Tax The Other Guy’s Drivers

E-Z Pass Transponder

Politicians like to spend money, but they generally don’t like to take from the people they have to face at the polls. This is why taxes on hotel rooms and rental cars are so high.

One of the latest instances of this “tax the other guy’s voters” strategy is the tactic of charging higher highway tolls to out-of-state drivers than to local residents. But this approach has a legal Achilles’ heel: The Constitution grants only Congress the power to regulate interstate commerce. Past efforts to favor locals over out-of-staters have frequently been overturned by the courts.

For instance, in 1985 a federal appeals court struck down New York’s attempt to give state vineyards a leg up by permitting the sale of wine coolers in supermarkets only if the products contained New York grapes. Wine coolers made with out-of-state grapes were relegated to licensed package stores. The court called the law “clearly protectionist” and unconstitutional. Of course, then-Gov. Mario Cuomo and lawmakers knew the law was unconstitutional when they passed it, but it scored them political points with New York’s wine industry. Protectionist wine laws made it to court again in 2005, when a U.S. Supreme Court decision struck down laws in 24 states barring interstate wine shipments but allowing shipments within state borders.

It is not always legally objectionable to offer state residents a better deal than nonresidents. Consider the difference between in-state and out-of-state tuition fees at public universities, for instance. But convincing a court that such differentiation is constitutional is not easy.

The highway toll system that dings nonresidents grew out of states trying to encourage drivers to use electronic highway toll payment methods, rather than cash. E-ZPass, which operates in 16 states, is one of the largest electronic toll payment systems in the country. Nearly 80 percent of drivers nationwide who use toll roads have an E-ZPass, and many states that participate offer lower fares for E-ZPass users as a means to encourage drivers to sign up. Even as some highways have gone cashless, transponders are usually still discounted compared to “toll-by-plate” alternatives.

But this system opened the door for dinging out-of-towners, even if they had a transponder. Because the E-ZPass system operates across state lines, part of its appeal is making interstate travel simpler. But, as Renu Zaretsky observed in a column for the Tax Policy Center, states including Massachusetts, New Hampshire and Rhode Island charge higher tolls for drivers whose E-ZPass was issued by another state. Depending on the state’s system, this may come in the form of a lesser discount than residents receive, or no discount at all compared to drivers without an E-ZPass.

Such an arrangement seems like a classic instance of politicians targeting people who are in no position to vote them out of office. Still, states are nervous about this gambit. When the Boston Globe questioned the constitutionality of Massachusetts’ toll structure favoring resident drivers, the state modified the system. Now everyone pays the same rate, regardless of their residency, as long as Massachusetts issued their E-ZPass transponder. Since a New Yorker or a New Hampshirite is perfectly free to obtain a Massachusetts E-ZPass, the state officials reason that this system should cause no constitutional problem.

They may well be right. But there is a practical problem with this approach, even if there is not a legal one. Both New Hampshire and New York issue their own E-ZPasses. They too offer lower rates for passes issued through their own programs. This means that out-of-state drivers must either accept the higher tolls or acquire an array of transponders for the various states whose roads they may use.

Picture what will happen when a New York driver approaching a Massachusetts toll booth suddenly realizes he needs to swap transponders to avoid being charged the higher rate. While maneuvering a two-ton vehicle at 65 miles per hour, the driver has to remove the New York E-ZPass, put it in a foil-lined container to prevent its being charged, fish the Massachusetts transponder out of a different foil-lined container and place it on the windshield before reaching the toll booth. Obviously a great idea. Yet this is the scenario promoted by two states that don’t allow handheld cellphone use while driving because of the dangers posed by distracted drivers.

To add insult to injury, tolls collected by state agencies are not even the sole source of revenue that maintains these highways. All drivers pay federal highway taxes, which are used to maintain the New York State Thruway, the Massachusetts Turnpike and similar state-run toll facilities. So the out-of-state driver has already contributed to the costs of maintaining the road he’s charged extra for the privilege of using.

Congress, or possibly the administration alone, could address this problem by docking federal dollars from states that pick on nonresidents this way. As a Floridian, whose state uses a different toll system that operates with simple windshield stickers sold at the same price to everyone, I like this idea. I like it even more when I drive one of my Florida cars back to the Northeast using my New York-issued E-ZPass and find myself paying higher tolls almost everywhere I go along the way.

About Larry M. Elkin 553 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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