BY KYLE POMERLEAU
Lawmakers are currently negotiating the details of an infrastructure package. Lawmakers want to avoid adding significantly to the debt but are split on the best method to raise revenue for the new spending. The Biden administration and the Democrats want to raise taxes on corporations. The Republicans, however, are unwilling to raise corporate income taxes and have suggested raising “user fees” to fund the new spending. The Republican suggestion, in principle, has merit.
User fees, or more generally, “user charges” are taxes or fees that individuals or businesses pay related to a benefit they receive from the government. This includes fees paid to the government to defer the cost of a service or a tax connected to the use of public goods.
Federal, state, and local governments currently fund much of US infrastructure with user charges. The federal government provides funding to state and local governments for highways through the Highway Trust Fund (HTF). The HTF receives dedicated revenue primarily from the excise tax on gasoline and diesel fuel. Airport infrastructure is funded in a similar way through the Airport and Airway Trust Fund, which receives revenue through several taxes and fees on airline tickets. States levy their own excise taxes on fuel to help fund infrastructure.
User charges are a fair way to distribute the cost of infrastructure. User charges conform to what is called the “benefit principle.” This principle states that the taxes and fees one pays for government benefits should be connected to the benefits one receives. In the case of highways, the consumption of gasoline has traditionally corresponded to use of roads, so a tax on each gallon of gasoline was seen as a fair way to have those that use roads contribute to their construction and upkeep.
Not only are user charges fair, but they are also efficient. A major problem in certain areas of the country is traffic congestion caused by overuse of roads. Traffic causes billions of hours of delays, overconsumption of gasoline, and lost economic activity. User charges such as congestion pricing, vehicle miles traveled (VMT) taxes, and tolls can create market signals that encourage drivers to reduce driving during peak hours. In addition, taxes on fuel can price externalities related to driving such as pollution.
A corporate tax increase to pay for infrastructure would not have these benefits. The amount of corporate income tax borne by taxpayers is not directly related to the use of US infrastructure. This is especially true of Biden’s proposals to raise the tax burden on foreign profits — profits earned in foreign jurisdictions using foreign infrastructure. In addition, taxing corporate income does not address externalities related to the use of infrastructure.
Leaning on user charges instead of the corporate income tax would not mean corporations avoid contributing to US infrastructure. A gas tax or a VMT tax would be paid by corporations roughly in proportion to their use of roads. For example, a company that transports a significant amount of goods on highways with heavy trucks would pay a significant amount of fuel taxes.
Those opposed to user fees generally cite their regressivity. User charges are like sales taxes and fall more heavily on low- and middle-income households than high-income households. However, it is not necessary to make every tax that the federal government levies highly progressive. What matters is the progressivity of the entire tax system. The impact on user charges could be offset with tax cuts or increased government transfers for low-income households.
User charges should not be abandoned as an option to fund infrastructure.