Revenue increases should also internalize environmental externalities
This week, the DC Council will decide how to close a $190 million shortfall in the FY2009 budget, and discuss how to begin tackling the additional $150 million projected gap for 2010. Lawmakers are inevitably going to look for a mix of spending cuts and revenue increases. This morning, Jenny Reed suggested ending the special tax exemption for other states' municipal bonds as one possibility. Are there other revenue options? Whatever mix of cuts or revenue increases you prefer, there will be some of both. Which revenue sources would be better than others?
Any tax or fee would ideally also internalize an economic externality. When there's no consequence for polluting, for example, people pollute more and every taxpayer shares in the cost of cleanup whether he or she polluted or not. Ideal economic policies would internalize these externalities, making sure that each good's price includes the cost of cleaning up its waste. If the good is valuable enough, people will simply pay the cost, and taxpayers won't have to shoulder the cleanup burden. If people can easily shift to a less-polluting alternative, they now have an incentive to do so.
Locally, the main sources of such externalized pollution are trash and auto emissions. Are there tools that could raise some revenue to close the budget gap, but more importantly, internalize some of the cost of the emissions or trash resulting from existing externalities? Here are a few possibilities, some of which are better than others:
- The gas tax. This is a simple and obvious one. DC's tax is 20 cents per gallon. Maryland charges 23, while Virginia charges 19 (17 cents in gas tax and 2 cents in sales tax). If DC raised its gas tax 3 cents to match Maryland, it would bring in about $3 million.
- The streetlight fee. During the last round of budget cuts, Mayor Fenty proposed charging all electric customers a flat rate to cover the cost of lighting streets. That would have been incredibly regressive, charging people living in a small apartment the same as those in a huge mansion, even though there are more streetlights per person in less dense areas. Last week, Councilmember Jim Graham floated the idea of resurrecting this idea, but charging proportionally to the actual street frontage of each property instead. That's still not really a streetlight fee but a kind of property tax (and as several commenters pointed out, doesn't internalize any externalities), but it's at least more progressive.
- Close the parking tax loopholes. Today, DC charges a tax on the sale of off-street parking. If you pay to park in a commercial garage, the garage operator has to give a percentage to the city. However, if a business leases parking in a commercial garage and gives it away for free to their employees, there is no tax. That makes no sense. Close that loophole. Better yet, scrap the existing system altogether and institute the "Clean Air Compliance Fee" which would apply to all downtown spaces, both paid and free. After all, trips to and from parking spaces pollute whether the space is free or not, and free spaces actually induce more driving.
- Congestion pricing. While trips to and from parking spaces pollute, it's really the trips that are polluting, not the spaces. A congestion charge in DC's downtown core would come closer to actually internalizing the real externality here.
- Residential parking permit fees. We charge $15 per year for the privilege of parking one's car on the street. San Francisco charges $76. $15 is so cheap it poses no disincentive to garaging three or four cars on the street. We could raise the fee or, better yet, institute a sliding scale for high numbers of cars.
- Driver license registrations. The price of new driver licenses and license renewals doesn't actually cover the cost of administering the program. DC could at least charge enough to cover its direct costs.
- Increased enforcement of bike laws. DC should write more tickets to drivers who block bicycle lanes and bicyclists who engage in unsafe riding, like blowing through a red light at a busy intersection without stopping or even slowing down.
- Enforce the existing bus-only lanes. 7th and 9th Streets have bus and bike lanes, but drivers routinely drive in those. We should enforce this law.
- Downtown performance parking. Some meters downtown are too cheap, while others are too expensive. More often, they're too cheap. We could adjust rates to market prices. I'm less comfortable using parking rates as a generalized revenue source, however, because meter rate increases do deter people from shopping in an area, and the right policy is to apply that money to improving transit, pedestrian, and bicycle access to that area to counterbalance the effect.
- Enforce commercial recycling. Commercial buildings generate most of the trash in the city, including recyclable trash like paper. But when DC writes a ticket to a building that's not recycling adequately, 76% of the time the business never pays. They ignore the ticket, and it gets mired in DC's Office of Administrative Hearings. Let's fix this.
- Charge by volume for commercial waste. San Francisco restaurants are extremely eager to try composting and other waste-reduction mechanisms because it's very expensive to dispose of trash in California. Here, it's cheaper. A tax per pound for the commercial haulers, with a lower or zero rate for recyclables, would create an incentive for buildings to reduce trash and increase recycling.
- Make the Circulator fare the same as Metrobuses. Does anyone really take the Circulator over a Metrobus because of the 30 cent fare difference? Also, the Circulator generally draws a more affluent ridership and more tourists. Why should bus commuters, especially poorer ones, pay more for their bus rides?
- Eliminate local parking tax exemption: Added: DCFPI's list includes a recommendation to end DC's match of the federal tax exemption that lets employees pay for parking in pretax dollars. The federal exemption isn't going to change, but DC doesn't need to also encourage driving by providing a tax exemption for it.
I'm sure some commenters are going to say, "Aha! I knew that all this talk about making parking easier or creating an economic incentive to save plastic bags was just a smoke screen to grab more money." Remember, taxes and fees serve two goals. They raise money, and they create a disincentive to do something. It's possible to make a charge completely revenue-neutral by rebating all of the revenue evenly to each resident, as some have suggested with a carbon tax for emissions at the national level, for example. An ideal gas tax would charge a high, set amount per gallon, then give every American an equal share of the revenue. Those who drove less would end up ahead on balance, or could use the money for transit or housing near their jobs.
I'd personally prefer to see actual government revenue rely as much as possible on progressive income taxes, and then keep all of these incentive-based systems revenue neutral. That minimizes the impact on the poor by making the tax code more progressive. Even more importantly, it ensures that the government isn't actually dependent on the bad behavior (like parking in a street sweeping area or running red lights) for ongoing revenue. Politically, however, that's not feasible. The next best approach is to institute targeted fees that internalize existing externalities, ensure that their impact is progressive rather than regressive, and fight hard if the government crosses a line and starts pumping them for revenue at the expense of the economic incentive effect.
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