Abstract Roads and railways in Sweden are mainly financed with nationalgovernment taxes. However, the regional distribution of benefits differs widely fromthat of tax payments. As a consequence, overspending is likely to occur. A conditionfor efficiency is that the collective of users should pay for such projects. Therefore,we propose a new regional order for financing projects: government expenditures fortransportation projects should be transferred to regions as well as the real estate tax tofinance them. We present estimates of the size of such expenditures and of the incomefrom real estate taxes following decentralization to regions.
JEL Classification R48
0 Introduction
A Swedish national government commission has proposed dividing the country intobetween six and nine large regions, in which regional governments would be elected in
We thank Mats Bohman, Svante Mandell och Mats Wilhelmsson, Royal Institute of Technology; Jan-EricNilsson, Swedish Road and Traffic Institute; Anders Olsson, City Office of Västerås; and Carl-OlofTernryd, former Director General of the Swedish Road Administration; as well as three anonymousreferees for their valuable suggestions.
R. Andersson (B)Professor Emeritus in Real Estate Economics at the Department of Infrastructure,Royal Institute of Technology, Stockholm, Swedene-mail: [email protected]; [email protected]
B. SöderbergProfessor in Real Estate Economics at the Department of Business and Economics,University of Gävle, Gävle, Swedene-mail: [email protected]
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general elections (SOU 2007:10). These regions would replace the present 21 Swedishcounties and the regional state authorities responsible for health care, public transport,regional development, and growth. This reorganizational proposal has been stronglycriticized for its lack of suggestions for new, suitable tasks, and a taxing authority forthe new regional governments. Our proposal is that the expenses for roads and railwaysshould be decentralized to such regions for the following reasons. If efficiency is theobjective of the society, incentives should be created in such a way that only roads andrailways providing a net benefit for the society should be carried out. Costs should bepaid for by the collective of users to whom the benefits accrue. This is not the casein Sweden since taxpayers in the whole country finance roads and railways, whilepeople in regions where they are constructed receive the benefits. Regional politicianshave incentives to lobby for their regional projects, playing down risks for high costsand low benefits of the projects. As a consequence, several big, expensive, projectsthat do not generate net social benefit have been carried out. To improve the situation,we propose a new regional order for infrastructure policy: expenditures for roads andrailways should be transferred to regions along with the real estate taxes to financethem.
The aim of this paper is to analyze the effects of such decentralization. We present abrief literature review in Sect. 1. In Sect. 2, we treat the issues of infrastructure pricingservices, and in Sect. 3 we deal with the financing of roads and railways. In Sect. 4, welook at a number of big, expensive transportation projects to question whether or notthey generate net benefits. In Sect. 5, we discuss the reasons such projects are chosen.Section 6 contains our proposal for the decentralization of central government expen-ditures and taxation for transportation projects. In Sect. 7, we compare governmentexpenses for such projects transferred to regions to incomes from real estate taxes alsotransferred to these regions. You will find our conclusions in Sect. 8.
1 Literature review
In his classical paper Tiebout (1956) claimed that “voting by feet” is an appropriatemechanism to solve the issue of revealing preferences for local public goods and thatcompetition among municipalities leads local governments to behave efficiently. Sincethen, quite extensive normative literature has appeared on the role of regional govern-ments and fiscal decentralization (Buchanan 1965; Olson 1969; Oates 1972; Berglas1976; Arnott 1979, 2004; Arnott and Stiglitz 1979; Henderson 1985; Fujita and Thisse1986; Fujita 1989; Hochman et al. 1995; Kanemoto et al. 1996; Rubinchik-Pessach2005; Lee 2005). The literature examines issues such as (a) the responsibilities of thecentral versus regional governments, (b) the optimal number of levels of government,(c) the efficiency gains from fiscal decentralization, (d) better institutional arrange-ments between the national and regional governments, and (e) optimal size of cities(Kanemoto et al. 1996; Arnott 2004). A few papers also deal with (f) the positive issueof countries decentralizing fiscally (Arzaghi and Henderson 2005).
