August 1, 2007 — Fuss Over Fees

Virginia's new traffic "abuser fees" are under fire. The economics behind them is also in question
By Doug Campbell

New traffic fees aimed at abusive drivers have outraged many people in Virginia. The fees went into effect in July as part of the state's
$1 billion transportation package. They come on top of existing financial penalties for bad driving and can reach more than $1,000, sometimes more than $2,000. Because they are part of the state's licensing fee schedule, not fines, they are applicable only to Virginia residents.

Amid the protests and lawsuits, Gov. Timothy Kaine and Speaker of the House of Delegates William Howell have held off calls for a special session to repeal the fees. They describe the fees as being reserved for serious offenses of reckless driving, not minor infractions. In the meantime, a look at the economics behind Virginia's experiment with these civil remedial fees may be in order.

The problem in Virginia is finding ways to adequately fund new roads in a state that until just a few decades ago was relatively rural. Now, traffic congestion is legendarily bad in many places, especially the metro areas of Washington, D.C., and Hampton Roads.

Imposing fees on drivers may be a politically attractive way to raise revenues for transportation projects because they are not taxes, strictly speaking. The very nature of fees, however, is that they can be more regressive in nature. That is, less-wealthy drivers may end up paying larger shares of their income than they have in the past compared with wealthy drivers. In addition, these particular fees quite obviously fail to charge out-of-state residents for their use of Virginia's roadways – a "free rider" problem if there ever was one.

Economists are in general agreement about how to address the road problem. "Any economist worth his salt would say that you should tie it to things related to mileage and use of the roads," says John Knapp, an economist with the University of Virginia's Weldon Cooper Center for Public Service. Tolls might be an ideal solution, he says, because they charge motorists more precisely for the wear and tear on roads.

Another possibility is an increased gasoline tax, which charges drivers more or less evenly for their road usage, depending on the mileage their vehicles get. Such a tax increase has been advocated recently by a growing number of influential economists, including Harvard's Greg Mankiw, the former chairman of the Council of Economic Advisers. Mankiw has argued that, besides raising additional revenue, an increase in the gas tax would provide other benefits — including decreased road congestion and an improved environment — as more motorists choose to curb their gas consumption.

In the case of Virginia's new fees, of importance is estimating how much revenue will be collected. Virginia's fees are projected to generate between $65 million and $120 million annually. Knapp notes that the near "draconian" nature of the fees means that they are almost certain to have an effect on driver behavior.

The fiscal impact statement attached to the bill that brought the new fees predicts revenues starting at $95.9 million in fiscal 2007-2008 (within the range of $65 million to $120 million most frequently cited in press reports) and reaching $135 million by fiscal 2012-2013. Del. David Albo, of Fairfax, who led the bill, could not be reached for comment.

"What kind of elasticity did they assume?" Knapp asks. "With these extreme new penalties, one would assume that people would reduce speeding and drive safer. If that's the case, then if they developed their revenue projection from historical data, they're going to have overestimated revenues."

Cigarette taxes, for example, might over time see diminishing returns to government coffers, as smokers decide to quit instead of pay higher prices. But cigarettes may be different than Virginia's traffic fees in one important way.

"I would think the negative externalities from smoking are very minor, so people may not mind if others continue to smoke," says George Hoffer, an economist at Virginia Commonwealth University who serves on the governor's advisory board of economists. "But the negative externalities from abusive driving are such that I think the average citizen would appreciate high elasticity – meaning, they would hope that there would be very few revenues raised from the fees because that would mean people are driving safer."

Hoffer has spent some time thinking about the optimal way to finance transportation projects. His ideal plan is threefold. First, there would be a monthly fixed fee imposed on all vehicles for the potential that it would be used on the roadways. Second, there would be a variable charge imposed per mile of travel on the roadways. This would be accomplished by outfitting all vehicles with global satellite positioning monitors.

Finally, there would be a "congestion tax," a fee based on when and where people drive. During rush hour in Northern Virginia, for example, motorists would be charged a higher toll than if they were on the same stretch of highway at noon. (Such a plan is in fact in the works in metro Washington, D.C.)

As much as he likes his own ideas, Hoffer is pessimistic that they will actually be adopted because of concerns over privacy. "This used to be just an academic exercise, but now we have the technology," Hoffer says.