Tag Archives: Economics

We Get What We Pay (Taxes) For – Roads Edition

(Note: This entry was originally published on October 7, 2015.)

It’s that time again!

Congress has waited until the last minute to solve all sorts of avoidable problems – funding the government as mandated by the Constitution, raising the debt ceiling as totally not mandated by the Constitution, and figuring out how to pay for roads and bridges.

Roads and bridges don’t get a lot of love in the press – they’re just not sexy or exciting. But you may have heard recently about the Highway Trust Fund running out of money. Turns out, the federal government collects a special excise tax every time you buy a gallon of gasoline – 18.4 cents to be precise – that helps to pay for new roads and bridges and to repair old roads and bridges. It sounds rather mundane – after all, building and maintaining roads and bridges is one of the most basic functions of governments at all levels – city, state, or federal. Unfortunately, the federal government isn’t collecting enough money through that excise tax to pay for all of the building and repairs that are necessary in a geographically expansive country with a half-century-old infrastructure.

In recent years, Congress has simply transferred funds from its general fund (paid for by our individual and corporate income taxes), and this has plugged the gap. But as any casual observer of Congress will see, funding anything these days is proving to be quite difficult for some of our Representatives and Senators. But why is it turning out to be so hard to keep dollars flowing for something as basic as roads and bridges?

We can actually summarize the problem in a single chart.

gasoline data

Sources: Dept of Energy, Dept of Transportation

What’s going on here? We’ve got four series of data, each of which has been indexed, meaning that the value in each year shows us how much larger or smaller it is relative to some base year. In this case, the base year is 1993. Why? Because that’s the last time the per-gallon tax on gasoline was adjusted. Got it? Great! Let’s dive in, one by one.

I Got the Purchasing Power Blues (gas tax, adjusted for inflation)
The federal gasoline tax has remained unchanged since 1993, which wouldn’t seem like sad a bad thing for taxpayers, because hey! the federal tax we pay on gasoline hasn’t gone up in over 20 years, and that’s a good thing, right? From the perspective of the person paying the tax, absolutely. But from the perspective of the government collecting the tax? Not so great. Because just as the per-gallon tax has remained constant, the prices of, well, just about everything have gone up, which means that the measly 18.4 cents per gallon the federal government collects just doesn’t go nearly as far as it used to. Ask any of my economic principles students, and they can tell you – when prices rise, our dollars lose purchasing power, a loss from which not even the United States government is immune.

If You Build It, They Will Drive On It (vehicle miles traveled, VMT)
People are driving more miles. No surprises there. Ever since the interstate highway system was created way back during the Eisenhower administration, Americans have taken to the roadways in increasing numbers, thanks to a growing population and a greater demand for cross-country travel. In addition, consider all of the products and supplies that are trucked back and forth in giant 18-wheelers each year. All of this driving adds up to more wear-and-tear on existing highways and byways, which leads to more and more money spent on maintaining the roads we already have. You break it, you buy it, And in this case, the “you” is “all of us”, with Uncle Sam and his city/state cousins picking up the tab. While VMT dropped a bit during the most recent recession, and hasn’t yet returned to its most recent peak (in part due to people finding alternative modes of transportation), we’re still driving a lot more than we were back in 1993.

Engines Roar, So Let’s Build MOAR ROADS (system mileage)
Wear-and-tear on existing roads is bad enough, but on top of that, the federal government continues to build new highways, wider highways, bigger more badass highways. This means a huge upfront cost in terms of obtaining right-of-way, clearing land, and actually pouring the cement/asphalt/concrete. And once it’s built, you guessed it…just like a brand new car fresh off the lot, the roads being to depreciate and deteriorate, piling up more maintenance costs on down the road (get it? down the ‘road’?)

Over the last decade, the average number of gallons of gasoline it takes to get from Point A to Point B has decreased substantially. Some of this increase in fuel economy has occurred ‘naturally’, as consumer seek out cars that get better mileage, and car markers respond by designing more fuel-efficient vehicles. On top of this market push, the federal government has continued to push for higher fuel economy standards, in an effort to decrease dependence on fossil fuels for reasons concerning both the environment and economic security. As vehicles become more fuel efficient, drivers need to purchase fewer gallons in order to travel the same distance, which translates into fewer 18.4 cent payments to the federal government.