Olson (1969) suggested a separate level for each local public good. According toHochman et al. (1995) the theory of fiscal federalism telling that a layer of governmentshould be established for each type of local public good is invalidated when space is
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explicitly considered. In that case, decentralization will be based on territories ratherthan on goods. Hochman et al. claim that metropolitan governments are the appropriatesuppliers of the whole range of local public goods to the individuals residing in theterritory under its control. Any piece of land should be the tax base of only one localgovernment. Then the decisions by a metropolitan government are not distorted byspatial spillovers and thus lead to efficient decentralization.
The American economist Henry George (1955) proposed in the nineteenth centurya single tax, namely on land, as a remedy for poverty. In the literature nowadays HenryGeorge’s Theorem is interpreted as stating, “the aggregate over the city of urban landrent less the opportunity cost of land in non urban use equals expenditure on pure localpublic goods” (Arnott 2004). Values of local public goods are capitalized in land val-ues, and these goods are supplied until their marginal utility is equal to their marginalcost. This theorem forms a theoretical basis for financing a community’s provision oflocal public goods by real estate taxes, assuming that values of such goods are capital-ized in land values. Oates (1972, p 42) claimed that a condition for reaching efficiencyis that a perfect match exists between those who receive the benefits of a local publicgood and those who have to pay for it. Berglas (1976) showed that according to the clubtheory of Buchanan (1965) and without any consideration to geography every localpublic good could be financed by user charges. But if differences in space concerningwhere local public goods are supplied and where the consumers live are considered,user charges according to marginal cost pricing will not be sufficient to cover totalcosts at decreasing total average costs (Arnott 1979; Arnott and Stiglitz 1979; Fujita1989; Hochman et al. 1995). As a provision of local public goods generate changes inland rents taxes on land rents might be used to cover such deficits (Hotelling 1938).Anas and Lee (1982); Anas (1985) used an equilibrium model to assess the prop-erty tax surplus generated by a proposed rail transit system in Chicago as a methodfor financing such a project. Anderstig (1993) suggested that the regions in Swedenshould be given the right to tax all types of land rents uniformly in order to be able tofinance regional infrastructure. Simultaneously the national taxes on real estate or partof them should be transferred to the regions as well as the relevant expenditures forregional infrastructure. We appreciate this paper as being very much in line with ourown suggestions. However, there are some important differences. Our suggestion isthat the regional tax should be on real estate and not only on land rent and not uniformbut possibly differing among different types of land as well as among the regions forreasons that we cover in Sect. 8, Conclusions.
2 User charges for infrastructure services
If the objective is efficient use of transportation infrastructure, the charges for itsservices should be determined by the variable costs a user causes according to thepricing principle of short-run marginal costs (Hotelling 1938; Walters 1968; SOU1973:32; Bohm 1974; Andersson and Bohman 1985; Bohman and Andersson 1987).A nearly ideal application of this principle is the pricing of electricity exchangedamong electricity producers and also sold to some big customers on the Nordic PowerBourse (Andersson 1984, 2007). For electricity customers, a two-part tariff is applied,
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containing a price per kilowatt-hour that varies depending on variations in short runmarginal costs among seasons and night and day plus a fixed charge per kilowattin order to cover total costs. Using this tariff the electricity companies discriminateamong customers according to the costs they are causing.
In Sweden, gasoline and diesel taxes may correspond to the prices for electricityper kilowatt-hour, as the gasoline and diesel consumed is roughly correlated to thevariable costs for wear and tear on a road that a car driver causes. By differentiatingthe taxes according to vehicles’ different wear and tear on the roads, discriminationbetween heavy and light vehicles is done. When the capacity of a road is fully occupiedas in rush hours in cities, traffic congestion occurs. Then congestion charges shouldbe used giving the car drivers incentives to consider such effects, as now is the casein Stockholm. Fumes and noise by car traffic are other examples of negative externaleffects on the environment and the climate that motivate environmental charges. Rev-enues from congestion tolls could be used to finance road projects. The Swedish RailAdministration charges the companies for operating the railways. To use the railwaysin an efficient way, short-run marginal costs should determine these charges.
