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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?


Photo by Shira Golding.

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
  11. 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.
  12. 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?
  13. 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.

David Alpert is the Founder and Editor-in-Chief of Greater Greater Washington and Greater Greater Education. He worked as a Product Manager for Google for six years and has lived in the Boston, San Francisco, and New York metro areas in addition to Washington, DC. He loves the area which is, in many ways, greater than those others, and wants to see it become even greater. 

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I don't think anyone takes the circulator for the 30 cent fare difference, but I do think people take it (tourists and visitors in particular) because the fare is a nice, round number. A dollar is easy. People have lots of dollars in their pockets. They don't always have 1.30 in exact change.

by Alex B. on Jul 27, 2009 11:51 am • linkreport

more thoughts later, but re #8: the current fine for driving in a dedicated bus/bike lane is $0.00. So all the cops can do is waste your time if they pull you over and generate no revenue for the city. Awesome.

by JTS on Jul 27, 2009 12:07 pm • linkreport

IF you want to internalize the externality of the street light, please give me an on-off switch in addition to the fee/tax that I will be charged.

Making property owners pay specifically as opposed to funding streetlights from general revenue has *nothing* to do with internalizing externalities.

by ah on Jul 27, 2009 12:12 pm • linkreport

Issuing drivers licenses benefits more than just the driver receiving the license. Any pedestrian should be glad to know that the city is making some effort to restrict the maniacs who are allowed to get in cars. They ought to pay for at least part of that effort too, through general taxation.

by ah on Jul 27, 2009 12:14 pm • linkreport

Gas tax won't fly. Last time we did that it drove a lot of stations out of business.

Circulator should stay a dollar. As the other poster noted, it is a nice easy round number.

by beatbox on Jul 27, 2009 12:24 pm • linkreport

Even with the higher gas tax, gas prices in Maryland are consistently lower then in DC. VA prices are also usually lower. Since most people who own a car in DC spend at least some time each week driving in either MD or VA (and you are never more than, what 5 miles from either state while in DC), there is really no reason to ever pay more for gas in DC. I haven't used a DC gas station in probably 10 years.

Increase DC prices even more, and the result will be fewer gas stations, and since it is nearly impossible to build anything but a gas station on an old gas station parcel, that means empty corner lots or an endless revolving door of low-end stations.

by monotrontic on Jul 27, 2009 12:28 pm • linkreport

Instead of a streetlight fee, why not just make them coin-operated? Do you think 15 minutes for a quarter is good?

by ksu499 on Jul 27, 2009 12:28 pm • linkreport

The entire residential parking program needs to be reformed. Prices should be market based. $15 is far too low, but every neighborhood has a different parking volume and thus should pay different prices. In a perfect world I would auction off the permits.

The number of zones also needs to be increased. For example, as a Zone 6 permit holder, I can park, for free, from RFK stadium, to the Nationals stadium, and all the way to the Southwest Waterfront. That is a pretty big "neighborhood" and actually allows people to commute to work via the residential parking system.

by monotronic on Jul 27, 2009 12:33 pm • linkreport

I should have combined these into one big post...

re busses:

Eliminate the Circulator bus on 7th st south of 395. Tourists have no desire to go to the Southwest Waterfront (maybe someday they will, but not today) unless they are on a tour bus taking them to Phillips. Those Circulator busses are always empty, save for a few local residents who use them to save a few cents of the Metrobus routhe that runs down 7th St.

So instead of reducing congestion, those busses drive and idle empty all day, serving no other purpose then to duplicate Metrobus routes already in existence.

by monotronic on Jul 27, 2009 12:38 pm • linkreport

Even though items #6 and #7 would have direct implications for me, these all sound like good ideas worth considering.

And yes on the gas tax!

by Anderkoo on Jul 27, 2009 12:39 pm • linkreport

How about having DCRA actually charge the correct tax rate for vacant properties and those owned by big developers AND actually billing them and collecting that correct amount? There would be a great deal of $$ added back to the DC coffers.

