Federalism in Action: Two States' Approach to Electric Cars

California and North Carolina are quite different in many ways, and now we can include their approach to electric cars. California has launched an aggressive subsidy program to get motorists to to rethink the internal combustion engine. From the LA Times:

Want to pay $7,000 for a $37,000 electric car?

It's not a trick question. For the first time, through the magic of subsidized leases, electric vehicles can now compete on price with comparable gas-powered cars — indeed, they are cheaper once you factor in gas savings.
Honda announced this week that it would drop the lease on its Fit EV from $389 to $259 a month. That price includes collision and vehicle theft coverage, maintenance, roadside assistance, even a charging station at your house. Factoring in the state rebate, that's an all-in, three-year ownership cost of less than $7,000 — maybe the cheapest $37,000 car in history.
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If you're looking to buy, state and federal incentives can shave as much as $10,000, nearly a third of the sticker price on a typical model. But automakers and most consumers have turned to leases to ease fears about uncertain long-term maintenance and resale values.
Credit California's tough pollution laws for the EV price war. The California Air Resources Board has mandated that zero-emissions vehicles must constitute 15% of all new vehicle sales by 2025, up from less than 1% now. That has automakers scrambling to get consumers into a set of green wheels, even though they are losing money on every car.
The goal is to boost consumer demand in the nation's largest auto market, hoping that bigger sales can spur research and development to lower the technology's cost.

Meanwhile, in North Carolina:

RALEIGH—North Carolina drivers who use hybrid cars could end up paying for it in the long run.
State lawmakers in the Senate have proposed drivers pay an additional fee if they drive a hybrid or electric car.
They are the car industry's answer to going green. Gas prices are a big reason the hybrid cars have become more popular but if you own one in North Carolina it could cost you.
"The old system of collecting money for our roads is outdated. If this is the best way that we can do that then we're going to be in some trouble for a very long time," said NC Sierra Club Communications Director Dustin Chicurel-Bayard.
One item in the Senate budget calls for drivers to pay an additional fee when they renew their car registration. For hybrid cars the fee would be $50, electric cars the fee would be $100. Since hybrid cars use less gas supporters say the fees would help the state collect that money they lose from the gas tax back in order to fund road projects.

You may or may not agree with either of these approaches to electric and hybrid cars. The goals from each state are very different, which is what we should expect with localized decision making. I suspect those most concerned with the environment will appreciate California's subsidies (some subsidies come from the automakers). Those concerned with how to pay for transport infrastructure may favor the North Carolina model. Both sets of policies have positive and negative attributes, but these are examples of how policy targets will vary across states as (more accurately: if/when) the federal role in transport finance declines.

Lisa Schweitzer on Decentralized Transport Funding

Eric Jaffe at the Atlantic Cities wrote a great piece on the opportunities and challenges of decentralizing transport finance. I am quoted:

"I'd expect under a decentralized system we'd see more variation across metropolitan areas," says planner David King of Columbia University. "We don't necessarily have shared needs, or homogenous needs across the country, when it comes to what we need for transportation."
King and others in the decentralization camp note that the federal government frequently gets transport policy wrong. Financial and housing incentives used during the interstate construction era led, in large part, to the sprawl that's crippling metropolitan areas today. There's widespread feeling that federal involvement in transportation has resulted in more roads and rails than America needs, with the prospect of free federal money encouraging questionable projects — such as the Detroit People Mover years ago, and some streetcar lines more recently — that might not have been built with local funding alone.
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"Decentralization of transport finance is happening, and we shouldn't fear it," says King. "It may or may not be better than what we have, but the current system is not sufficiently wonderful that we should fight to make sure it remains."

One of the people who has influenced my thinking on decentralized transport finance is USC's Lisa Schweitzer, who wrote a nice piece in Planners Network a couple of years ago.  From her piece:

For those who would like to see U.S. transit systems expand, the push towards devolving infrastructure finance entirely to states and regions puts the battle for transit funding into familiar territory: the states already provide about $12 billion to transit in U.S. cities, and transit agencies currently spend quite a bit on lobbyists in state houses across the country. Nonetheless, states are in no better budgetary condition than the federal government. 

Such devolution to states and regions may radically alter urban transit funding in significant ways, not all negative. As it is, federal transit spending has been concentrated among a handful of states as transit is primarily an urban service. Given the nature of gas taxes, the federal gas tax could go away and the states where transit is an important issue could (in theory) immediately pass an increase in their state gas tax commensurate to the federal tax, and consumers would pay the exact same amount at the pump. Gasoline buyers in places like California and New York are net donors to other states due to the large amount taxpayers in these states chip in to the federal funds, which then go to pay for roads in other locations. If California or New York or the if the federal gas tax went away, states could increase their state gas tax commensurate to the federal tax, and consumers would pay the same at the pump. If California or New York or other donor states made up for the loss of federal support with higher state taxes, they might actually be better off  loss of federal support with higher state taxes and kept their receipts, their transit operators might actually be better off with devolution.

She then explains that this isn't a certainty--or even likely--and discusses implications for transit.

Local Priorities and Decentralized Transport Investment

If current US trends towards decentralized transportation finance and investment continue then we will also see a shift in spending priorities. For instance, cities are more likely to spend on quality of life improvements than the federal government will. This is because of local complaints to reduce externalities from noise, speeding and crashes on local streets. Yet a shift in spending priorities may or may not result in a more optimal transport system.

