HIDDEN TAXES ARE EASIER TO RAISE
November 16, 2007
Because electronic toll collection systems -- such as E-ZPass in the Northeast or Fast-Trak in California -- automatically deduct the toll as the car drives through the toll plaza, and the driver therefore need no longer actively count out and hand over cash for the toll, electronic payment arguably reduce the visibility of tolls, says Amy Finkelstein, a research associate with the National Bureau of Economic Research.
According to Finkelstein:
- This reduced visibility of tolls comes at the cost of higher tolls.
- She estimates that the introduction of electronic toll booths causes drivers to pay higher tolls -- some 20 to 40 percent higher -- than if electronic collection had never been introduced.
For her study, Finkelstein collected 50 years of toll data on 123 publicly owned roads, bridges and tunnels in the United States:
- Starting in 1987, electronic tolling was introduced on these facilities; by 2005, about two-thirds of the facilities used electronic tolling.
- Once a facility introduces electronic tolling, drivers start to use the technology, and eventually usage levels out at about 60 percent of toll payments.
- Finkelstein finds that as drivers switch to paying tolls electronically, toll authorities raise the toll rates.
- As a result, even though many facilities offer discounts to drivers who pay electronically, the toll that drivers end up paying electronically is still higher than it would have been had the facility not introduced electronic tolling (although it's lower than what their fellow drivers who still pay with cash have to fork over).
The most plausible explanation for the phenomenon, Finkelstein argues, is that drivers who pay the toll electronically don't notice price hikes as readily as manual-toll users do. So public resistance to toll increases lessens as more and more drivers pay electronically, and thus transportation authorities are able to push through more toll increases.
Source: Laurent Belsie, "Hidden Taxes Are Easier To Raise," NBER Digest, November 2007; based upon: Amy Finkelstein, "E-ZTax: Tax Salience and Tax Rates," National Bureau of Economic Research, Working Paper No. 12924, February 2007.
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