Road tolls for financing road construction have long been used for French motor-ways. A problem with this kind of financing is that big and heavy trucks choose todrive on the old road network Route Nationale instead of on the motorways in orderto escape the tolls. This traffic through cities and villages causes wear and tear onthe streets, congestion and risks for accidents, fumes, noise and vibration that devalueadjacent real estate while at the same time the full capacity of the French motorwaysis not used. Another example of this popular public–private partnership concept thatnowadays has become popular in Sweden is the Arlanda Railway, taking passengersfrom Stockholm to Arlanda, the Stockholm international airport. This railway wasconstructed and is operated by a private company, Arlanda Railway Express, that hasbeen financing the investment with user charges. According to Nilsson et al. (2008)it is not obvious that Arlanda Link Project is a good candidate for a public–privatepartnership because of “the failure to attract coach travelers and car users to an envi-ronmentally preferable mode of transport” (p. 90). The motorway from Stockholm toArlanda is not financed by tolls as the motorways in the south of France. This meansthat tickets for trips on Arlanda Railway are relatively expensive compared to a tripto Arlanda by car or by bus. Therefore, ordinary people choose not to use the rail-way. Consequently, the Arlanda Railway is underutilized. This caused the companyoperating Arlanda Railway to be liquidized and reconstructed.
This is not a surprising outcome for a public–partnership. For the railway to competeon the same conditions as cars and buses, the motorway could have been converted toa toll road. Then some of the traffic on the motorway would have been transferred tothe Arlanda Railway owing to positive cross-price elasticity. But then the utilizationof the motorway would have dropped to an inefficiently low level. Introducing a tollfor the motor traffic arriving at the Arlanda Airport would have been a better alterna-tive. But even then, use of the Arlanda Railway would be low compared to financingthe railway with taxes. Recently, the operating company Arlanda Railway Expressoffered The Greater Stockholm Local Transit Company the possibility to take overfor a yearly fixed amount of money. This would certainly be a much better solution.A third example of financing the costs for construction with user tolls for car traffic is
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the Öresund Bridge between Sweden and Denmark. The time gains could have beenlarger and so the net benefit for the society of the bridge, if the bridge had been financedwith taxes. As the time gains for using the bridge are capitalized in real estate on bothsides of the bridge a regional real estate tax is a financing alternative.
3 Financing roads and railways
In this paper we focus on a particular local public good—the transportation infrastruc-ture. Roads and railways are not only local public goods; they also constitute nationalsystems and in this way are national public goods as well. For example, in California thestate highways are financed by California’s real estate taxes while interstate highwaysare financed by federal taxes. However, the interstate highway system in California ismostly used by the people living in California. There is a similar financing system inSweden, since roads and railways are mostly financed by Sweden’s national taxes butto some extent also by taxes from the municipalities and the counties. Such taxes arenecessary because revenues from user charges are not sufficient to cover total costsowing to decreasing average total costs for local public goods. Thus, the perfect matchasked for in the theory presented above (Oates 1972) does not exist between thoseto whom the benefits accrue on the local level and the tax payers on the national orfederal levels financing the provision of national and interstate highways.
Then how would it be possible to discriminate between the users of a road or rail-way and the non-users? Ideally, a fixed charge or tax should instead be directed onlyto the collective that receives benefits of a road or railway. von Thünen (1826) longago pointed out the connection between transportation costs and values of real estateby demonstrating how differences in distances to a city center contribute to explaindifferences in the values of agricultural land. Alonso (1960) and Mohring (1961)demonstrated similarly how differences in transportation costs contribute to explaindifferences in land values within a city. Investments in a road or railway improve theaccess. There are time gains as well as reduced risks of traffic accidents along withother improvements in the environment. Such gains are capitalized in the values of realestate close to new roads and railways. This connection presents a basis for financingroads and railways by means of real estate taxes. Hotelling (1938) suggested a com-bination of user charges according to the principle of short-run marginal cost pricingplus real estate taxes to cover fixed costs for the transportation infrastructure. Usinglocal or regional real estate taxes plus user charges for short-run marginal costs, it ispossible to discriminate among different collectives of users of roads and railways.
