by H. William Batt, Ph.D., Albany, NY
The following presentation was given at The
Third Annual Global Conference on Environmental
Taxation, April 12-13, 2002, Woodstock, VT
Introduction
From the standpoint of an economic geographer, and
for some land economists, land rent is simply capitalized
transportation cost. Land rent is the surplus generated by
social activity on or in the vicinity of locational sites
which accrues to titleholders of those parcels. Whether or
not it is recaptured by public policy, rent is a natural
factor deriving from the intensive use of natural capital.
More intensive use of high value landsites leads to site
configurations that are less dependent upon transportation
services. People can access them easily even by walking.
One must remember that transportation is not an end in
itself but rather a means. This is something often
forgotten even by urban planners, the distinction between
accessibility and mobility. As explained well in a recent
text, The Geography of Urban Transportation:
"Accessibility refers to the number of
opportunities, also called activity sites, available within
a certain distance or travel time. Mobility refers to the
ability to move between different activity sites (e.g.,
from home to a grocery store)."
The result is that we do an awful lot of traveling
to get what and where we want. We have paid enormously for
mobility even at the expense of access. Subsidizing motor
vehicle transportation makes the problem worse! Author
Kirkpatrick Sale recognized this when he argued that:
"Cities are meant to stop traffic. That is their
point. That is why they are there. That is why traders put
outposts there, merchants put shops there, hostellers erect
inns there. That is why factories locate there, why
warehouses, assembly plants, and distribution centers are
established there. That is why people settle and cultural
institutions grow there. No one wants to operate in a
place that people are just passing through; everyone wants
to settle where people will stop, and rest, and look
around, and talk, and buy, and share.
Site Rent and Transportation Costs
Higher density development has all the economies of
scale, savings in cost, reduction in externalities,
dividends in community and political enhancement, and
benefits to urban areas that we all say that we want. The
greater the proximity to points of desirable accessibility,
the lower are typically the transportation costs.
Conversely, sites remote from the urban centers of greatest
locational value will have higher transportation costs.
When the fixed costs of transportation infrastructure and
parcel site improvements are accounted for (which tend to
be relatively the same regardless of location), one is left
with the marginal costs of operations.
This relationship has been demonstrated more
empirically in a recent study by the Urban Land Institute.
The author concluded that, for Portland Oregon: "each
additional mile [traveled] translated into slightly more
than $5,000 in housing costs; closer-in locations command
a premium, those farther out save money. A ten-mile
difference, all other things being equal, would amount to
about $56,000 in new home value."
For a household in which one worker drives downtown
(or at least to a more central location) to work, that
ten-mile difference may amount to 4,600 miles annually,
assuming 230 days of commuting and a round-trip of 20 miles
each day. Moreover, if non-work trips to the central area
and elsewhere doubled that amount, the tradeoff would be
about 9,000 miles annually, which could mean a higher/lower
driving cost of $3,000 annually, not counting the time
saved/spent.
That's the savings for living closer to the urban
center by ten miles. If the urban resident has to rely
upon a car nonetheless, subtracting some $3,000 annual
travel expenses will still leave him paying again that
much, and likely more, to own a car. James Kunstler put
the true costs along with other experts at about $6,100
annually seven years ago. The American Automobile
Association calculated that a car driven 15,000 miles in
2001 cost 51 cents per mile or $7,650. Even that figure
reflects only direct costs to the driver, not those passed
to society. One study calculated that the total costs of
motor vehicle transportation to our society equal
approximately a fourth of our Gross Domestic Product (GDP).
Road user fees in 1991 totaled only about $33 billion
whereas the true costs to society were ten times that; put
another way, drivers paid only 10% of the true costs of
their motor vehicle use.
The latter figures include externalities like
pollution and the costs of highway crashes. Hortatory
public pleas for people to tune up their engines so they
pollute less, inflate their tires properly, and drive more
safely are not likely to change the reality that people are
forgetful and fallible. Regardless, pollution-free cars are
not available; people must drive to participate in this
society. The consequences of SO2, CO2, and ozone are no
longer a matter of debate; they are scientific fact.
