On the road again: how tax policy drives transportation choice

Virginia Tax Review, Wntr, 2005 by Roberta F. Mann

I. INTRODUCTION

In the United States, almost 80% of commuters drive to work alone. (1) Why do U.S. commuters persist in driving alone when the evidence is clear that they are wasting time and money, exposing themselves to the risk of accidents, polluting their neighborhoods, and damaging their health? While personal preference and convenience undoubtedly play a significant role in the decision, (2) many commuters have no other practical choice. For years, the government has subsidized a low density, petroleum-intensive lifestyle, thus creating this dilemma. (3) Both direct federal funding for transportation projects through the Highway Trust Fund (4) and a plethora of indirect federal funding through the tax system (5) limit transportation choices. Examples of this indirect funding include (1) the disparate treatment of employee fringe benefits for transit versus parking, (2) the home mortgage interest deduction, which encourages low density housing, and (3) the preferential tax treatment of the oil and gas industry. Other federal tax provisions, such as expensing rules that encourage purchase of large sport utility vehicles (SUVs) (6) and the deductibility of advertising expenses liberally used by the automotive industry contribute to the problem. Changes to the federal tax system can help create a solution.

Although state law affects transportation choices, if we want to reduce single occupant vehicle transportation throughout the United States, looking to federal tax policy has certain advantages. First, as noted above, every citizen is affected by the federal tax system. Second, federal taxation is a self-executing, nation-wide delivery system for behavioral change. Finally, if we want to send a national message about the importance of reducing fossil fuel dependency, federal legislation should be consistent with that message. The federal tax system in the United States has pervasive influence over its citizens' lifestyles by creating economic incentives and disincentives for behavior. Increasingly scholars recognize that the behavioral incentives created by the federal tax system significantly affect the environment in a myriad of ways. Yet the general public and many legislators appear unaware of the tax system's unintended consequences. (7) The evolutionary nature of tax law and its immense complexity makes it almost inevitable that provisions of the Internal Revenue Code (Code) will affect taxpayer choice in unanticipated, and sometimes contradictory, ways. The federal tax system influences urban transportation choices by failing to account for negative externality costs, and in some instances, actually subsidizing choices that result in significant environmental and social cost.

In this paper, I will first examine how driving alone became the dominant transportation mode for American commuters. Next, I will explore who bears the full cost of driving. After briefly describing urban transportation alternatives, I will discuss potential solutions, focusing on changes to the federal tax system, but also exploring regulatory alternatives. Finally, I will discuss the challenges such reforms likely will face and strategies for overcoming those challenges, including comparisons of the solutions tried in other countries.

II. A MATTER OF CHOICE

A. History

Before the middle of the nineteenth century, urban transportation primarily consisted of footpower. (8) The lack of speedy transportation limited the size of pre-industrial cities. (9) The advent of the industrial age caused serious crowding in cities and consequent pollution and adverse health effects. (10) Industrialization created both the problems and the means to solve them: wealth. (11) New technologies emerged, such as sewer systems and public transportation. (12) Public transportation preceded the development of the automobile by about twenty years. (13) By the time the automobile was invented, cities had evolved into transit hubs. (14) For example, Philadelphia and its Main Line suburbs still show the linear development of the "transit city." (15) In transit cities, medium density, mixed-use areas developed along the transit routes. (16) These areas served as small, walking scale cities. (17) The development of the automobile did not cause an immediate shift in transportation mode. People did not regard this novel invention as a form of serious transportation, but as a pleasure vehicle. (18)

In the early twentieth century, most transit systems were privately owned and operated, made a profit, and received no public support. (19) One thousand street railways companies carried eleven billion passengers by 1917. (20) Ridership began to decline after 1923, (21) and imposition of fare restrictions by local government regulation led to widespread bankruptcies after World War I. (22) Collusion and criminal activity doomed one of the nation's most extensive and efficient transit systems. (23) Transit systems nationwide continued to falter as the federal government began to spend increasing amounts on the highway system. (24)