By Steve Lonegan | March 3rd, 2008 - 11:46am
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New Jersey has one of the most poorly-run state governments in the nation and Governor Jon Corzine has only made it worse. In just two years, he has raised the sales tax after a government shutdown, pushed a sham so-called property tax relief that amounts to larger rebate checks (that are unlikely to continue beyond a couple of years), enacted a dubious new school-funding formula, and now is pushing the largest debt issue in U.S. history, funded by a massive 800 percent hike in New Jersey’s tolls.

Last November, New Jerseyans inflicted a stinging rebuke to Governor Corzine and his coterie by rejecting two out of the three ballot questions. If the majority of New Jerseyans won’t put up with tax-shift gimmicks and expensive bond issues, can the governor find a way to raise taxes and borrowing without voter approval? He is certainly trying. If Corzine gets his way, the ever-growing burden of the state’s debt will fall on motorists who use the Garden State Parkway, the Atlantic City Expressway, or the New Jersey Turnpike and out-of-state drivers, as well as on consumers who will pay more for food and consumer goods that will be more expensive to truck with the higher tolls in place.

Corzine’s Plan

Corzine wants to create a nonprofit “public benefits corporation (PBC)” to manage the state’s toll roads. The state will sell the right to manage its roads to the company for up to $40 billion; the company will get the money by floating bonds. The plan provides for 50 percent (plus inflation) toll increases on the New Jersey Turnpike, the Garden State Parkway, and the Atlantic City Expressway every four years from 2010 to 2032, and then by the cost of inflation every four years until 2085. Corzine plans to use the money raised to pay off $15 billion in transportation-related debt and $16 billion in general state debt.

Although the governor is, in effect, trying to pay off old credit cards with a new credit card, he contends that this is not true, that

Any debt issued by the PBC will be the debt of the PBC, and the bondholder’s only recourse is against the revenues collected by the PBC. Neither the state, nor its taxpayers, has any legal or moral obligation for the debt issued by the PBC, and this will be spelled out in the enabling legislation. [1]

This argument is disingenuous. The PBC would be a creation of the state, regulated by the state, and would be managing the state’s roads. The governor is trying to claim all the positive benefits of privatization while emphatically denying that his plan privatizes the roads in anyway. The editors of the Star Ledger argue that while the Corzine administration insists “the new toll-backed debt isn’t the responsibility of the state…if his new super-tolling agency ever ran into financial trouble, the state would be under enormous pressure to bail it out to keep Wall Street happy.” Similarly, Hyman Grossman, a retired managing director of Standard & Poor’s Ratings Group, who even has some sympathy for Corzine’s plan, attests that “To some extent, it’s backdoor financing. To say it’s not state debt is not being straight.”

Refinancing at a Higher Rate

Once it’s clear that new debt is backed by the state in all but rhetoric, Corzine’s plan becomes easier to understand and less appealing. New Jersey is currently $30 billion in debt, financed with short-term bonds at an average rate of 4.49 percent. The new bonds will be long-term bonds (75 years) and will have a higher interest rate (around 7 percent). In other words, the governor essentially wants to use a credit card with a higher interest rate to pay off numerous other credit cards that on average have much lower interest rates.

The Public Benefits Corporation

The PBC would operate, maintain, invest in, and expand the roadways, but the state would retain ownership of the roads. The New Jersey Turnpike Authority would enter into a “Concession Agreement” with the PBC which would establish the state regulations that the PBC would be required to follow. It would oversee and enforce the conditions of the agreement, thereby monitoring the operation, maintenance, and capital investment decisions the PBC would make, imposing “severe financial penalties for noncompliance.” [2] These new responsibilities would subsume all the Turnpike Authority’s previous powers. Most of its employees would work for the PBC with the same salary and benefits.

The nominated PBC Board of Directors would have to be confirmed by another new creation, the “Public Interest Corporation (PIC).” The PIC would represent “the interests of the State, its citizens and transportation stakeholders (including, for instance, commuters, truckers and environmental interests.”

The whole scheme is confusing, seemingly by design. The governor’s plan claims that the PBC will bring “private sector efficiencies” to the state’s roads despite the fact that he declares in his Townhall FAQ that, “Under the structure we are proposing no party can profit at the expense of the citizens of New Jersey…This means that no outside investor or anyone on Wall Street will make a profit from owning or successfully operating the toll roads.” How can there be private sector efficiencies without the single most important aspect of the private sector—the profit motive? His plan assures that the efficiencies will come about through a “highly qualified board and management team.” That is a recipe for a new layer of bureaucracy, not new efficiency. Further, this “highly qualified board and management team” would be subject to the approval of the PIC, a perfect vehicle for special interests to influence policy.

