost pricing) means that users pay directly for costs imposed on society by their vehicle use (Transportation Costs). At a minimum, this includes recovery of government expenditures on roadway facilities and traffic facilities (Wachs, 2003; Balaker and Staley, 2006; Forkenbrock, 2006). It can also include recovery of the equivalent of rent and taxes for land used for roadways; charges for various external costs caused by motor vehicles, including unpriced congestion, uncompensated crash damages, parking costs; and environmental damages, and converting some fixed costs into variable costs (Deen, 2003; Parry, Walls and Harrington, 2007). Many specific TDM strategies can help implement Full Cost Pricing, including various types of Road Pricing, Parking Pricing and Distance-Based Fees. Table 1 summarizes the applicability of various pricing strategies to more accurately charge for various costs. Because motor vehicle use imposes several types of costs, optimal transportation pricing requires several types of user fees.

 

Table 1            Applicability of Pricing Strategies To Various Costs

User Fee

Roadway

Parking

Congestion

Crashes

Pollution

Road Tolls (fixed rates)

2

 

2

1

1

Congestion Pricing (time variable)

2

 

3

 

1

HOT lanes

1

 

2

 

 

Cordon Fees

2

 

2

 

1

Distance-Based Fees

3

 

2

3

3

Pay-As-You-Drive Insurance

 

 

1

3

2

Parking Pricing

 

3

2

 

1

Increase Fuel Tax

1

 

1

 

3

Rating from 1 (slight benefit) to 3 (very beneficial).

 

 

Revenue-Neutral Tax Shifts

Since governments must tax something to raise revenue, many economists recommend shifting taxes from socially desirable activities to activities that impose external costs (Durning and Bauman, 1998; Hagler Bailly, 1999; Hoerner and Jan Mutl, 2000; EEA, 2000; OECD, 2001; Parry and Small, 2004). For example, revenue from increased road use charges and fuel taxes could be used to reduce employment and general sales taxes, resulting in less vehicle travel and more employment and business activity. This can provide multiple benefits, including economic development, environmental protection, and more efficient transportation.

 

 

Neutral Tax Policies

An optimal tax structure is economically neutral. It would not favor automobile expenditures over other transportation modes, transportation over other consumer expenditures, or transportation facilities over other investments. Some current tax policies unintentionally favor automobile use (Moret, Ernst & Young, 1994). For example, tax policies encourage employers to provide company cars or offer generous mileage reimbursement rates as a perk (Transport 2000, 1998). In some countries, more than a third of new vehicles are purchased as company cars (Luk and Richardson, 1997). Of the vehicles provided by employers to employees, typically 15-20% of their mileage is for personal use (Runzheimer, 1996). One major study estimated that current company car tax policies increase business mileage by about 5%, adding about 1 billion miles of vehicle travel in the United Kingdom (Ashden Trust, 1997). Another study (Gutiérrez Puigarnau and Ommeren, 2007) found that company car subsidies increases ownership by about 0.48 vehicles per household, resulting in social welfare costs estimated between €450 and €1,000 per company car, totaling between €10 and €20 billion for Europe overall. Kenert and Kuhfeld (2007) compare vehicle tax structures in various European countries and recommend a variety of reforms to reduce unintended distortions and help achieve strategic objectives, such as pollution emission reductions.

 

Employee parking subsidies are often exempt from income taxes, and land devoted to parking is often taxed at a lower rate than if the land was used for a building. As a result, a typical employee must earn more than $1,500 in annually pre-tax income to pay directly for a parking space that costs their employer $1,000 in rent or mortgage costs. This creates an incentive for employers to provide free parking as an employee benefit, but without Parking Cash Out policies, employees who use other modes receive no comparable benefit (Potter and Rye, 2000).

 

Industrial policies can also be reformed to avoid favorable tax treatment and indirect subsidies that encourage fossil fuel production (Koplow and Dernbach, 2001). This could include changes to investment depreciation tax policies, and internalization of shipping facilities and energy security costs (such as costs associated with the Strategic Petroleum Reserve).