To summarize:
– demand for (use of) roads is increasing (VMT is up by over 30%);
– more roads are being built (up 5%), and an aging system will continue to require maintenance;
– per-mile-demand for gasoline is decreasing (in part due to the 25% increase in average fuel economy); and,
– the federal tax on fuel remains unchanged in nominal terms (which means 40% loss of purchasing power).

Even if the tax on gasoline had been tied to the price level when it was last adjusted in 1993, meaning that it was being adjusted for inflation on an annual basis to compensate for a loss of purchasing power, the revenue generated from the tax would still today be insufficient to account for higher levels of required spending needed just to maintain our current system.

So…What to Do?
A number of options are available to Congress, the real question being whether they possess the willingness to do anything other than kick the can further down the metaphorical road.

1) We could hike the fuel tax in one fell swoop, and then chain it to the price level in the future. This would catch us up with 20 years of price fluctuations, and ensure that the fuel tax maintains its purchasing power moving forward. But, just to break-even with the higher price level, the per-gallon tax would need to rise from $0.184/gallon to $0.301/gallon, adding about $0.12 to the current price of every gallon of gasoline. This might sound drastic, but in a world where gas prices swing back and forth by $0.10, $0.20, or $0.30 within a single week or month, this might not be such a bad jolt to the system. Demand for gasoline is relatively inelastic, so there would not likely be a huge dip in gallons of gasoline purchased. After this one-time spike, the tax would rise by an average of 2% in future years, which in dollar terms would mean about an additional $0.01/gallon per year. Not such a bad idea…except for the increase in VMT, the increase in fuel economy, and the increase in system mileage.

2) We could simply scrap the fuel tax and roll highway construction and maintenance back into the general fund. Dedicated revenue/expense budget items can be nice, until the revenue starts drying up and/or the expenses balloon. On top of that, Congress can’t seem to agree to fund anything, and adding highways back into the general fund budget absent any other changes on the revenue side of the equation would automatically increase the annual deficit (SACRILEGE! TREASON!). However, we’re already paying for the highway funding deficit with transfers to the highway trust fund from the general fund. So perhaps the only real challenge would be finding the money form elsewhere if the fuel tax goes away. (I know! I I know! Is funny joke, no?)

3) We could switch from an excise tax on fuel to a vehicle-miles-traveled tax. It makes sense in that construction/maintenance of each mile of road would be funded by a road-user fee. This would account for the fact that more miles are being driven, even as fewer gallons of gasoline are purchased per mile traveled. In more technical terms, rather than taxing a complement to road miles (gasoline), we tax the use of the road itself. This option makes a lot of sense, but it is not without its own challenges: how would we measure VMT, and how would we go about assessing the tax? (I suspect Grover Norquist and Co. would have something to say about this….)

I don’t imagine we’ll be seeing any significant changes in the next few weeks, as Congress will be having bigger arguments over the federal budget in general, and the debt ceiling in particular. It would be nice if we could find a more sustainable method of funding our interstate highway system. It really is an amazing bit of public infrastructure, and it would be a shame to see it crumble. Roads and bridges may not be sexy, they may not get the attention they always deserve, but as citizens and taxpayers, it would behoove us all to pay a little more attention to some of the mundanities of taxing and spending, and encourage Congress to find a more permanent solution to a long-term challenge.

Don’t hold your breath.

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On Markets, Wages, and the Honey Badger

(Note: This entry was originally published on August 3, 2015.)

Recently, a long-time friend of mine gained some national attention for his take on fast food workers demanding and securing $15/hour in wages in New York City. He makes a well-written, yet concise argument in favor of workers pushing for living wages, and I encourage you to give it a read. You’ve probably seen it show up on your Facebook feed looking something like this:


It also reminded me of something a grad school acquaintance said some years ago in a discussion about skills, experience, and earnings. He argued that if a person’s labor is only worth $2/hour in market wages, then such a person should not expect to earn more than $2/hour.

These two arguments bring into question how we determine what people should be or will be paid. On the one hand, we can argue that people deserve to earn a living wage, enough to support themselves in exchange for supplying a standard amount of labor. On the other hand, we can argue that skills and experience should be compensated based on how potential employers value those skills and experience; in other words, let the market decide.

