This is One Tax We Need to Raise

by David Fessler, Energy and Infrastructure Expert
Thursday, June 24, 2010: Issue #1288

It’s a good thing I’m not running for government office… because I’m about to propose higher taxes.

But hear me out before you vote “no” to my article below.

I’m not talking about taxation in general. Like every other American, I’m not in favor of higher taxes. But the type of taxes that I am in favor of are on specific things that…

  1. we think are undesirable/harmful.
  2. people use heavily.

For example…

~ Federal & State Tobacco Taxes: I’m not a smoker, but there’s fairly sound medical data that says smoking is detrimental to your well-being.

Cigarette taxes vary by state. For instance, if you smoke in Missouri, you pay its government just $0.17 per pack in taxes. But Rhode Island smokers pay a hefty $3.46 per pack.

The nationwide average tax for all states is $1.18. Add in the $1.01 the feds charge smokers to inhale and you’re talking some serious money.

~ Alcohol: Many people enjoy beer, a decent glass of wine, or single-malt from time to time. But the feds and states tax you every time you do.

However, there’s a tax on something that we use frequently… but one that hasn’t caught up with the times…

This Road Fund is Running on Empty

With governments scrambling for dollars and unemployment hovering near 10%, new sources of revenue are hard to come by.

So it’s more than a little surprising that the federal gasoline tax is still where it was back in 1993: 18.4 cents a gallon.

And it’s this tax that helps pay for the building and repairing of roads in the United States. Revenue from the tax is deposited into the highway trust fund.

However, the fund took a huge dive when the recession hit. And the domino effect of the downturn hit the fund, too. Americans started driving less, as many people got laid off from their jobs and/or were generally more strapped for cash.

As a result, current revenue from the federal gasoline tax is much too small to cover existing projects, let alone new ones. In fact, the only way the fund hasn’t gone bankrupt is thanks to annual cash infusions from the government’s general fund.

In 2010, of the nearly $40 billion earmarked for spending from the highway trust fund, 50% of it will come from general fund transfers and 50% of it from the federal gasoline tax.

And with Congress and the President reluctant to raise the gasoline tax, the funding deficit is destined to continue.

And that’s a problem, given the significant cost to build and repair roads and bridges…

You Use It… You Pay for It

The cost to build an interstate varies depending on a number of factors. Most fall between $1 million to $2 million per mile, but Boston is home to the most expensive road in U.S. history, at over $1 billion per mile.

The problem with forking out such huge amounts of money isn’t so much the cost itself… but who’s footing the bill.

Everyone is paying to build and fix the roads… even if they don’t use them.

However, there’s a simple solution to the problem: tolls.

Road tolls aren’t a revolutionary idea. They’re implemented all over the United States. Many major roads and bridges already have tolls – and most of the money collected is used to maintain them.

In my home state, for example, we have the Pennsylvania Turnpike. People who drive on it pay for its maintenance via tolls – and it’s a relatively well-maintained road.

But last year, when the state attempted to pass legislation that would put tolls on Interstate 80 – a major east-west route through Pennsylvania – the Federal Highway Administration shot it down.

It cited a rule, dictating that revenue from tolls can only be used to maintain that particular road. And Pennsylvania was going to use it for maintenance funds on some of its other roads – roads that I can personally say are some of the worst in the country.

So should we increase the federal gasoline tax to help pay for new roads and improvements to existing ones? Well, it would serve two purposes…

  1. It would close the widening budget gap in the federal highway trust fund.
  2. It would make gasoline more costly. However, given that the average person won’t change their routine unless a cheaper alternative appears, installing tolls on roads and bridges that don’t have them would also generate essential revenue for state coffers. And people who don’t drive wouldn’t pay.

Investing in Private Infrastructure

A number of states have thrown in the towel and sold off or leased portions of roads, airports and bridges to private companies. In doing so, they receive much needed revenue and get rid of the maintenance.

There are also a number of public companies that own and invest in infrastructure…

  • Macquarie Infrastructure Company (NYSE: MIC)

The firm owns, operates and invests in various infrastructure businesses in the United States and is one of the larger firms in the business.

Its energy-related division includes bulk liquid storage terminals and gas production and distribution. It also owns the largest cooling system in the United States, Thermal Chicago, which provides water to over 100 buildings to keep them cool during the summertime.

  • Macquarie Global Infrastructure Total Return Fund Inc. (NYSE: MGU)

This is a broader way to invest in the infrastructure sector. The firm’s infrastructure investments include pipelines, toll roads, electric utilities, airports, water, seaports and electric transmission lines.

So if you wish to gain direct exposure to the infrastructure sector, consider adding a few shares of either of the Macquaries to your portfolio.

Good investing,

David Fessler