 

 

Gradual and Predictable Fuel Price Increases

One TDM strategy that can be relatively easy to implement is to implement, gradual and predictable (less than 10% at any time) long-term Fuel Tax Increases. This is particularly appropriate in jurisdictions that have traditionally subsidized or undertaxed fuel. At a minimum, fuel taxes should cover basic roadway expenditures (a minimum tax of about 10¢ per liter), or more to fund other transport sector expenditures (including subsidies for rail and public transit services), and contribute to general funds (Metschies, 1999). Puentes and Prince (2003) find that U.S. fuel taxes would need to more than double if user fees are to cover all roadway expenditures.

 

 

Improved Transportation Pricing Methods

Current transportation pricing methods have several problems. Fuel taxes and vehicle registration fees do not accurately reflect many of the costs imposed by a particular vehicle. Fuel tax revenue is likely to decline in the future as vehicles become more fuel-efficient and shift to alternative fuels. Conventional parking pricing and road tolling systems are inconvenient and expensive to operate. New Pricing Methods can overcome these problems.

 

 

Smart Growth Policy Reforms

Current land use planning, regulatory and fiscal practices often encourage lower-density, urban periphery, Automobile Dependent development patterns. A number of reforms can help create more neutral policies, supporting more efficient land use development. These reforms include changing zoning codes and development practices, supporting infill development, development fees and utility pricing that reflect the higher costs of dispersed development, and support for brownfield redevelopment.

 

 

Least-Cost Planning And Investments

Least-Cost Planning (or Integrated Planning) means that demand management strategies are given equal consideration as capacity expansion in planning and investments. This helps overcome current practices that tend to favor capacity expansion and motorized modes (Comprehensive Transportation Planning). Least Cost Planning allows TDM to be implemented when it is the most cost effective solution overall.

 

 

“Fix It First” Spending Priority

Current transportation planning and funding practices often favor capital expenditures over maintenance and operations. Capital projects are considered prestigious (public officials can participate in ribbon-cutting ceremonies and have their names on plaques attached to new roads, bridges and rail facilities) and many transportation funds may only be used for major capital improvements. This encourages jurisdictions to expand transportation system capacity and implement major new projects even when they have inadequate resources to maintain and operate existing facilities, or when incremental improvements to existing facilities and demand management strategies would provide greater economic benefits.

 

“Fix It First” means that transportation planning and funding give top priority to maintenance, operations and incremental improvements to existing transportation facilities, and major capital projects are only implemented if there is adequate additional funds. The U.S. federal ISTEA program, and some state transportation funding programs are based on Fix-It-First principles (STPP, 1998).

 

 

Neutral Planning and Investment Policies

Some current planning and investment practices favor automobile-oriented transportation improvements over other modes, and favor transportation over other types of public expenditures (Sussman, 2001; Meyer, 2001; Beimborn and Puentes, 2003; EWG, 2004). Current planning practices often exaggerate the benefits of highway projects and understate the benefits of TDM solutions (Evaluating TDM). Comprehensive Planning can help correct these errors. Many jurisdictions have funds dedicated to highway and parking facilities that cannot be used for other transportation solutions even if they are more cost effective overall. Applying Least Cost Planning allows all types of transportation improvement to be considered equally.

 

Table 2            Comparing U.S. Transit and Highway Funding Rules (Beimborn and Puentes, 2003)

 

Transit

Highways

Federal Funding

Current federal law authorizes as much as 80% federal share, but FTA practice is to recommend only projects with maximum 60% federal share. The Bush administration proposes a 50% or lower share.

Federal match is 80-90%, depending on program. Program funds are allocated by formula. Most states have dedicated fuel tax and licensing revenues that make it easy to provide matching funds.

Project Criteria and Justification

Extensive list including cost effectiveness and financial plan.

No requirement for cost effectiveness.

Land Use Impacts

“Transit supportive land use patterns” a key project selection criterion.

Land use impacts of project not considered.

Performance Evaluation

Peer comparison is mandatory and reported to Congress. There is a detailed process used to compare alternative projects.

Peer comparison is rare. Alternative comparisons are optional at state level.