But how exactly does a market determine a wage? Let’s take a look at a simple example.

panem et circenses

Pictured above is a photo of a worksite not far from my hometown. On any given night, a variety of people are working at this site, and being compensated for their labor. To keep it simple, let’s imagine the work that’s being done the night of an NBA game, and focus on the work of two groups of workers – the professional basketball players and the concession stand attendants selling hot dogs and beer.

The night of a basketball game, thousands of spectators pack the arena. They are there, primarily, to observe a basketball game, but during the basketball game, they will become hungry and thirsty, and will head to the concession stand. These spectators will be demanding two types of labor – the type that allows some people to play an entertaining game of basketball, and the type that cooks a hot dog and pours a beer. For both types of labor, demand will be very high.

Who supplies that labor? It turns out that while a great number of people would like to become professional basketball players, very few individuals actually possess the professional-level skills to play in the NBA. This means that there is a very limited supply of top-level basketball players. However, there are a great number of people who possess the extremely limited skill set necessary to cook a hot dog or pour a beer. Thus, there is an abundant supply of workers who could possibly fill the role of concession stand attendant.

So demand is high for both types of workers, but supply is low in case, high in the other. Using a simple model of supply and demand, we can see what the results will be with respect to what the two types of workers end up being paid.

Basketball and hot dog workers
As you can see, even though there is a great demand for both players and concession stand attendants, the difference in supply leads to two very different outcomes – basketball players receive a high market wage, while concession stand attendants receive a very low market wage.

These market dynamics are the result of the buyers and sellers of labor in these two distinct labor markets negotiating, in a sense, based on what price they (the spectators) are either willing to pay for the labor, or what price they (the players and attendants) are willing to accept. The “market” plays the role of intermediary, trying to find a balance between the two groups. It does not care about the results, so long as they are efficient in their allocation of scarce resources. The “market” is, in a sense, amoral. Or, to put it bluntly, the “market” is like the honey badger – it just don’t give a shit.

Allowing the market to set wages seems fair on the surface. After all, if a person’s wages are lower than they desire, and they would like to earn more, they are free to invest in themselves, building up their skills and experience in an effort to attract higher wages. The responsibility to earn more rests with them. Fair enough.

But how feasible is this when wages are too low? Imagine a person whose labor, as determined by the “market”, is worth only $2/hour. A standard 40-hour work week would generate a paltry $4,160 per year…well below the cost-of-living for an individual, even in the lowest-cost cities. This person would need to work far more hours just to survive. But even working 12-hour days, for 7 days a week, would only lead to an annual income of $8,760. Again, a meager living for an individual. How exactly is this person supposed to find the time, let alone physical stamina, to engage in activities outside of work that can in some way improve their skills or experience? A daunting challenge, indeed.

So what does this mean for us as a society? There’s no single method of determining someone’s pay that is inherently better than any alternative. But at the end of the day, we must ask ourselves – what is the result of our collective decisions and actions? There’s nothing inherently evil about a market – markets are, after all, amoral. But might there be something wrong with a society that leaves all of the wage-setting power to a nebulous, emotionless structure – the “market” – that cares not at all about the physical or mental well-being of people? In other words, what happens when we operate not only as a market economy, but as what Harvard philosopher Michael Sandel calls a market society?

People who work, regardless of what work they perform, deserve to earn a living wage. This doesn’t mean everyone should be guaranteed a life of luxury. But it does mean everyone who works should be capable of achieving a basic standard of living.

The market is amoral – it will set a market wage based on supply and demand, balancing what workers are willing to accept against what employers are willing to pay. And unfortunately for workers, in most cases, the balance tilts in favor of the employers.

As a society, we face a choice: accept this market outcome, or find an alternative. The market outcome itself is amoral. But for society to accept it, always and forever, is immoral.

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The Residential Solar Panel Premium: A Texas Case Study

(Note: This entry was originally published on August 28, 2015.)

I’ve been looking into residential solar panels lately: trying to figure out how much it would cost, whether it’s better to purchase or lease, how difficult it is to go through the permitting process, and what the net benefit of the panels would be in terms of energy and cost savings.

And then I heard another resident of my city tell about his experience with installing solar panels on his home. Not long after his system had been set up, one of his neighbors decided to sell their home. My associate happened to be outside one day when the realtor was stopping by, and after taking one look at his home, and seeing the solar panels mounted on his roof, she asked him if he was interested in selling his own home.