Despite frequent headlines about replacing the internal
combustion engine, all the realistic substitutes also
ultimately rely upon fossil fuel power; solar powered cars
are far in the future, if at all, and also fail to deal
with any transition. And every person driving his or her
own car multiplies the probabilities of accidents. Those
crashes alone, nothing else, represents a figure equal to 8
percent of the American GDP. In human terms nationally,
this is about 43,000 deaths and 2 million hospitalizations
annually. When people step into a car they are seldom
mindful of such odds. However, if the direct pecuniary
costs of driving increase in any substantial way, such as
for an increase in motor fuel as many experts forecast,
there will surely be a significant changes in the tradeoffs
involved in housing/transportation choices. Making costs
visible and linked to private personal behavior is one way
to ensure that transportation pays its own way.
Public opinion polls are practically unanimous in
their demonstration of the kind of environment most
Americans say they would like to live in. Sociological
studies have documented graphically how alienating the
car-dependent environment really is. There is an inverse
correlation between the ability of a street to move and to
park cars and trucks, and the amount of social interaction
between neighbors on that street. One study two decades
ago compared three similar residential streets, with
different levels of traffic volumes, in San Francisco.
Residents on the different streets were asked to indicate
on the base maps of their streets where friends and
acquaintances lived. Those living on streets with the
least traffic volume had three times as many friends and
twice as many acquaintances as those living on the streets
with heavy traffic volumes. More recently Harvard
Professor Robert Putnam has made similar findings in his
book "Bowling Alone". It is also no accident that on
measures of livability, those locations regarded as most
attractive are also the ones that are most
bicycle-friendly.
Driving is no longer regarded as fun, not on
today's typically congested highways. There was a time
when most people drove cars for pleasure; today people
resent their having to drive so much and often see driving
as a burden. A number of recent books and their popularity
reflect resentment over our forced dependency on motor
vehicle transportation. Jane Holtz Kay's "Asphalt
Nation", Clay McShane's "Down the Asphalt Path", Wolfgang
Zuckerman's End of the Road, and Katie Alford's "Divorce
Your Car" are only a few such examples. But despite their
vague discomfort people typically lack the perspicacity to
incorporate these non-pecuniary costs into their decisions
about locational choice.
Correcting Distortions by Pricing
Recovering the economic rent from urban parcels
helps people to appreciate the true costs of the
transportation versus location trade-off. It brings the
carrying costs of site choices back to the present time and
makes them comparable with travel choices. Collecting site
rent becomes an operating cost. The other corrective policy
is to raise transportation costs to a level commensurate
with their full value as private goods. Transportation user
fees, in the form of motor fuel taxes, green taxes,
congestion fees, and recovery costs for the administration
of drivers' licenses and registration fees could easily
provide the needed price corrections to bring into balance
marginal transportation costs and land rent collection.
Doing so would equilibrate choices between people living
and working in high rent urban centers and those in
peripheral low rent (but higher travel cost) locales.
A tax on land value (or alternatively the tax on
land rent) coupled with the proper design of transportation
fees can equilibrate the competitive advantage of markets
in urban areas relative to suburbs, thereby reducing, and
perhaps even reversing, the centrifugal forces of sprawl
development. The land tax cannot alone redress the
problem, especially so long as such inordinate social
subsidies are granted to private motor vehicle
transportation services. Nor can transportation fees,
raised to a level fully commensurate with the social and
private costs they incur, alone ensure that the price of
locations will be matched. But to the extent that both are
assessed, they reach far toward correcting this
disequilibrium. One could even argue that all site rent
should be recaptured by society and that all transportation
costs that are identifiable as consumption of private goods
should be priced accordingly. Some advocates even suggest
that doing so will not only foster economic efficient
behavior but also provide a citizen's dividend consistent
with economic justice.