To illustrate the problem of the lack of match between those to whom the benefitsaccrue and those who have to pay most for the provision of the roads and railways letus consider a car driver in the south of Sweden. For this car driver, there are no directlinks between the costs of a new road in the south of Sweden and her/his nationaltaxes. Nor are there any such links between her/his national taxes and the costs for anew road in the north of Sweden, where she/he perhaps will never drive a car. A personin the north of Sweden also contributes with her/his state taxes to finance the road inthe south that she/he perhaps never will use. An argument might be that the burden offinancing will be evened out among regions, since a person from the south contributes
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to finance roads and railways in the north as well. However, national taxes make itimpossible to discriminate among people who use a road and those who do not inthe way the electricity companies discriminate among different customers accordingto their different consumption of electricity using their two-part tariff. Using local orregional real estate taxes plus user charges to cover short-run marginal costs it wouldbe possible to discriminate among different collectives of users of roads and railways.If the Öresund Bridge and the Arlanda Railway were financed with such taxes insteadof with tolls and user charges, there would be more traffic over the bridge and onthe railway owing to the price elasticity. This would have been reflected in greaterincreases in the values of the real estate on both sides of the Öresund Bridge andaround the Arlanda Railway stations. There are links between on the one hand invest-ments in infrastructure and on the other hand real estate taxes on increased values fornearby real estate.
It can be argued that a municipal real estate tax should be used to finance infrastruc-ture, as is the case in OECD-countries and in the USA (Andersson 1993, 1999). Butif such a tax should be used mainly for financing roads and railroads, advantages ofreturns to scale and cooperation are arguments for transferring such a tax to a regionallevel suitable for coordinating road and railway projects. Hochman et al. (1995) sug-gested “the appropriate suppliers of local public goods are metropolitan governmentswhich finance them through user charges and land rent” (1995, p 1224). Transferringthe legal right to tax real estate to a number of large regions in Sweden would make itpossible for politicians at that level to finance investments in infrastructure on their owninstead of being dependent on the national government for financing as now is the case.Then, political representatives of the customers will also have economic incentives tochoose investments worthwhile for their taxpayers (Andersson and Söderberg 2008).
4 Why are so many mega projects that do not generate net benefits chosen?
In the book Mega projects at Risk Professor Bent Flyvbjerg et al. (2003a) and histeam present an analysis of a vast number of infrastructure projects in different partsof the world (see also Bruzelius et al. 2002; Flyvbjerg et al. 2003b). Initial calcula-tions for carrying out 258 projects in the transportation sector were compared to theiractual costs. For 90% of them the costs have increased considerably. Incomes fromthe projects were simultaneously overestimated. These projects were carried out moreor less independently of the cost levels realized. The design of these mega projectscould change quite a bit during their progress for various reasons, such as requestsfor increased security and environmental considerations and can explain some of theincreased costs. Flyvbjerg et al. claim that a further reason is that competition amongdifferent project interests and authorities makes it rational for them to stress the pro-jects value for the society and speak with small letters about the risks for delays andextra costs. If high projected costs are presented, chances to get government-financedprojects are diminished. The people proposing such projects receive the greatest ben-efits while the country’s taxpayers have to pay a big part of the bill. People with vestedinterests have strong incentives to promote the projects, playing down the risks ofextra costs. Flyvbjerg (2007) warns of overoptimistic estimations as basis for projects
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proposed by regional groups with vested interests. He proposes that risks for costsnot initially explicitly estimated and considered should be paid by those who get thebiggest benefits from the projects. Inputs of risk capital from private investors shouldbe stipulated in contracts.
