Some perspective on the gas tax

The federal highway trust fund is going broke, one of those long-known realities that is finally starting to sink in among the official nattering nabobs. Whether it is the New York Times, the USA Today or Slate (the hysterics of which I found particularly laughable), the analysis comes right from the American Society of Civil Engineers’ (ASCE) talking points. Even the Daily Show has weighed in. Here’s what we are to believe:

The gas tax needs to go up because (1) it has not been increased since 1993 so inflation has eroded a lot of its purchasing power (wait – I thought inflation was good). Then there is (2), our cars have gotten more fuel efficient and so the gas tax doesn’t go nearly as far as it once did. Finally, (3) we have horrible congestion, safety problems and we need the economic growth that comes with transportation investments.

I started wondering….how big would the funding gap be if we had indexed the gas tax to inflation back in 1993? What if we had indexed it to economic growth? We if we had adjusted it for average daily traffic, probably the best measure of demand given the fuel efficiency issue? Here’s what those answers look like when compared to the revenue the ASCE indicates is needed to continue on the current path ($94 billion additional per year).

I’ve passed this around and people want to know the math, which I’m going to provide below, but here’s the takeaway: we may have a funding problem, but that’s not what is going to take us down. Our real problem is that we have not had to think about what we are doing for a long, long time. We’ve been so wealthy and affluent that funding the most bizarre transportation arrangement on earth became akin to the American way of life. Congestion-free roadways and ample parking are to the United States what bread and circuses were to Rome. Get out your fiddle, that smoke is real.

The question facing us now isn’t whether or not to increase funding for transportation but whether or not to reform – or even question – the very nature of our approach to transportation. An increase in the gas tax, additional sales taxes/fees or more deficit spending only allow us to continue to distort – for a few more years – a transportation system that is not financially viable. Without any price signals providing supply/demand feedback, we are destined to build ourselves into insolvency (again).

And a final word to you transit and bike/ped advocates who have been promised riches if you’ll get behind calls for more money for this system: you are fighting for scraps today with disingenuous partners when, if you simply walked over the next ridge, you would find more financial support than you ever dreamed. That ridge: localization.

We had the greatest transit and the greatest pedestrian facilities before we had centralized transportation policy. Bike/ped and (when not done by highway engineers) transit improvements are the highest returning transportation investments a city can make. Phase the federal and state governments out of this game and you open up enormous possibilities for bringing about the world you desire. Stick with this tired approach and you will continue to be an afterthought in a system that is going bankrupt.

Now the math…

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There is one overriding assumption to my calculations that I know to be false, but here it is: I assume a static response to price increases. In other words, as the price goes up, I assume that people absorb the increase and continue to drive just as much. They will not.

There is a complex and dynamic feedback loop that occurs when energy prices increase that cannot be accurately modeled. The end result for my calculations is that I overestimate the amount of revenue to be gained from an indexing to inflation, gdp and traffic and I underestimate the amount of gas tax increase needed to meet our needs. Since the startling thing about this analysis is the gap between what a reasonable increase would produce and what is needed, guessing at a dynamic feedback loop would simply be running up the score. The gap is already too big to overcome; we need to start thinking differently.

Just know that, when you are looking at the chart, the inflation, GDP and traffic lines should be lower, and the need line much higher, than what is represented. I've attached my spreadsheet so you can mess with it yourself.

I began my analysis with our actual fuel tax receipts since 1994. These I obtained from the Federal Highway Administration.

I then took the consumer price index as an inflation adjustor from the Bureau of Labor and Statistics (Table 24) and adjusted the gas tax by inflation for each year. At the end of last year, the inflation adjusted federal gas tax would be 29.7 cents per gallon. This is a 57.3% increase that would produce (again, with a static analysis) an additional $16.7 billion, enough to close the present hole in the trust fund.

The GDP numbers worked out in much the same way. I obtained them from About.com (top of the Google search). A federal gas tax that grew as fast as the economy would currently be at 30.1 cents per gallon and produce an additional $17.3 billion dollars annually (assuming a static response).

I’m not one who believes there is a direct relationship between transportation investments and economic growth so I thought it important to model a non-economic statistic. Average Daily Traffic (ADT) is about as close as we can get to measuring actual demand in a system where the relationship between supply and demand is shrouded in a web of perverse incentives. I obtained ADT numbers from the Federal Highway Administration. Growth in traffic was substantially less than economic growth over the years in question. Adjusted for ADT, the 1993 gas tax would today be 23.8 cents per gallon. This would add $7.6 billion to the trust fund.