Information Transparency and Accessibility

Information and data are publicly accessible and transparent.

Information and data are difficult to access and unclear for the general public.

This comparison indicates that planning and funding practices tend to favor highway over transit, skewing transportation systems to encourage automobile use and discourage alternatives.

 

 

Allow Local Governments Greater Funding Flexibility

Higher levels of government (federal, state, provincial) often limit the types of taxes and fees regional and municipal governments can apply, which often discourages the use of efficient transportation user fees (Institutional Reform). In particular, restrictions on Road Pricing, Parking Taxes and Location-based Utility Fees should be eliminated, and local governments should be encouraged to use tax and funding options that encourage more efficient travel behavior and land development practices. In other words, if governments must raise revenue, taxes that provide double dividends (i.e., that also reduce traffic congestion, crash risk, pollution problems, etc.) should be favored.

 

 

Vehicle Tariffs and Industrial Development

Countries can establish import and industrial policies to limit motor vehicle ownership and favor efficient travel modes. Non-motorized vehicles (bicycles and pushcarts) and buses can have relatively low import tariffs and taxes, while private automobiles and fuels can have relatively high tariffs and taxes to discourage their purchase. Industrial development policies can support related industries, such as government or NGO loans to help establish local bicycle and cart manufacturing, assembling and retail businesses. This is particularly appropriate in developing countries.

 

 

How It Is Implemented

Most comprehensive market reforms require federal or state/provincial legislation. Some tax reforms (such as tighter controls over personal use of business vehicles) can be implemented by government agency administrative action. Parking Pricing and Road Pricing can be implemented at the local or regional level. Parking Pricing, Parking Cash Out and Distance-Based Insurance can be implemented by businesses.

 

 

Travel Impacts

Travel impacts depend on which reforms are implemented, how they are implemented, their magnitude, whether there are other supportive public policies, and over what time period (Transport Elasticities). Travel impacts are greatest if reforms are predictable and gradual, and if they are supported by other transportation and land use reforms that improve Accessibility and Transportation Options. PETS (2000) describes several modeling exercises to estimate the effects of more optimal pricing on travel behavior.

 

Potential travel reductions are large. For example, a set of state-level tax and pricing shifts are predicted to reduce total vehicle travel in Washington State by 15-35% (Litman, Komanoff and Howell, 1998). One study estimates that company car tax reform in the UK alone could reduce total car use by 2.4% (IEEP, 1999). Total motor vehicle travel is predicted to decline by 20-50% in an optimal transportation market that incorporates all cost effective market reforms (ICF, 1997; Litman, 2005).

 

Table 2            Travel Impact Summary

Travel Impact

Rating

Comments

Reduces total traffic.

2

Creates a more efficient transport system.

Reduces peak period traffic.

2

"

Shifts peak to off-peak periods.

2

"

Shifts automobile travel to alternative modes.

2

"

Improves access, reduces the need for travel.

2

"

Increased ridesharing.

2

"

Increased public transit.

2

"

Increased cycling.

2

"

Increased walking.

2

"

Increased Telework.

2

"

Reduced freight traffic.

2

"

Rating from 3 (very beneficial) to –3 (very harmful). A 0 indicates no impact or mixed impacts.

 

 

Benefits And Costs

Transportation Market Reforms can provide a wide range of transportation benefits, including reduced traffic congestion, road and parking facility cost savings, reduced crashes, increased travel choice, consumer savings, environmental protection and more efficient land use, depending on the type of pricing and other factors (Pricing Evaluation).

 

To the degree that such reforms reflect Market Principles they can increase economic productivity, development and competitiveness (Economic Development). Tax shifting encourages efficiency and technological innovation, reduces the economic costs of imported petroleum, and encourages employment and investment.

