How Should Metropolitan Washington, D.C., Finance Its Transportation Deficit?

It is widely perceived that projected public spending on transportation infrastructure in the metropolitan Washington, DC, area for the next 20 years will not be enough to halt, let alone reverse, the trend of increasing traffic congestion. Consequently, there has been much debate about how additional sources of local revenues might be raised to finance more transportation spending. This paper develops and implements an analytical framework for estimating the efficiency costs of raising $500 million per annum in local revenue from five possible sources. These sources are increasing labor taxes, property taxes, gasoline taxes, transit fares, and implementing congestion taxes. Our model incorporates congestion and pollution externalities, and it allows for interactions between the different policies. Under our central estimates, the efficiency cost of raising $500 million in additional revenue from labor taxes is $118 million; from transit fares is $136 million; from property taxes is $16 million; from gasoline taxes is $66 million; and from congestion taxes is $19 million. The higher costs of the labor tax and transit fares reflect their negative impact on employment, and on pollution and congestion, respectively. A case could be made on efficiency grounds for using congestion fees and gasoline taxes to raise the revenue, though it should not be overstated. For example, much of the pollution externality is already internalized through pre-existing gasoline taxes, and the inelastic demand for peak-period driving and for gasoline limits the pollution and congestion benefits per dollar of revenue raised. Moreover, the relative advantage of these policies is sensitive to alternative scenarios for external damages. The property tax has a relatively low cost because it reduces pre-existing distortions created by the favorable tax treatment of housing.