A reason for a government to carry out big, expensive projects that do not generatenet benefits for the country seems to be considerations to its voters in regions importantfor it to stay in power. Then the government’s decisions about transportation projectsare taken more with an eye to maximizing voters than the net benefits of a project.This diminishes financial resources available for smaller projects that do generate netbenefits. When the national government pays a large share of the costs for mega pro-jects, groups of vested interests have strong incentives to lobby for their projects. Suchprojects could be good for a region only paying 25–50% of total costs (Nilsson 2002).Thus, politicians working locally or regionally try to convince the government that itshould pay for a major share of the costs by designating regional roads and railways tobe national. The benefits of an extra SEK 1 billion spent on such projects by nationalfinancing accrues to people in a region that need not to pay for total costs. In everymunicipality or region only costs that they have to finance themselves are counted andcompared with the benefits of a project. Such groups want to start their projects asquickly as possible, because a minister cutting the ceremonial band of a project seemsto be a point of no return. Thus, it looks as if politicians are not able to reconsidera project depending on how costs develop. The bills for extra costs are transferredto the taxpayers. But if total costs are counted, such vast projects very often turn outnot to be profitable for the society as a whole. This type of regional policy should beshut down and other policy measures used (Andersson 2005). Institutional reforms arerequired to create incentives that favor a choice of transportation projects that generatenet benefits. Nilsson (2002) has presented a number of such proposals.
5 Big road and railway projects not generating net benefits
In 2007, the Swedish Government’s expert suggested a traffic package for Stockholmregion at a total cost of SEK 100 billion (Cederskjöld 2007). SEK 50 billion shouldbe allocated to roads as SEK 25 billion to the big motorway “Bypassing Stockholm”(“Förbifart Stockholm”). Nearly as much was to be allocated to new railways, includ-ing SEK 16.3 billion to “City Railway”. The national government will contribute 75%of the total costs. The Stockholm region has to pay only 25% of the total costs for thisproject. This traffic package has met considerable political criticism since the oppos-ing parties in Stockholm want still higher government subsidies for the constructionof public transport facilities.
These huge, expensive traffic projects in the Stockholm region are not the onlyones in the country that are highly questioned; far from it. The former governmentwanted to allocate SEK 100 billion to big railway projects, such as “The City Tunnelof Malmö”, the tunnel through the mountain ridge of Halland, the “Botnia Railway”and “Norrbotnia Railway”. These projects have by far also surpassed the initial costestimations. Thus the costs for the “City Tunnel of Malmö” have doubled since thestart, from SEK 6 billion to SEK 12 billion. The costs for the tunnel through the
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ridge of Halland have increased by 700% since the start! This increase was caused,among other things, by geotechnical difficulties in drilling into a ridge consisting ofloose glacial deposit, along with costs for negative effects on the environment. The“The Botnia Railway” is now calculated to a cost around SEK 20 billion, i.e., morethan double the sum of SEK 8.4 billion presented in the government’s proposition forthis project a decade ago. The “Norrbotnia Railway” is still only a project on paperdecided by the former Swedish government and estimated to cost around SEK 20billion. SIKA (1996), The Parliamentary Auditors (Riksdagens revisorer 2000) andSwedish Rail Administration (Banverket 2003) have in their reports shown that thesebig railway projects are not profitable from the society’s point of view.
6 Regional real estate taxes financing transportation infrastructure
In most OECD countries including the USA, the real estate tax is the main financingsource for municipal infrastructure. The real estate tax was also used at the municipallevel in Sweden before it was transferred to the national level. This transfer meant thatpeople can no longer observe any connection between their payments of such taxesand what they receive back from it in improvements in services from infrastructure.Therefore, people in Sweden look upon the national real estate tax as a tax that makesno sense. Arguments for returning to a situation with a local real estate tax have beenpresented (Andersson 1999, 2005). That could strengthen the incentives for choosingmore efficient alternatives (Mandell 2003).
Using market values for real estate as the basis in determining the real estate taxhas been criticized, since strong increases in such values, particularly in the big citiesduring recent years, have led to quite big increases in real estate taxes. Because of thatowners of single-family houses have become irritated, even if some rules about max-imum levels for the real estate tax levels were introduced to prevent overly dramaticconsequences. Our hypothesis is that home owners would better tolerate a regionalreal estate tax than a national real estate tax when they experience how tax revenuesused for improving roads and railways are capitalized into values of their real estate.Then house owners would be able to see values coming back from such a tax.