 

The petroleum industry argues that tax shifts are economically harmful (Wiese and Tierney, 1996), but their analysis ignores potential economic benefits from more efficient resource use and reductions in more economically harmful taxes. Studies that incorporate these effects indicate that revenue neutral tax shifts could increase economic development (Walz, et al, 1999; EEA, 2000). One study found that increasing fuel taxes and using the revenues to replace income taxes could increase GDP by 7.7% and average household wealth by 5.5%, while reducing fossil-fuel use by 38% (Norland and Ninassi, 1998). A major UK Treasury study estimates that a 5% reduction in travel time for all business travel on the road network would generate savings equivalent to approximately 0.2% of GDP (Eddington, 2006). Other studies indicate that policies that reduce automobile dependence tend to increase economic development (Litman and Laube, 1999). Some Market Reforms increase Affordability by allowing consumers new opportunities to save money when they reduce their vehicle ownership and use.

 

Costs may include transition costs (the costs of changing to accommodate change) and increased transaction costs (costs of collecting fees and enforcing regulations). These costs can be minimized by using efficient Pricing Methods and making changes predictable and gradual. Impacts on Transportation Choice are mixed and vary depending on how Price Reforms are implemented. Although they make driving more expensive, they tend to increase support for alternative modes, particularly if implemented in conjunction with other strategies to improve transportation choices.

 

Table 2            Benefit Summary

Objective

Rating

Comments

Congestion Reduction

3

Particularly if reforms include congestion and parking pricing.

Road & Parking Savings

3

Encourages more efficient use of transportation facilities.

Consumer Savings

1

Consumers save overall if they receive tax revenues and savings.

Transport Choice

2

Increase driving costs, but increases support for alternative modes.

Road Safety

3

Most reforms increase safety by reducing total traffic. Distance-based insurance is particularly effective at increasing road safety.

Environmental Protection

3

Particularly if emission fees are included.

Efficient Land Use

3

Reduces automobile travel, makes urban locations more attractive.

Community Livability

3

Reduces automobile traffic and impacts.

Rating from 3 (very beneficial) to –3 (very harmful). A 0 indicates no impact or mixed impacts.

 

 

Equity Impacts

Equity impacts vary depending on what reforms are implemented, the quality of travel choices that are available, and how revenues are used. To the degree that price reforms correct market distortions and internalize external costs, they increase horizontal equity by having consumers pay more of the costs they impose on society.  However, price changes tend to affect some groups more than others, which are often a major obstacle to Transportation Market Reforms.

 

Tax and price increases are often criticized for being regressive with respect to income, but most are no more regressive than other taxes and fees, and they can be progressive is revenues are used to benefit lower-income people (Pricing Evaluation). Some price reforms, such as Pay-As-You-Drive Insurance and Parking Cash Out, are progressive with respect to income. Most Price Reforms benefit transportation disadvantaged people (non-drivers) by reducing the indirect Vehicle Costs they bear, and by improving transportation alternatives. Some Price Reforms improve Basic Access by giving priority to HOV, freight, and other higher-value vehicle trips. Ryan and Stinson (2002) evaluate the distributional impacts of revenue-neutral tax shifts, with higher fuel taxes or mileage fees matched with reductions in general taxes now used to subsidize roads.

 

Table 3         Equity Summary

Criteria

Rating

Comments

Treats everybody equally.

0

Mixed. Depends on details.

Individuals bear the costs they impose.

3

Tends to reflect “user pay”.

Progressive with respect to income.

0

Mixed. Depends on details and use of revenue.

Benefits transportation disadvantaged.

3

Tends to reduce costs and increase travel choice for non-drivers.

Improves basic mobility.

2

Discourages lower-value trips without restricting higher-value trips.

Rating from 3 (very beneficial) to –3 (very harmful). A 0 indicates no impact or mixed impacts.

 

 

Applications

Market Reforms can be appropriate in just about any geographic condition although their benefits tend to be greatest where markets are highly distorted, and in urban areas where the problems associated with motor vehicle traffic are greatest. Most reform strategies are implemented by federal or state/provincial governments, although local governments, businesses and campuses can implement Parking Pricing reforms.

 

Table 4         Application Summary

Geographic

Rating

Organization

Rating

Large urban region.

3

Federal government.

3

High-density, urban.

3

State/provincial government.

3

Medium-density, urban/suburban.

2

Regional government.

2

Town.

1

Municipal/local government.

1

Low-density, rural.

1

Business Associations/TMA.