So this got me thinking – does the presence of a solar panel system increase a home’s selling price? There’s not a whole lot of literature on the subject, but a couple of studies out of California have indicated that there is indeed a positive impact on home prices. Hoen et al. (2013) estimate that solar panels generate a premium of roughly $5.50 per watt installed, while another study by Dastrup et al. (2012) find that solar panels generate about 3.5% in premium. I wondered – do homes in my area enjoy the same solar premium?
I began by figuring out which homes in my city – Irving, TX, in the heart of the DFW metroplex – currently had solar panels installed. A request to the city for permit data showed that several dozen residential property owners had applied for and been granted permits for the installation of solar panels. A majority (38) of these homes had been issued a “Final” permit, indicating the installations were complete. After consulting Google Earth, I was able to confirm that 31 homes had solar panel systems of varying sizes installed as of early 2015, and that they were dispersed throughout the city (rather than clustered in particular neighborhoods).

Map - Irving Solar Homes

solar panels everywhere

The next step was to gather data on all aspects of homes that have an impact on sales price. As a proxy for sales price, I turned to appraised value, which was readily accessible. The Dallas County Appraisal District collects data on a wide ranger of property features, which are then used to determined the property’s value for the purpose of tax assessments. From the appraisal district, I collected data on the following variables: age, size (in square feet), the number of storeys, bedrooms, baths (half/full), pools, central air, brick exterior, wet bars, sprinkler systems, outdoor decks, and the school district. The final variable is the presence of solar panels, measured with a dummy variable – equal to 0 if the home has no panels, and equal to 1 if the home has panels. (Note: This case study does not account for the size of solar panel systems, in terms of wattage or financial investment.) Between 2010 and 2015, the number of homes with solar panels increased, from zero to thirty-eight, with most of the increase occurring in the last year.

Irving solar home count

a bright future for solar power in Irving?

With 31 homes confirmed to have solar panels by 2015, and 6 years of data, the final sample was 223 home-year observations. The next step was to use what economists call a hedonic price, or hedonic regression, model. This model allows us to isolate the impact of any particular feature on the home’s overall price. For example, results of this case study show that additional bathroom lead to a 5.4% increase in value, a pool adds about 8% in value, and each additional year of age decreases value by about 1%. (Most of the results obtained in this case study appeared to be on par with those found in other, larger studies.)

Of most interest is the impact of the solar panels. In this sample, the presence of solar panels leads, on average, to an increase of just over 4.7%, and the effect is highly significant (at the 1% level of confidence). By 2015, all of the homes in this sample had solar panels present, so to double check the results, I expanded the sample size to include a ‘sibling’ home for each of the 31 solar homes to serve as a control group. This expanded the overall sample to 443 home-year observations. Doing so led to a smaller premium, dropping from 4.7% to about 3.8%, although still significant at the 5% level of confidence.

Solar regression results

for all the data geeks out there…

What does this mean for homeowners? It suggests that solar panels have a significant impact on a home’s perceived value, and eventually its sell price. As the anecdote noted above makes clear, those in the business of selling homes have an eye out for new or non-traditional features. In addition to the traditional aspects of a home – age, size, location, physical attributes – homeowners must now consider a wider range of features when buying or selling a home. And for homeowners interested in installing solar panels in order to reap energy cost savings, they can rest assured that at least some of their investment will be capitalized into the price of their home should they choose to sell it in the future.

What does this mean for “solar communities” as a whole? If the presence of solar panels is in fact reflected in appraisal values, it suggests a boost to the local tax base, as more and more homeowners choose to invest in solar. But beyond the increase in home values and tax revenues, an increase in the presence of residential solar panels within a community will lead to a decrease in demand for traditionally-generated electricity. With a decrease in the draw on the regional grid, communities can expect fewer temporary blackouts during seasons of increased electricity usage, or, they can devote the energy and costs savings to other economy activity. Overall, it seems that solar investment can be a win for everyone.

There are a number of caveats to be made about this analysis but the most important has to do with the short time-frame of this particular case study. There were no homes in Irving, TX, with installed solar panels prior to 2011. Since that time, it does not appear as if any of the homes where solar panels were installed have been sold. In other words, it remains to be seen whether the observed increase in appraised value translates into an increase in future sales price. But so far, the results look promising, in terms of the financial, economic, and environmental benefits.

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