Bruno De Borger and Stef Proost just published a paper in Journal of Urban Economics where they examine social welfare effects of various local strategies. Here is the abstract:

This paper considers various policy measures that governments can use to reduce traffic externalities in cities. Unlike much of the available literature that emphasized congestion, we focus on measures that reduce pollution, noise and some accident risks. These measures include noise barriers, speed bumps, traffic lights, tolls, emission standards, low emission zones, and bypass capacity to guide traffic around the city center. Using a simple model that distinguishes local and through traffic, we study the optimal use of these instruments by an urban government that cares for the welfare of its residents, and we compare the results with those preferred by a federal authority that also takes into account the welfare of road users from outside the city. Our results include the following. First, compared to the federal social optimum, we show that the city government will over-invest in externality-reducing infrastructure whenever this infrastructure increases the generalized cost of through traffic. We can therefore expect an excessive number of speed bumps and traffic lights, but the right investment in noise barriers. Second, when implementing low emission zones, the urban government will set both the fee for non-compliance and the emission standard at a more stringent level than the federal government. Moreover, at sufficiently high levels of through traffic the urban government will prefer imposing a toll instead of implementing a low emission zone. Third, whatever the tolling instruments in place, the city will always underinvest in bypass capacity. Finally, if it can toll all roads but is forced to invest all bypass toll revenue in the bypass, it will never invest in bypass capacity. Although the paper focuses on non-congestion externalities, most insights also hold in the presence of congestion.

So the authors expect that cities will raise the cost of driving through capacity reduction, charge higher fees than the federal government would, discourage through travel and avoid investing in road expansion (in part to keep fees and tolls high). These are interesting claims, and I hope we are able to test these through natural experiments over the next few years. This model should be extended to include land uses, as well, which can help mitigate some of the increased cost of travel.

How Much Control Do States Have Over Transport Funding

The proposed (and DOA) House transportation spending bill has lots of people thinking about the federal role in transport funding. In short, the US House bill eliminates federal transit support and allocates the gas tax to roads. It's a bit jarring, for sure, but raises lots of issues about federalism and transport policy. Lisa Schweitzer has a series of excellent posts about this at Urban Ethics and Theory (start with her conclusion), and I suggest you review what she has to say about this.

But others are supporting the federal role because they claim that states and local governments are already making their transport investment choices, so the federal role doesn't alter how the money is spent. The Transport Politic has a post about this here. He argues that "devolution is overrated." I'll argue that this analysis is not quite right because it is limited to the role of fuel taxes and because it undervalues the political distortions.

Freemark does say that states and localities have screwed up spending projects before, and he's right that they have. This doesn't mean that the federal government is better in the role of deciding what projects to fund, however. In fact, many states, counties and metro areas use sales taxes to build new systems and maintain roads, and these taxes are often voted on directly buy the voters. (Sales taxes may be a more regressive form of paying for infrastructure than fuel taxes, and perhaps an analysis of tax incidence might support a federal role, but that's not what the opponents of the House measure are arguing.) When put on a ballot new taxes for transportation projects are overwhelmingly passed (about 75% of the time), even when the new taxes are going to be used for expensive transit investments. These may not be good investments in many cases, but there is ample evidence to suggest that in the absence of federal funding or a complete devolution to local and state decision making transit would not be defunded or in danger of going away.

The federal role complicates local decision making due to political constraints. First, as a piece of background, nearly all gas taxes collected are returned to the state where they were generated. By law at least 92% of all receipts has to be returned to the state where they were generated, and in many cases it is much higher. (This is a new-ish law so don't look at historical donor-donee figures for this.) But all new projects, even if they are listed as a priority by the states, must comply with all federal guidelines and policies. These can greatly increase the costs of projects in both time and money. New York City moved forward with the 7 line extension of the subway system without federal money because of compliance concerns.* Moreover, the federal guidelines through SAFETEA-LU favor commuter oriented projects that have a lot of time savings. These may not actually be high priorities for states and cities, but if you want any money you have to adhere to these guidelines. In addition, federal matching money policies act as incentives for transport plans to maximize their matching dollars, not design the best transport investment. Remember, 10 years ago no one was considering street cars in US cities. Now there are over 70 projects under consideration because the Obama administration committed $280 million for streetcars. Those 70 projects are there because of federal priorities, not because of local preferences. (I've mentioned this before.)

To make a point about local mistakes versus federal mistakes, these streetcars are likely to be a disaster. Operating in mixed-traffic, they will slow down transit, congest auto travel and worsen pollution. This occurred in Paris as dedicated bus lanes were replaced with streetcars. However, if cities paid for these themselves then a few would install streetcars and the rest would realize they are a bad idea.Instead, the federal government will pay for all the streetcars so everyone will realize they are a bad idea after they are all built, so rather than a few bad projects and a little cost we will get lots of bad projects at a lot of cost.

Overall, the role of federal funding for transportation has likely peaked as the gas tax has peaked. I doubt that any federal tax will replace that buying power, and it will be the onus of states, regions and cities to  fund more of their transport investments. (If you think the prospects of higher federal gas taxes are grim, you should consider how much worse the prospects for federal user fees are.) I won't speculate as to what that means for road or transit funding, but will say it will be different. The sooner that states and cities start crafting policies to pay for their transport priorities the better off we will all be, and the more responsive these policies will be to people's concerns.

*The city did ask for federal help with a second station when costs increased but was turned down.