The adjustment for funding need is certainly going to be the most debated number I’m putting forward – as it should be. I used the headline number from the American Society of Civil Engineers, which states on their website:

ASCE’s economic report on surface transportation, released in July 2011, found that our deteriorating infrastructure will cost the American economy more than 876,000 jobs and suppress the growth of our GDP by $897 billion by the year 2020. 

We are facing a funding gap of about $94 billion a year with our current spending levels.

To get 77.7 cents per gallon, I use a simple ratio of current spending with total needed spending.

I'll repeat that this is a static analysis and thus 77.7 cents is a low number. If gas prices were to rise that much there would be many people who would drive less or choose a different mode of travel. This means the gas tax would need to go up even higher to collect the same amount of revenue. At some point the situation becomes a dog chasing its tail; every price increase prompts a reduction in driving and the need for more price increases. Ultimately the gas tax funding mechanism would collapse and/or driving would become an activity for only an elite few. That's difficult to see happening politically.

A final word about the ASCE need number. Those of you that have read Strong Towns for any appreciable time period know that I am not a fan of ASCE. They are not a group that works to support the noble engineering profession but a special interest group that advocates for more public funding for its members. It uses shameless tactics, including distorted math, to make the case. Any numbers put forth by ASCE should be highly suspect.

So why would I use their number for need? I use it because the ASCE approach is actually how engineers and city officials put together their list of needs. I’ve been in the meetings, been part of assembling the capital improvement plans. We used to call them “guaranteed employment plans” because the engineers would program into them their next five years’ worth of work and then go out and chase the funding. There is always a lot of padding in these plans masquerading as “need”, the money that then flows to the city creating – via the mechanisms by which it flows – a prioritization of the large, new project over the routine maintenance.

I use the ASCE number because there is no limit to the “need” we can come up with if there is enough money. There is no feedback – no direct price that any consumer of the system pays – for its use and so there is no signal discerning actual demand. No way to determine a want from a need. The goal is a congestion free commute with ample, cheap parking for all along with all the ribbon cuttings and well-paying construction jobs.

I use the ASCE number because it represents an America where we don’t have to think very hard, one with an embarrassment of riches available to cover up our immediate folly and allow us to put off anything truly difficult. One where the only real feedback is total failure. That’s a fragile place. It is yesterday's America. This generation's challenge is to change it.

We’re running out of money. It’s time to start thinking.

Spreadsheet with data

National Gathering Update

Registration is now open to our members for the 2014 National Gathering in Minneapolis, September 12-14, 2014.

CLICK HERE TO RESERVE YOUR SPOT AT THE STRONG TOWNS NATIONAL GATHERING

Last week we announced that Monte Anderson will be keynoting the event. This week we want to announce one of the other exciting items that is scheduled to happen: release of Transportation in the Next American City.

Yes, Saturday morning we are going to give attendees an early sneak peak at the long-awaited Strong Towns report on mobility and transportation. There will be no cameras or recording devices and lots of time for discussion and feedback. Not only will attendees get the information before everyone else, but we need you to help us finalize this important message. Be part of the team -- see you at the gathering.

Optional Friday Morning Workshop

On Friday morning prior to the start of the Gathering (8:30 AM – 12:00 PM), Chuck Marohn will be conducting a stand-alone workshop that covers the in-depth look at the Curbside Chat and Strong Towns transportation principles.  AICP credit will be available for this workshop and will be a separate fee of $65. To register, click here.

Accommodations

A hotel room block is available at the Hyatt Regency at the south end of Nicollet Mall in downtown for $109 a night. Rooms are available through the block on Wednesday-Sunday nights.  The Hyatt is conveniently located along the 18 bus line which will get participants to all the weekend’s events. It is 8 blocks from the Blue Line LRT which runs to the MSP Airport.  The rooms contracted through the block will receive complementary wi-fi access. Rooms will be available through August 8 and you can book a room directly through this special website interface: https://resweb.passkey.com/go/StrongTowns

We hope to see you all at the Strong Towns National Gathering!

The Monkey Parking Arbitrage

Wikipedia describes “arbitrage” as follows:

In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices.

Arbitrage is a simple, common and accepted investment strategy. Today, large banks make billions on the arbitrage opportunity set up for them by the U.S. government. Banks serve as intermediaries for the Treasury Department, who sells government bonds to take on debt, and the Federal Reserve, who buys the bonds with printed money (quaintly called “Quantitative Easing”). The price difference is not a commission or fee, it is the difference between the price set by the Treasury and the price on the “open market”. We can debate how open a market is when it is dominated by one entity with bottomless pockets, nonetheless, for the banks involved, this spread in prices becomes an arbitrage opportunity. There is a guaranteed market and thus, for the banks, an instant and risk free profit.

