Fuel Tax vs Property Tax

Why do we to pay two taxes for roads?

One of the most common objections to VMT charging or mileage-based user fees is “I already pay (for roads) with fuel taxes”. While I have heard or read this many hundreds of times, I have never heard anyone complain, “I already pay (for roads) with property taxes.”

It is interesting that we are so very sensitive to (or aware of?) of fuel tax, but not so much to property tax. And why do we pay two taxes for our roads, anyway?

A 2009 article from Access Magazine explains this neatly.

Early in the 20th century most US “…cities had the technical and financial means to widen their streets, install traffic signals, and carry out other operational fixes. But they lacked the means to shoehorn extensive freeway systems into dense urban areas. One problem was that the tax instruments available to local governments were not appropriate for the task. Local governments had the authority to levy taxes and special assessments on property and businesses, but not, for example, on fuel. The property tax is a sensible mechanism for financing local streets and roads, because these streets link individual land parcels to the world and help give them value. It is thus logical for property owners to help pay for local street construction. Freeways, however, affect the value of property across the entire metropolitan area, not just of nearby parcels. This makes it hard to justify special assessments on freeway-adjacent properties, since the majority of a freeway’s benefits accrue to travelers and landowners over much larger areas. (Indeed, being too close to a freeway can lower land values, particularly for residential property.) … A potential solution to these problems emerged in the 1920s with the development of the gas tax. As a way to finance freeways, gas taxes had much to recommend them: they placed the tax burden on users of the system, they were relatively easy to administer and collect, and they were robust. Property tax revenues nationwide plummeted 72 percent during the Depression years of 1930 to 1939, but fuel consumption and its associated tax revenues proved surprisingly resilient. Except for a small dip at the beginning of the Depression, fuel consumption rose every year until World War II (emphasis mine).

So a fuel tax was indeed a valuable innovation 100 years ago. It would remain a valuable innovation if the purchasing power of fuel tax were consistent with the needs of building and maintaining roads. But it is not. As fuel economy improves, as the purchasing power of the road building and maintenance dollar shrinks, and as we refuse to increase the fuel tax, its efficacy continues to wane. And that is only half the problem with the fuel tax. It also does not respond to congestion.

And while the property tax is also insensitive to congestion as a pricing signal, its correlation with road use is even more tenuous than is the fuel tax. This makes it less fair than fuel tax—since a young renter who contributes to her landlord's property tax payment and who does not use a car overpays for road use.

So we have two taxes that are ineffective in managing demand, one of which we cannot adjust and the other of which we seem to have minimal awareness of. While mileage-based user fees could solve both problems given the right policy design, we seem particularly attached to a status quo that is unable to give us the roads we need, and that increases congestion.

Our attachment to a tax structure that is keeping in place a very serious problem for both inter-urban and intra-urban mobility is critically bankrupt and a huge barrier to solving congestion and its attendant ills.