There is no reason vacant homes in Shaw are taxed incorrectly and breaks are given to Shiloh Baptist Church (oops sorry, mistakes are made - yeah right) and developers like Jemal who lets their property sit vacant for years and years and may a mere pittance towards them

by RobA on Jul 27, 2009 1:12 pm • linkreport

ksu499 -- How about operated by a ezpass-like transponder. As I'm walking, my ezpass will activate the lights within 50-100 feet of me. When I pass by they shut off within moments. I get billed a few pennies each time I activate a streetlight. If multiple people are around, well, the first one there gets dinged, but as soon as he leaves so do others.

For those worried about the poor, we can put a tax on the light-tolls and use them to buy ezpasslights for low-income residents.

Now that's internalizing the externality.

And we'll all be able to see the stars as a result.

by ah on Jul 27, 2009 1:13 pm • linkreport

Better yet, why not go for Puerto Rico status: demand no federal taxation since we don't have representation. I guarantee you that overnight, we will not have a revenue problem. There will be so many folks lining up to buy/rent residency in DC that we'll have to set up barriers on Potomac bridges. DC income tax alone (from all those running from Federal taxes) will let us all live high on the District hog.

by Wayan on Jul 27, 2009 1:21 pm • linkreport

Does D.C. assess property tax for vehicles? I was under the impression that the district doesn't tax car ownership but has really high insurance rates. Is this true? Either way, a property tax on cars or an increased one would be similar to a parking permit and less regressive, no?

by James M on Jul 27, 2009 1:23 pm • linkreport

James -- cars are charged sales tax upon purchase. There is no ad valorem tax on cars--only Virginia and a few other states have such a tax.

How about charging for parking by the foot, like for yacht dockage? The RPP would be $15/year/foot of length of car. Smartcars FTW!

by ah on Jul 27, 2009 1:51 pm • linkreport

I actually really like ah's idea about parking-by-the-foot. I would support that.

by Dan Miller on Jul 27, 2009 2:06 pm • linkreport

The list perhaps would be taken a bit more seriously were it not so ridiculously one-sided. How about we increase the fines for jaywalking to $250 per offense? And increase fines for bicyclists failing to stop at stop signs or red lights to about $500 per offense? Bike registration fees also need to be increased.

I have to laugh at the estimated revenue from increased gas taxes. OTR prepared ridiculously high revenue assessments from the increase in the vacant property tax. Then it turned out that their assessments were off by a massive amount. Same thing with the gas tax estimates.

And rather than yet more tax-and-spend policies that will adversely impact the city's attempts at getting more families and middle class workers to set up shop, how about some government spending reductions? Cut a bloated government workforce. Sell off public properties that are sitting vacant for decades. Ask our elected leaders to take a 10% pay cut. Cut bureaucratic red tape that strangles businesses. Get rid of laws and regulations that are out of date.

Why is it that no matter the economic conditions, the progressive crowd's first response is to raise taxes?

by Fritz on Jul 27, 2009 2:07 pm • linkreport

The Circulator should absolutely be the same fare as the other systems in the area, why should tourist get lower fares than residents (aside from residents who are either going to from Georgetown/Union Station or Adams Morgan/Columbia Hgts) the system operates as a cheapass tourmobile especially the one around the mall and the one that took over the n22 route which never gets as crowded as the n22 did.

Matter of fact how much does the circulator pull in with the novelty bus system; the system needs to start operating how it was supposed to; with every new route added that plan seems to be going away.

DC should raise Drivers license fees while lowering the non drivers i.d. since it seems like everytime the change any fee with drivers licenses somehow non drivers id's get a change also.

All laws should be enforced regardless of anything, most laws regarding bicyclists, bus lanes and pedestrians are never enforced.

I have never seen a pedestrian law ever enforced in DC over the past 15 years.