A Free Lunch?

Governor Corzine claims that tolls are a way to force out-of-state drivers to pick up the tab for New Jersey government, in effect exporting the state’s tax burden.

Whether or not the plan is technically constitutional (we have serious doubts that punitive taxes on interstate travel and commerce pass muster), Corzine hasn’t tapped into a free source of revenue as he seems to think. While less convenient for many routes, it is possible to avoid the toll roads, pushing traffic onto local roads not designed to handle it, causing damage that will strain local government budgets, as well as adversely affecting quality of life.

Moreover, high tolls will shift travel and shipping patterns not just within the state but also outside of it, with alternative routes through Pennsylvania. Some business that are sensitive to transportation costs will relocate outside the state, bringing not just their toll revenue but all of their tax revenue and jobs with them.

Taxing out of state motorists will discourage trade with the rest of the country. Once you add high transportation costs to high corporate, income, sales, and property taxes, Pennsylvania, Delaware, and even New York will start to look like a better place to start a business than New Jersey.

Disproportionate Burdens

Supporters of the governor’s plan have pointed out that, even with the toll increases, New Jersey will still have a relatively low state-wide toll burden relative to other states. Yet the new tolls do not have a broad base—they are not borne equally because there are only three toll roads. As such, this statistic is wholly irrelevant.

Residents in Ocean and Monmouth counties will be hit with a huge cost of living increase. These two counties account for a disproportionate share of toll road revenue—8 out of the 10 zip codes that generate the most E-ZPass revenue on the Garden State Parkway and 7 out of the 20 zip codes that produce the most combined revenue for the Parkway and the New Jersey Turnpike lie within Ocean and Monmouth. [3] By 2022, it will cost a commuter $28.00 to travel the length of the Parkway. [4] Jonathan R. Peters, a finance professor who specializes in transportation costs, has analyzed the costs of Corzine’s plan. He has concluded:

  • In Vineland, the average yearly sum of toll payments for the 1,800 people or businesses that have E-ZPass accounts is $64.71. By 2010, that will rise to $106.07. By 2022, it will rise to $510.42.
  • In East Vineland, the average yearly sum of toll payments would rise from $16.73 today to $115.19 by 2022.
  • In Millville, the average will rise from $10.89 today to $74.99 in 2022.
  • In Buena, the average will rise from $10.69 to $72.66 in 2022.

 

It goes without saying that residents who don’t use these roads will not face any direct fee or tax increases, which begs the question: why should commuters be forced to pay for the debts of all? Rutgers Economic professor Joseph Seneca confirms: toll hikes to pay off state debt “shift costs to another group, obviously a smaller group.” [5]

Of course not all of the effects of the new tolls will be easily visible. Peters has concluded that the planned toll increases are so high that New Jersey residents will make major life decisions based simply on the tolls. [6] Many people on the margin of the workforce—stay-at-home moms thinking about picking up a job, for example—will decide to forgo work because the high level of taxation and the cost of commuting.

This is an example of what economists call “excess burden” or “deadweight loss.” Even people who do not pay the tolls can suffer because they are forced to substitute away from the situation they prefer. Very few people would owe any money to the government, for example, if politicians enacted a $1000 a gallon gas tax because no one would drive any more. People would have to take public transportation or something else—something they would prefer not to do. The same phenomenon is at work with drastic toll increases. While many people would prefer to live and work near the Turnpike, the Parkway, and the Expressway, prohibitively high transportation costs will force them to a second choice.

In addition, higher tolls mean higher taxes on shipping. An 800 percent hike in shipping costs for trucks on the state’s toll roads will mean substantially higher prices on consumer goods that need to be moved in those trucks. Those higher prices will be borne by consumers, a stealth sales tax hike that will hit lower income New Jerseyans the hardest. It goes without saying that residents who don’t use these roads will not face any fee or tax increases, which begs the question: why should commuters be forced to pay for the debts of all? Rutgers Economic professor Joseph Seneca confirms: toll hikes to pay off state debt “shift costs to another group, obviously a smaller group.” [7]

The following map illustrated the regional discrimination of the toll increases:

Of course not all of the effects of the new tolls will be easily visible. Peters has concluded that the planned toll increases are so high that New Jersey residents will make major life decisions based simply on the tolls. Many people on the margin of the workforce—stay-at-home moms thinking about picking up a job, for example—will decide to forgo work because the high level of taxation and the cost of commuting.

This is an example of what economists call “excess burden” or “deadweight loss.” Even people who do not pay the tolls can suffer because they are forced to substitute away from the situation they prefer. Very few people would owe any money to the government, for example, if politicians enacted a $1000 a gallon gas tax because no one would drive any more. People would have to take public transportation or something else—something they would prefer not to do. The same phenomenon is at work with drastic toll increases. While many people would prefer to live and work near the Turnpike, the Parkway, and the Expressway, prohibitively high transportation costs will force them to a second choice.