Real estate in Sweden has been uniformly taxed on a national level. In 2006, the newGovernment replaced the national real estate tax with something called a municipalreal estate charge. The tax was lowered, particularly in the big cities with high marketvalues but still the tax is uniform for the whole country. Furthermore, it is still thenational government, not the municipalities, that determines the tax rates and how touse the income. Thus, the power over the real estate tax has not been decentralized.
Above, we presented theoretical arguments in favor of the case with the real estatetax as well as the expenditures for transportation infrastructure being determined ona regional rather than on a national level. Therefore, we propose the following simul-taneous transfer from the national government to regions:
• The right to determine the real estate tax rates is transferred from the nationalgovernment to the regions.
• The government’s expenses for roads and railways are also transferred to regions.• Income from regional real estate taxes covers expenses for roads and railways.
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This proposal assumes an earmarking of revenues from regional real estate taxes forroad and railway projects. It also assumes that a reorganization of the country intolarge regions takes place. Third, it assumes a decentralization of the infrastructureplanning and decision-making to such regions.
It is hard for a government to give up its power to finance “gifts” to regions suchas spectacular motorways, railways, and airports, etc. whose voters are importantfor its power base. But savings of billions of Swedish Crowns, SEK, for the soci-ety from better choices of projects as effects of this proposal should be taken intoconsideration when looking at such political advantages. If the regional governmentsthemselves determine the real estate tax, negotiations between the state governmentand the regional governments about traffic packages are not required. Requests fromregional lobbying groups concerning nationally financed investments in roads andrailways will consequently diminish.
Swedish Road Administration and Swedish Rail Administration have divided thecountry into seven and five regions, respectively, for their operative works. In 2007Swedish Rail Administration reorganized by centralizing some tasks. However, theirregional offices are kept in place to perform maintenance, etc. The financing task couldalso be decentralized to such regions. Denmark recently launched a regional reformthat has given new large regions the responsibility for parts of the infrastructure net-work.
If the financing tasks for roads and railways are totally transferred from the cen-tral government to the regions, problems may arise when coordinating the roads andrailways among the different regions considering the reality behind the concepts ofnational roads and railways. In particular, freight traffic is more interregional thanroad passenger traffic. Furthermore, rail projects for interregional high-speed trainsrequire coordination between regions. Thus, a coordinating authority might still berequired on a national level using the present tax base in order to finance a part ofsuch projects with, for instance, a kilometer tax that depends on vehicle wear andtear. Such an authority, Swedish Transport Agency, recently established, is in com-mon use for the planning of roads and railways but could also include such tasks forairports and harbors (Bohm 1974, Chapter 6). Traffic safety, noise and emission reduc-tions should also be taken care of on the national level. Some national governmentmoney should be allocated for such an authority. But instead of a national financing of50–75% of the projects costs a considerably smaller percent might be sufficient. Themain responsibility for decisions should normally be a task for the regional authorities,so those getting most value from the projects also have to pay most of the costs.
Complicated, expensive bridges, tunnels, etc., in the big cities make their costsfor investments in infrastructure high. For instance, the costs to construct a tunnelincluded in “The North Link” in Stockholm are estimated at SEK 1 billion per 100 m.But if the real estate tax is transferred to the Stockholm region, the politicians willreceive sufficient money from the tax to finance their transportation projects on theirown. The values of real estate are high in Stockholm, so rather high incomes can bederived from a real estate tax. Thus, the Stockholm Region would be able to financeprojects like “City Railway” and “Bypassing Stockholm” on their own. Another ques-tion is whether the regional government would still want to do that considering that itsresources might be used in other alternatives. In the north of Sweden the values for real
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estate are usually quite low and consequently the expected incomes from a real estatetax are also low. On the other hand, no such expensive transportation infrastructure isnecessary. Nevertheless, the costs in these regions might be considerable because oflong distances. Therefore, when financing transportation projects with real estate taxesvarious types of real estate as well as the tax rates could be taken under consideration.When the responsibilities for transportation projects are decentralized to the regionallevel, the regions in the north should pay for their own big, expensive railway projects,such as the Norrbotnia Railway. Whether it will still be considered wise to go aheadwith such a project when they themselves have to pay for it without any governmentsubsidies is another question. They might be wise to consider the various alternativeuses for their tax money. In Flyvbjerg et al. (2003b) it is shown that the overspendingin big infrastructure projects is an international phenomenon.