If DC would enforce the bus lanes hell there wouldn't be a revenue problem just stand between I and E streets along 7th street and problems are solved or by any metrobus stop downtown there would be boxes full of tickets each day.

by Kk on Jul 27, 2009 2:17 pm • linkreport

I agree with all EXCEPT the driver's license tax. Currently, driver's licenses are the single form of identification that is universally accepted nationwide. As long as that state of affairs exists, the government should minimize any barriers to obtaining one, including eliminating the license fee. If you want to hit drivers for the land-use cost of owning their own private car, raise the VEHICLE registration tax instead, which would encourage car-sharing and discourage multiple-car ownership.

by tom veil on Jul 27, 2009 3:22 pm • linkreport

Monotronic, as one of those Southwest Waterfront residents who takes the Circulator, I assure you I don't do it to save thirty cents per trip. I do it because it runs far more frequently than the 70/71 Metrobus. (I know this because when I'm taking the bus southbound, I wait at 7th and Constitution, and take the first bus going south of L'Enfant Plaza. 95% of the time, it's the Circulator.)

by cminus on Jul 27, 2009 3:23 pm • linkreport

@ tom

Not true Non drivers ID and passports are also accepted forms of identification that are accepted nationwide

PS how is something universally accepted nationwide ?

by kk on Jul 27, 2009 3:25 pm • linkreport

Monotronic: Because we WANT to move tourists easily around the city. DC buses are too confusing, the system too intimidating. You telling me a tourist is going to figure out a Duke Ellington or Mclean Gardens route? Union Station/Georgetown, convention center/waterfront-these simple point to point routes are easy to figure out.

by beatbox on Jul 27, 2009 3:55 pm • linkreport

i agree, those horrible biker people need to start doing as they're told. let's make it $10,000 per offense for those people, and let them rot in jail if they can't afford to pay.

can i tell you how awesome it is, David, that you would seek to clamp down on cyclists for existing unjust laws instead of seeking to make those laws fair? this in the face of already-horrendous cycling conditions.

absolutely brilliant.

by Peter Smith on Jul 27, 2009 4:21 pm • linkreport

@kk: By "universally accepted nationwide", I mean accepted by everyone, including businesses, not just the government. Try buying a case of beer using your passport or student ID and I'll give you even odds the clerk will say something like, "that's a nice passport, but I'm going to need to see your license. The manager won't let me sell beer unless you have a license."

by tom veil on Jul 27, 2009 4:26 pm • linkreport

It's so sick that this dumb city can't even suggest dynamic congestion pricing. It's one of the few things that the DC metro area can accomplish that is completely contained within one government (the District of Columbia, of course).

We MUST somehow make people pay for the delays they impose on others during a commute (see the recent report that claims the average car traveling into Manhattan imposes $160 of delays on others: http://tinyurl.com/l92dcc).

Implementation would take a lot of willpower and ingenuity, but nearly every example of a congestion-priced urban core is a positive story. Ultimately this would raise significant money to fund the additional public transport that would be needed, and drastically reduce both time wasted in traffic and (for those of you who care about this) carbon emissions and other forms of pollution.

by a person on Jul 27, 2009 5:16 pm • linkreport

@ tom

Passports and passport cards are meant to trump any other type of id if the business owner is uninformed in this he/she needs to be brought up to speed.

and I have never been been asked to see a license I have always showed a non drivers ID or student ids and there are no questions about a drivers license aside from times such as a bar where you must show state or federal government id (passport or passport card)

by Kk on Jul 27, 2009 5:16 pm • linkreport

A few doses of reality:

1) DC has as many employees today as it did when the city had 35% more people. And the schools have as many employees as they did three years ago, when they had 25% more students. Start cutting do-nothing employees, especially those from Ward Nine (outside the city).

2) DC Council spends millions on earmarks - and ear holding - such as 10 million dollars for restoration of Ford's Theater (a national, not local, historic site) and several thousand for taxpayer subsidized oral sex for one member of that august body. It's really all about spending.
For every dollar they get, they spend a buck-something.

3) The Mayor just diverted some of the stadium taxes to the general fund. And yet you all seem to think your nickel a bag plastic bag money will go to clean up the Anascostia River. My bet is it will be swept away by another river... that one of red ink. Your idea that money can be diverted to good causes is the triumph of hope over experience and reality.

