Revenue Recycling and the Welfare Effects of Road Pricing

Abstract

This paper explores the interactions between taxes on work-related traffic congestion and pre-existing distortionary taxes in the labor market. A congestion tax raises the overall costs of commuting to work and discourages labor force participation at the margin, when revenues are returned in lump-sum transfers. We find that the resulting efficiency loss in the labor market can be larger than the Pigouvian efficiency gains from internalizing the congestion externality. In contrast, if congestion tax revenues are used to reduce labor taxes the net impact on labor supply is positive, and the efficiency gain in the labor market can raise the overall welfare gains of the congestion tax by as much as 100 percent. Recycling congestion tax revenues in public transit subsidies produces a positive, but smaller, impact on labor supply.In short, our results indicate that the presence of pre-existing tax distortions, and the form of revenue recycling, can crucially affect the magnitude, and possibly even the sign, of the welfare effect of road-pricing schemes. The efficiency gains from recycling congestion tax revenues in other tax reductions can amount to several times the Pigouvian welfare gains from congestion reduction.

What type of road pricing scheme might appeal to politicians? Viewpoints on the challenge in gaining the citizen and public servant vote by staging reform

“…If however, we eliminated the annual registration fee in the presence of a peak charge of 3c/km, and hypothecated all the revenue to public transport improvements, over 51 percent would vote for the scheme, enough to ensure a positive outcome. The evidence reinforces the view in the growing literature that how the revenue is allocated is critical to obtaining buy in to road pricing proposals (see Hensher and Li 2013 for a review and also Parry and Bento 2001) 6 .…”

“…In recent research by , using ideas promoted in the literature by many authors (for example, Parry and Bento 2001, Small 1992, Nie and Liu 2010, Kockelman and Kalmanje 2005, a model of voting choice between the current situation and a number of reform packages, suggested, ex ante, that over 62 per cent of participants would vote for a cordon-based payment of $8 to enter the Sydney CBD in peak periods and $3 outside of peak periods, and respondents would also be prepared to pay the charge on top of existing annual registration fees (ARFs) and fuel costs so long as 100 percent of the revenue was used to improve public transport. Distance-based charging is less popular if there is no reduction of the ARF and no hypothecation of revenue to uses supported by voters, with the highest percentage voting for a scheme, where the charge is 3c/km in the peak only, being 32.2 per cent.…”

Labour supply and commuting

“…One reason is that there are divergent theoretical views on this effect (e.g. Cogan, 1981;Parry and Bento, 2001). This is related to different assumptions regarding the relevant behavioural margins.…”

“…In case of commuting however, it seems more reasonable to assume that labour supply is negatively distorted by an income tax (e.g. Bovenberg and Goulder, 1996;Parry and Bento, 2001;Mayeres and Proost, 2001;Calthrop, 2001). In this case, a road tax may even have a negative effect on welfare (Parry and Bento, 2001).…”

Income Tax Deduction of Commuting Expenses and Tax Funding in an Urban CGE Study: The Case of German Cities

“…Because further distortionary taxes exist in Germany tax interaction e¤ects and tax revenue recycling e¤ects are important issues (see also Parry and Bento, 2001). Therefore we have to discuss e¤ects of tax deductions simultaneously with other taxes which might be used to …nance the commuting subsidy.…”