Arriving at the appropriate revenue formulas is the
challenge. Recapturing land rent is likely best achieved
by setting the rates at a level that will stabilize the
market price of landsites in the face of speculative
pressures. Because the collection of rents fosters
economic activity in the regions of highest value, it may
just be that market prices will remain stable even with
very high levies. The downward pressure on market prices
exerted by a tax is countered by the increased incentive to
improve parcel sites with the highest value. Georgist
economists like Dr. Mason Gaffney and Dr. Jerome Heavey
argue that ultimately all tax revenues come from rents in
any case; that it is only a question of how much they are
shifted through to other sectors of the economy before they
are collected. Professor Gaffney explains this by noting
that:
"After-tax interest rates are determined in world
markets and the local supply of capital funds is highly
elastic. So, local taxes on capital do not stick to
capital. Even national taxes on capital typically fail to
stick, because capital is a citizen of the world. Local
labor supplies are also pretty elastic, although not so
totally. Local taxes on labor, therefore, do not stick to
labor, either. Payroll taxes drive people out of
localities that impose them, for example. Ditto for sales
taxes. Customers move, or shift their purchases, to where
taxes are lower, or zero. Sellers shift, too, to the
extent they bear the tax. What else is left? Just land,
and land cannot emigrate or immigrate from the local
jurisdiction."
This means that taxing away land rent more relieves
it from circulating through labor and capital, allowing
those factors to be more productive in turn.
Significantly, perhaps most importantly, the collection of
land rent, on account of its inelasticity, incurs no
deadweight loss like tax levies on labor and capital. The
economy thus functions more efficiently - i.e. with less
drag and friction.
With respect to charges upon transportation
services and externalities, there are several components to
a proper pricing design. The first step to proper pricing
is to identify the proportion of transportation services
that ought rightly to be seen as private goods as opposed
to public goods. Although this is a daunting task, the
frequent figure used is 80 percent - 20 percent proportion.
The public good proportion of road use reflects the amount
of reliance by services provided by the government and
associated agencies like mail service, national defense,
public safety (ambulance, police and fire departments), and
so on. The private use of the roads constitutes the
overwhelming amount of its use. This means that as a rule
80 percent of the highway use charges should be paid by
individual drivers, directly or indirectly. It is easy to
distinguish five elements of transportation service cost:
capital investment, maintenance costs, regulation costs,
environmental externalities and congestion costs. Each of
these calls for a different treatment with respect to
revenue design.
As noted earlier, capital investments affect the
market value of locational sites by conveying rent to those
in any way benefitting from the service. That rent
accruing to proximate sites can easily recaptured to pay
off the debt service of project construction. Typically
rent collection is ignored, however, left instead in the
hands of titleholders whose sites are serviced by the
infrastructure investment. This drives speculation in
land, with all the negative effects it brings both
economically and politically.
In fact the rent created by capital investment in
transportation can be enormous. One nine-mile stretch of
interstate highway in Albany, New York, costing $125
million to construct has yielded $3.8 billion in increased
land values within just two miles of its corridor in the 40
years of its existence. This is a thirty-fold return in a
timespan typically used for bond repayment! The Washington
Metro created increments in land value along much of the
101-mile system under of construction in 1980 that easily
exceeded $3.5 billion, compared with the $2.7 billion of
federal funds invested in Metro up until that time. No
doubt the return is far greater today. The component of
transportation costs constituting capital expenditure can
and should be recaptured through the collection of land
rent since it accounts for the creation of that value
particular to proximate locational sites.
Maintenance costs on the other hand are best paid
for from user fees, and can range from excise taxes on
motor fuel, tires, heavy truck charges and others still.
Such pricing has received considerable attention in recent
years, even though it has been difficult to implement for
political reasons. Heavy trucks, for example, pay special
mileage charges, which should ideally be based upon
axle-weight and distance, commensurate with the wear and
tear on the roads that they cause.
High-tech innovations using transponders for
electronic road pricing according to time and place of
vehicle travel are being explored and implemented in Hong
Kong, Singapore, New Zealand and on modest scales
elsewhere. The virtue of a tax on motor fuel, at least for
automobiles, is that charges are roughly commensurate with
miles driven if rates are set at the proper levels. But
electronic road pricing can be far more precise if concerns
about personal privacy can be overcome by computers that
calculate user charges based solely upon point
calculations. Bringing prices into line with marginal
costs is the most efficient and equitable way to pay for
highway transportation services, and one can expect to
witness significant advances in this realm before too many
years pass.