The narrow base hit the hardest by the toll increases isn’t just delineated by region: the poor bear a disproportionate burden as well. According to Peters, “there is a significant amount of variation in terms of burden as related to the income per capita. A significant number of towns with relatively low incomes have very high burdens under existing tolls.” [8] Each point on the following graph represents a zip code:

The disparity becomes even more pronounced when the burden of the tolls is calculated as a share of income:

An Unconstitutional Tax on Commerce

The commerce clause was included in the U.S. Constitution because under the Articles of Confederation states were establishing tariffs on interstate commerce that were slowing the growth of the national economy. The idea of granting the power to regulate interstate commerce to the federal government was to keep fees and regulations to a minimum.

The major contention with Governor Corzine’s plan is that the fees collected from his proposed toll would vastly exceed any reasonable cost of maintaining the system they are tolling. The Governor has openly admitted that the funds raised will not be used solely to fund the transportation system but instead are targeted at reducing existing state debt. Additionally, he cannot argue that drivers charged a toll are receiving a benefit commensurate with the fee. If he were to argue that instate drivers derive some secondary benefit from a reduced state debt then he would be clearly be creating two different classes, intra and interstate drivers. This violates the equal protection clause of the 14th amendment.

Various courts have used the idea of a “fair approximation of the use of the facilities” when determining whether or not to allow states to charge tolls. The Corzine plan charges tolls so out of proportion with fair value, in order to fund general government, that it clearly amounts to an unconstitutional restriction on interstate commerce.

More Unintended Consequences

That less people will use the toll roads in the aftermath of a toll increase is common sense. But, according to a 400-page report by the London based transportation consulting firm Steer Davies Gleave, cars and trucks will abandon the toll roads at much higher numbers than the Corzine administration forecasts. Traffic will fall precipitously and will not return to today’s levels for 40 years. At face value, that could be construed as a good thing. The traffic that won’t be on the toll roads will not disappear, however. According to the report, between 20 and 30 percent of traffic on the Turnpike and the Atlantic City Expressway and between 10 and 20 percent of the traffic on the Garden State Parkway would turn to other roads, mass transit, or freight rail. Add clogged back roads to New Jersey’s ever expanding list of problems.

A Corzine administration official maintains that its initial estimates are correct, citing the relatively small impact that 70 percent toll hikes had on traffic flow in the early 1990’s. Besides the fact that Corzine’s planned toll hike is vastly larger, the administration is assuming a linear decline in traffic. In actuality, such drastic toll increases may drive people off toll roads at an exponential rate.

Conclusion

Cutting spending and limiting the size of government is anathema to Governor Corzine’s worldview. If it succeeds, his plan will successfully perpetuate the state government’s tax, spend, and borrow philosophy under the guise of reform. The state of New Jersey has lived beyond its means for too long. It is the one of the most overtaxed states in the nation and the governor continues to claim that he doesn’t have enough revenue, that he can’t cut spending, that he needs to borrow and tax more. In reality, he needs to downsize, prioritize, and privatize. It’s the only way to truly balance the budget and pay down the debt.

Notes

[1] Save Our State: Financial Restructuring and Debt Reduction. Frequently Asked Questions. Available from http://www.njslom.org/Governor-restructure-FAQ....

[2] State of New Jersey: Financial Restructuring. Available from http://nj.gov/frdr/pdf/background.pdf

[3] “Don’t take Corzine toll hike plan sitting down,” posted on February 1, 2008. http://www.app.com/apps/pbcs.dll/article?AID=/2...

[4] http://www.afphq.org/index.php?id=4732&stat...

[5] Jason Method. “Workers’ worst friend: Toll hikes, study says.” Available from http://www.thedailyjournal.com/apps/pbcs.dll/ar...

[6] Method

[7] Method

[8] Jonathan Peters, Ph.D. Preliminary Analysis of the Regional and Social Impacts of the Proposed Monetization of the Noew Jersey Toll Roads. Available from Author.

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quote of the day

"Governor Christie ripped President Obama this summer for failing to carve out some time during a Texas fundraising swing to visit the Mexican border, where the unprecedented flood of immigrant children from Central America had reached a crisis point. ...Yet Christie is not squeezing in a tour of the troubled border during his own three-day trade and diplomatic mission to Mexico, which is set to begin on Wednesday. The governor is planning a series of meetings with Mexican officials, including President Enrique Peña Nieto and the finance and energy ministers." - columnist Charles Stile

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