7 Government expenditures for roads and railways and revenues from realestate taxes
When considering a transfer of the expenses for transportation projects and incomesfrom real estate taxes as well as from the central government to the regions, it isimportant to determine how these entities are related to each other for each region,and if any deficits occur, how they can be covered in a politically feasible way. Areorganization of the country into 6–9 big regions has been suggested. But it is not asimple task to delimit optimal regions. And it is far from clear how such a reform canbe carried out. To get an idea of the financial outcome of our proposal for decentral-izing the decision-making for infrastructure projects as well as the real estate taxesto such big regions we have to make an assumption about such reorganization. Thus,we have chosen to divide the country into the following six big regions. Then, we canpresent some estimations concerning how the state expenses for roads and railwaystransferred to these regions could be covered by real estate taxes also transferred tothem:
The Scanian Provinces, Western Gothia, Eastern Gothia, Lake Mälar Valley,Southern Norrland, Northern Norrland.
This division of the country into big regions reminds to a great extent of existingdivisions used by the two state authorities in this field for their operative productionunits: Swedish Road Administration and Swedish Rail Administration. They havedivided the country into seven and five big regions, respectively. We do not claimthat this is the optimal design of the regions; it is just an example that permits us tocalculate the financial consequences of such an order. Table 1 shows how the expensesfor roads and railways have been divided among these six regions for 2006 and forcomparison the respective regional contributions to the state real estate taxes for thesame year.
Income from real estate taxes of SEK 24.9 billion in 2006 covers the total costsfor road and railway works. The Lake Mälar Valley receives quite a big surplus ofSEK 5.3. billion while the region Scanian Provinces will get a deficit of SEK 2.1billion and the two northern regions of Sweden deficits of SEK 1.8 billion and SEK1.8 billion, respectively. By decreasing the government’s general subsidies the surplus
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for the Lake Mälar Valley could be regulated while the state’s general subsidies couldbe increased to cover deficits for the northern regions.
Another possibility to cover the deficits for the northern regions is to increasetheir real estate taxes. More generally, a regional real estate tax could be widened toembrace all types of real estate. Furthermore, the tax rate could vary over regions, andover property types. The current state real estate tax rate varies for different types ofreal estate and several types of real estate are not taxed at all, including agriculturaland forestry real estate. Table 1 shows the hypothetical tax incomes from an assumedwidened real estate tax are presented for 2006. The tax rate is assumed to be uniformover property types within regions, but vary regionally. The assumed tax rates are thelowest necessary to make the tax revenue for each region cover the regional expensesfor transportation projects.
The tax rate will become lower than 1% for the Scanian Provinces, Western Götalandoch Eastern Götaland. For the Lake Mälar Valley it will become 0.4%, i.e., very muchlower than 1%. For the two northern regions it will be higher than 1%. But if thesame tax rate for the electricity production facilities today is applied, i.e., 2.2%, thetax rate for all other types of real estate will become 0.8% for the South of Norrlandand 1.0% for the North of Norrland. However, the expenses for the big regions couldbe chosen at higher or lower levels. The tax rates could be chosen according to whatthe regional governments find appropriate. It will certainly be important to make anattempt to neutralize the effects on the budgets for all the parties involved in order tomake this type of reform politically feasible. Thus, the general state subsidies could beadapted to keep the total tax burden unchanged. The gains from investments in roadsand railways will be capitalized in the values of real estate. That could motivate theuse of regional real estate taxes as a financing instrument. The improvements in theforest road network that will be capitalized in the forest industry are mainly financedby the forest industry. However, the value of forests will also increase with publiclyfinanced improvements in main roads and railways, since the timber has to be trans-ported further on (Anderstig 1993, p 55, note 11). It may be harder to find increases inthe value of electricity production plants, since electricity is transferred by a specialdistribution system.