Separate from maintenance operations are the costs
involved in the regulation and supervision of drivers and
motor vehicles themselves. License and registration fees
should ideally be designed only to recover the costs
involved in their administration. To be sure, such
administration may reach to operations beyond license plate
bureaucracies to safety inspections, certain judicial
functions, and so on. But charging for road use through
such measures is not only inefficient but inequitable.
Charging for pollution externalities of motor
vehicle travel invites more complex issues. One approach
widely explored involves reliance upon what are known as
Pigou taxes, after noted British economist Arthur Pigou.
It attempts to recover the costs of externalities in the
natural environment and even involving health damages. Yet
Pigou taxes are more often talked about than actually
implemented. Related to such designs are those growing out
of the theories of Ronald Coase, designed not necessarily
to recover the full social costs of negative externalities
but rather to foster the most efficient economic choice
among options, even if some parties are disadvantaged.
Taxes recovering such costs are most easily collected at
the production stage - at the wellhead or the refinery for
oil, and from the manufacturer for tires and other
materials.
Still a third approach is that represented by the
Georgist tradition, which would recover the costs of
specified pollution externalities by accepting them to the
extent that the environment is capable of absorbing them,
and charging polluters for the use of the environment as a
sink for such wastes. This approach is particularly
attractive as a way to charge for the release of noxious
gases in motor vehicle exhaust.
The last dimension of motor vehicle transportation
charges can be designed to reflect the costs of congestion.
To some extent, those costs are already borne by drivers
since they pay in the value of their time for that lost by
slowed traffic. But not everyone's time has the same
value, and proper pricing of road use reflective of time
and place is an attractive solution to maintaining the
efficient flow of highway service. Here again, electronic
road pricing can help with efficiency.
These pricing approaches taken together offer the
prospect of both recovering costs in their varied forms as
well as fostering efficient transportation services. There
are grave misconception in how much fiscal policies distort
social and economic behavior. And the fiscal policies that
foster the greatest distortions of all are those involving
road costs and the failure to collect economic rent. Rather
than resort to traditional command-and-control approaches
which are frequently just as cumbersome and distorting as
current unthinking fiscal measures, now is an opportune
time to consider models which will help us to get things
right.
Costs of Conventional Taxes and Subsidies
The conventional property tax, one taxing both land
values and improvement values, is analogous to a train with
an engine at each end. The tax on land value fosters
improvement on the parcels with the highest market and
social value, while the tax on structures discourages that
very same thing. No wonder it is that economic activities
is stymied most in the urban centers and manifests itself
in areas where the least imposition of all has taken hold.
As scholar Jessica Matthews once put it: "In a now
familiar sequence, developers reach for the cheapest land,
out in the cow pastures. Government is left to fill in
behind with brand new infrastructure: roads, sewerage
systems and schools, paid for in part by those whose
existing roads and schools are left to decline. Property
values rise in a ring that marches steadily outward from
the city and fall in older suburbs inside the moving edge."
Because residential development can't meet the
public bills, local governments compete for commercial
investment with tax discounts that deplete their revenues
still further. Property taxes then rise, providing an
incentive for new development. Years of such leap-frogging
construction devours land at an astonishing pace.
Developing land use and transportation patterns
that assume walkability or transit service rather than
individual and private motor vehicles is the very
definition of livability. Experts agree that the minimum
density necessary to make public transit services
economically viable is 10 to 12 households per acre,
although cities developed in the post-automobile era,
lamentably, one sees very little prospect of altering
automobile dependency. One study found that "the range of
costs induced by spread-out development, . . [i.e.] houses
built in sprawling developments, may cost 40 to 400 percent
more to serve than if they were located close to major
facilities, were clustered in continuous areas, and in
corporate a variety of housing types." But by bringing
prices into line with costs, both on the transportation
services side and on the site-rent side, it is possible
both to foster those personal choice calculations that are
consistent with sustainable urban environments.
------------------
Dr. William Batt is Executive Director of the
Central Research Group, Albany, NY, and is Secretary of the
Board of Directors of The Center for the Study of
Economics, Philadelphia, PA.
For a related GroundSwell article, "Bill Batt
Addressed TOES * on Transportation", see the July-Aug. 1997
issue.
* The Other Economic Summit.