4) Using California spending and taxing examples doesn't seem to be a very good idea, at least not now. If collie-forn-yuh becomes our role model, we're in worse shape than I thought. (Sorry, David, I couldn't resist.)

5) Raising the gas tax three cents to match Maryland is a very good idea. Most of the other ideas, like congestion pricing, fly in the face of Congressional veto or reality or both.

Spending, David. It's about spending. And efficiency. Also.

by Mike on Jul 27, 2009 5:23 pm • linkreport

adding, i also think it's wonderful that we have prime-time transportation advocate suggesting a crackdown on 'bicyclists who engage in unsafe riding,' but just can't bring himself to call for a crackdown on, you know, people who are actually dangerous -- drivers who engage in unsafe driving.

i don't know what it is -- it's like that old lefty thing -- to be taken seriously by the establishment you have to show your willingness take on the 'established enemies'. think of all the liberal bloggers who rip on Chomsky just so they can be taken seriously by the establishment. or Bill Clinton 'playing political football with the lives of poor people' by slashing welfare programs. so proud today.

by Peter Smith on Jul 27, 2009 7:12 pm • linkreport

Congestion pricing. While trips to and from parking spaces pollute, it's really the trips that are polluting, not the spaces.

You call it congestion pricing, and then you talk about pollution. If pollution is the problem, one would want to tax vehicles that create more pollution. A Civic pays the same congestion charge as a Suburban. The concept isn't bad, but "pollution charge" would be more apt.

I've often noticed that automobiles cause many social ills (air pollution, water pollution, congestion, changes in land use) and sometimes when we solve one problem it does not solve others. For instance, here you talk about a congestion charge. Even if automobiles did not pollute at all, congestion would still be a problem.

by Omari on Jul 27, 2009 7:57 pm • linkreport

Gas tax, yes, no brainer. Also true of closing loopholes and enforcing existing laws - that includes cyclists for dangerous cycling. But you should include more enforcement for drivers too, since as Peter points out, they kill something like 4000 times more often then cyclists do.

Is Congestion Pricing actually revenue positive? I seem to recall that London was just breaking even.

The streetlight fee is a bit silly, but I'd be glad to see the tax on electricity go up to cover it. It's good for the environment and the Federal Government coughs up a big chunk of it, since they're one of the biggest buyers.

Parking fee should be higher, based on the length of the car and the neighborhood and should be priced higher for additional cars per adult. Though this would result in a black market for parking permits, money would flow from car owners to non-car owners and I'm OK with that.

I'd also change the registration fee for a car to be based on the weight of the car - heavier cars cause more wear and tear on streets and are more deadly and the gas mileage.

One I might add is to fine those who have a treeless tree box in front of their home or business. For most people that's one tree. Anyone can maintain a single tree. Have the traffic enforcement people handle it.

by David C on Jul 28, 2009 1:29 pm • linkreport

Interesting list... although, It's interesting that you made both of these statements:

"Remember, taxes and fees serve two goals. They raise money, and they create a disincentive to do something."
and
"I'd personally prefer to see actual government revenue rely as much as possible on progressive income taxes..."

Maybe I'm naive, but isn't a progressive income tax an incentive for people not to work?

by PT on Jul 28, 2009 6:26 pm • linkreport

Please note:
DCRA determines vacancy status and hence higher (class 3) tax rate but OTR actually taxes properties and collects the revenue.

by Matthew on Jul 28, 2009 7:43 pm • linkreport

And, Matthew, they both do a lousy job of it. DCRA gives away exemptions too easily, fails to obtain sufficient proof of vacancy for when it is challenged, and keeps lousy records of how many years exemptions have been given.

OTR then allows appeals itself for hardship cases. The whole thing is a joke.

by ah on Jul 28, 2009 8:24 pm • linkreport

Maybe I'm naive, but isn't a progressive income tax an incentive for people not to work?

Welcome, John Galt!

And no, it's not a disincentive for people not to work. If you were to argue it's an incentive for folks to move, you might have a point.

by ibc on Jul 29, 2009 1:30 pm • linkreport

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