I once read a book that described an early arbitrage of gold in European markets. This was hundreds of years ago. Some bankers had figured out that there was a distortion between the price of gold in one market – say Germany – and another, like England. Using a fancy telegraph machine to communicate prices, the bankers would buy gold at a lower price in one market and then sell it at a higher price in another. After shipping risks, the price difference was an instant and risk free profit.

High frequency traders are, in a way, creating an artificial arbitrage when they use their co-location in the exchanges and their super-fast networks to get out in front of traders. They distort prices slightly ahead of known demand and, in doing so, create instant and risk free profits for themselves. This is a little different in that the HFT’s actually artificially create the arbitrage opportunity; HFT is not about price discovery but about creating that arbitrage.

We are comfortable with most of these arbitrage opportunities and even praise them as a smart and innovative aspect of capitalism and free markets. Indeed, the job of a market is price discovery and so arbitrage is a necessary and important balancing mechanism. Yet one simple form of arbitrage – one available to the ordinary guy with a car and a smart phone – has infuriated public officials, as well as some drivers and fairness advocates, in San Francisco.

Monkey Parking (twitter) is an app that allows someone to alert drivers when a parking spot is coming available. A driver looking to park then bids on that spot and the individual vacating waits for them to show up. Monkey Parking handles the transaction, the seller leaves the spot and the driver pulls in.

Obviously an app like Monkey Parking would not work in my hometown of Brainerd, Minnesota. Here there is so much parking that nobody would ever pay for it. The supply, even at a price of zero, vastly exceeds the demand. This is true for most American cities, even where they charge for parking. In San Francisco, however, there is a huge arbitrage opportunity because, at current prices, there isn’t enough parking to meet the demand. Those who use the Monkey Parking app are engaging in the long accepted practice of arbitrage. They are exploiting the difference between market prices – the cost of parking set by the authorities and the actual cost the market will pay – and pocketing the difference as instant, risk free profit.

San Francisco officials are not sold on the merits of arbitrage as a way to correct market imbalances, as least not when it comes to parking. The city has issued a cease and desist to Monkey Parking and has threatened any who use it with enormous fines. Here is what City Attorney Dennis Herrera said in a press release:

"Technology has given rise to many laudable innovations in how we live and work -- and Monkey Parking is not one of them," Herrera said. "It's illegal, it puts drivers on the hook for $300 fines, and it creates a predatory private market for public parking spaces that San Franciscans will not tolerate….People are free to rent out their own private driveways and garage spaces should they choose to do so. But we will not abide businesses that hold hostage on-street public parking spots for their own private profit.

Note that the only reason it is illegal is because the city has said so. There is nothing inherently illegal about what Monkey Parking does. Neither the company nor the app occupies any parking spot or creates an agreement for occupying a parking spot. The city of San Francisco has simply decided that they don’t like it. Ironically, the city has indicated Monkey Parking violates California’s Unfair Competition Law, but who is Monkey Parking competing against? They simply facilitate an arbitrage no differently than the telegraph allowed those bankers to arbitrage gold prices. Would San Francisco have shut down the telegraph?

There are three market responses to solve this problem. The first is to allow the people of San Francisco to use Monkey Parking and other similar apps to continue to arbitrage the difference in prices. This is politically unpalatable because it is seen as unfair by those who would like to be able to pay the below-market price for parking. It is also dumb because, from a market perspective, the taxpayer has paid for those parking spaces and is allowing the value they created to leak to private individuals.

The second is to build more parking. The arbitrage opportunity is available because, at the current price, more people want to park than there are available parking spots. The problem here is a difference between supply and demand. Build more parking and San Francisco can keep the price to park at the current level. Of course, one must question whether or not the city can break even building more parking at the current low rates. I suspect, as do some others with more insight, that they cannot, that they are in fact currently losing money subsidizing parking. At the end of the day, losing money on parking is also dumb policy.

This brings us to the obvious response, the choice that the market is screaming for: raise the price of parking. If parking were more expensive, there would be a balance between supply and demand and the Monkey Parking people would have nothing to arbitrage. The city/taxpayer would capture that difference and there would be ample amount of parking available at the current market price. The people who like their parking at below-market prices wouldn’t like it, but then again, wouldn’t we all prefer to pay less than cost for the products and services we use. The world doesn’t work that way (at least not for long).

I’m rooting for Monkey Parking in this one. If you believe our cities have too many parking lots and not enough productive space, you should be too.