Wednesday, August 15, 2007

Rule #1 of Public Finance

Here in Virginia, there has been much ado about so-called "bad-driver fees" that get added on to your normal fines if you commit certain types of driving offenses like wreckless driving, or if you are a repeat offender for normal offenses like speeding. The idea behind the law is to raise the approximately $65 million needed to help fund the repair and construction of roads and bridges in Virginia. Other states such as Michigan, New Jersey, and Texas have similar fees. The catch for Virginians is that out-of-state drivers are exempt from the fees.

Is it Constitutional? Challengers to the bill are claiming that this violates the equal protection clause and the 14th amendment of the US Constitution. The law has been alternately struck down and upheld by various appellate courts, and was most recently reported to be upheld in Tuesday's Washington Post (Tim Craig, Virginia Bad Driver Fees Upheld, Aug. 14, 2007 p. B-01).

Is it Safe? In the short run, it may make roads safer because it raises the cost of bad behaviour. In the long run, the impact on safety is less certain. According to Craig's article, "Michigan judges are calling for repeal of the program because they are seeing an influx of motorists cited for driving on suspended licenses." What it doesn't add is the fact that many of these unlicensed motorists are also likely to be uninsured.

Is it Fair? Taxing in-staters does seem to make sense on the basis of the benefits received principle--Virginians do tend to use Virginia's roads and highways more than out-of-staters. However, groups that advocate for low-income households are concerned about the impact it may have on the basis of the ability to pay principle. The Post article relates the story of an 81-year old lady getting an excessive fee slapped onto a wreckless driving citation.

Is it Politically Smart? Constitutional/unconstitutional? Safe/Unsafe? Fair/unfair? The bottom line here is that economically there are arguments that can be made on both sides, but the real reason this bill should never have been passed is that it is POLITICALLY STUPID. As a matter of politics and electoral competition, rule number one of public finance is: ALWAYS TAX THE OUTSIDER. Why? Because she doesn't vote in your district/state. This law disproportionately taxes the people that can legally vote in Virginia. Pack your bags, Virginia House.

On the other hand, Kansas City decided it would throw public dollars at the owners of the Chiefs to make a few hundred million in renovations to Arrowhead Stadium so they could host a Super Bowl. Let me say first that there is no worse public finance blunder than to throw money into a sports stadium. Check out Division of Labor for a series of good rants on this. But I absolutely love the way they decided to pay for it: They added a $4 fee to car rentals. It's beautiful. Locals almost never rent cars, and if they do, they can probably avoid the fee by renting from an office in the 'burbs (which is where most locals likely to rent cars live). Plus, there's no statutory bias in how or to whom the fee applies. An article by Rick Alm and David Helling in the Kansas City Star (July 18, 2006) cites a study by William Gale and Kim Reuben (2006) that says the fees are inefficient, that they disproportionately tax certain groups, etc, but least politically they got it right in KC. For AGES we've been taxing the outsider to gain revenue-- hotel taxes, higher sales taxes in touristy areas, etc. This is nothing new. At least POLITICALLY it makes sense, which is more than I can say for Virginia's bad driver fees.

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