8 Conclusions
In this paper we propose a new regional order for the infrastructure policy in Sweden.We do this because the present regional distribution of benefits differs widely fromthat of tax payments. This means that the new regional order we propose can providechanges in the transportation sector at lower costs. In the present system of financ-ing transportation projects at the national government level, politicians are tempted tocarry out spectacular, oversized, expensive transportation projects that do not generatenet benefits for the society, so there will be a waste of resources. Such projects couldbe worthwhile for a region, when it needs to pay only part of the total costs whilethe tax payers from the whole country have to finance the rest of the costs with theirgovernment taxes. Such projects are carried out at the opportunity cost of smaller prof-itable projects that cannot be realized. Such a waste of resources can go on because
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123
Financing roads and railways with decentralized real estate taxes 851
of the impossibility using national taxes to discriminate among customers of a roador railway and those who do not get any benefits from it. Regional real estate taxeswould make it possible to discriminate among different collectives of infrastructureusers. Then the customers’ political representatives will have stronger incentives tocarry out investments worthwhile for the taxpayers. The values of such investmentsare capitalized into increases in the values of real estate close to the roads and railwaystations. So, regional real estate taxes provide more straight links than national taxesto investments in roads and railways. Returns to scale and coordination advantagesmake it rational in letting authorities on a regional level take care of these tasks. Theproposal is summarized as follows:
• The Government’s expenditures for transportation projects are transferred toregions.
• The legal right to tax real estate is transferred to regions and the incomes are usedto cover the expenditures for transportation projects.
• Each regional government determines its real estate tax rate.
Anderstig (1993) suggested a uniform regional tax on land values for all types of land.We have suggested that a tax on the regional level should still be on the total value ofreal estate, not only on land rent. The rationale for that is that in most cases it is veryhard to distinguish clearly between values for construction and for land. Besides thetax rate need no longer be uniform for the different regions. It should mainly be upto the regional authorities to determine their own tax rates according to their differentneeds to cover expenditures for their infrastructure, maybe within some limits.
National transportation authorities are still required for several reasons. In partic-ular, some freight traffic is interregional. Also railways for high-speed trains requirenowadays a coordinating authority on a national level between regions, based on thepresent national tax base for financing a part of such projects. But instead of financing50–75% of the costs for such projects with national taxes, as now is the case, a con-siderably smaller percentage could decrease the actual overspending in big projects.
We have provided an example in which the country has been divided into six regions.The aim of this is to be able to calculate the financial consequences for the regions in adecentralized transportation planning system. We find that for 2006 regional real estatetaxes could cover the state’s expenses transferred to the big regions with the exceptionof the regions in the south and the north of Sweden. To cover deficits for these regionsregional real estate taxes could be increased. If a regional real estate tax is applied toall types of real estate and varied among the different big regions according to what isrequired to cover the expenses it will vary between 0.4 (for Lake Mälar Valley) and 1.3(for Northern Norrland). Alternatively, the deficits could be covered by regulation ofthe general national subsidies to municipalities and counties. The levels of expensesfor the different big regions could be higher or lower depending on the regional gov-ernments’ choice. The levels of the tax rates are chosen according to what a regionalgovernment finds appropriate. To make such a reform politically feasible, it will beimportant to neutralize the effects on the budgets for all parties involved. The goalsof income distribution and regional development could be taken care of by adaptinggeneral subsidies, so the total tax burden for the different regions will not be changed.The decentralized transportation planning system proposed requires building up the
123
852 R. Andersson, B. Söderberg
competence of the staff in each region. However, competent consultants who can, forinstance, carry out cost-benefit analyses are available in the existing planning systemat the national level and will certainly be so also for the regions’ planning authorities.This new regional order for the transportation infrastructure policy in Sweden willprovide stronger incentives for economizing with the society’s resources. Billions ofSwedish Crowns now spent on spectacular, expensive projects that do not generatenet benefits for society could be saved and instead be spent on projects that generatebenefits.
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