The Gas Tax Revisited: A Guest Post


It would seem to be a fantastic time to raise gas taxes right now: while the economic climate is so dire that all other tax hikes have been shelved (even the high-earner income-tax increase that Obama pushed during his campaign), gas prices have fallen so far in recent weeks that even an outrageously high per-gallon tax wouldn’t hurt much right now. (It’d be kind of like a SMarT Plan in reverse.) But as with all tax matters, things aren’t so simple.


Eric A. Morris is a researcher at U.C.L.A.’s Institute of Transportation Studies, concentrating on a vast swath of transportation issues including history, economics, and management. He has agreed to weigh in here on the gas tax, a subject that has turned up a few times on this blog. Enjoy.

No Taxation Without Internalization
By Eric A. Morris
A Guest Post

There may be no such thing as a good tax, but if there is, it may well be the levy on gasoline. It is simple to administer and collect, it is difficult for users to avoid, it encourages fuel economy, in absolute terms, it falls more heavily on the wealthy (who tend to own more cars and drive more miles), and it puts the tax burden where it belongs: on the users of the transportation system.

Moreover, it internalizes externalities. Autos produce a number of side effects whose costs are borne by others, not the driver. These include air and water pollution, damage to roadways, harm to people and property from crashes, and congestion costs (delay) that motorists inflict on each other.

Economists generally encourage the internalization of externalities, so that actors pay the full social costs, not just the private costs, of their activities. This means the socially optimal quantity of a good will be produced.

In the case of the gas tax, internalization would mean drivers pay the full costs of the harm, such as delay, that they inflict on others. This would raise the cost of travel, meaning fewer and shorter trips.

Counting up the true monetary cost of the auto’s externalities is a very difficult proposition, and fuel taxes internalize some of those externalities (pollution) better than others (congestion). But Dubner and Levitt have presented some numbers here. Very roughly, we find that internalizing the auto’s externalities would require a gas-tax hike of around $2 per gallon.

Yeah, like that’s going to happen. Despite its many charms, the fuel tax is perhaps one of the most resented in our society. If, at a time of concern over global warming, a purported environmentalist like John McCain advocated a gas-tax “holiday,” fuel-tax fans know they’re in trouble.

The irony is that even as the fuel tax is increasingly perceived as a burden, its true bite has been slowly dropping over time. According to Brian Taylor at U.C.L.A.’s Institute of Transportation Studies, California’s fuel tax would have to be increased by about a dollar a gallon to return to the real per-mile rate in effect in the 1950’s.

The fuel tax is atrophying because it is not indexed to inflation, because fuel economy has improved (though this is clearly a good thing in other ways), and because elected officials lack the political will to vote for frequent rate increases. In fact, they have found a rather puzzling solution to the problem: subsidize automakers and farmers to produce fuels and vehicles that will reduce gasoline use, while at the same time letting the gas tax wither, giving consumers a financial incentive to increase gasoline use.

Transportation improvements are increasingly paid for through hikes in sales taxes, which have none of the gas tax’s charms: they are regressive and are detached from use of the transportation system (none of those nifty internalization effects). From an economist’s perspective, society is actually regressing toward an even more inefficient outcome.

What’s responsible for the gas tax’s P.R. problems? True, the tax is a financial burden, but in the big picture, spending on fuel is a very small percentage of household expenditures (according to the Consumer Expenditure Survey, less than 5 percent).

Moreover, consumers in many nations that are considerably less wealthy than the U.S. pay far higher fuel taxes. The total levy in Britain approaches $4 per gallon, as opposed to a national average rate of around 50 cents here — and British civilization is not crashing to the ground. (On the other hand, over 40 nations, largely in the developing world, actually subsidize fuel. This seems like questionable public policy: poor nations devote precious resources to encouraging comparatively wealthy drivers to congest the roads and foul the air.)

Finally, while voters vehemently oppose fuel-tax increases, they seem happy enough to vote those sales-tax hikes on themselves (we just passed one in Los Angeles County).

Perhaps there are some peculiar psychological dynamics at work. A half-cent increase in the sales tax sounds inconsequentially small, while a five- to ten-cent increase in the gas tax (which, depending on the state, would produce around the same amount of revenue) sounds more onerous. Obviously, the sales tax falls on a much broader base, but the vast majority of voters are not inclined to perform this mental calculus.

Another issue may be that the gas price is perhaps the single most visible price in our economy. No other industry posts large and ubiquitous signs throughout cities that sear its prices into our brains. It’s a bit of a game for bored drivers to be on the lookout for cheap gas and to note every fluctuation in prices.

Moreover, gas prices are quite volatile, making the “check out the latest gas price” diversion even more exciting. Thus increases in gas prices are big news, while if the price of a Big Mac were to rise 10 cents, relatively few would even notice.

Resistance to the gas tax has caused problems beyond the externalities issue. The gradual sunset of the revenue stream has left state departments of transportation scrambling to maintain the current transportation system, let alone expand it. Thus there is a movement toward alternate forms of revenue generation.

Early experiments with variable tolling (highway tolls are set according to congestion levels) have been promising. This may be combined with privatization (private firms build/operate toll roads), which is getting serious discussion and has even been put into effect in a few cities.

Few relish the thought of paying tolls and many are suspicious of private-sector encroachment into what has traditionally been a public responsibility. But since we are unwilling to tax fuel more heavily, this path may be inevitable.

If this situation doesn’t appeal to you, don’t worry, there is hope: you can always move to Europe.

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  1. B K Ray says:

    It does seem like the right thing to do and at the right time. Coming off of very high prices in the we have learned to survive them and gas should have always been prohitively taxed.

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  2. PaulK says:

    This seems more regressive than you admit. More middle and lower-middle income drivers have longer commutes. I agree that wealthier people may have more cars and/or more gas guzzling cars, but I do not agree that the wealthy would be more affected by this since there is no evidence the wealthy have longer by-car commutes. Middle and lower-middle would tend to have to live where they can afford and work where there jobs. So, gas taxes will hit harder.

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  3. Mark B says:

    The main problem with a substantial tax increase to fuel tax is that other taxes for middle-income families are likely to stay the same. A higher fuel tax will mean a higher government net take.

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  4. Valpey says:

    The central problem in my view, which you identify, is that it is unpopular to legislate tax increases. In addition to the non-rational unpopularity of such a tax which you cite, we might call this an unintended consequence of the Electoral College and the disproportionate political power that rural states have (places where driving greater distances is more necessary to more citizens).

    What we ought to put in place is a variable federal gas tax rate which is set according to the economic needs of the day in a way similar to how the Fed controls interest rates – the goal being to keep the economy moving while meeting revenue objectives.

    Concessions could be made to rural states in such a way as to negate the overall tax burden to most residents. Alternatively, adoption of the Amar Plan (a.k.a. the National Popular Vote Interstate Compact) is called for.

    Pigovian taxation need and will be a cental weapon in the fight against global warming and congestion relief

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  5. PaulK says:

    Other problem is the externalities of pollution and crashes and congestion would be too broad a brush. Newer cars pollute less, and not just relative to amount of gas used. So, you are overcharging for that for many drivers (or undercharging for others). Similarly crashes: the tax is not indexed to people’s likelihood of crashing and the damage they would do if they did crash (small cars do less damage, some locations have a much lower incident of crashes, etc). For congestion, you would need a discount for people who maximize the number of people in their vehicle, since they are reducing congestion if they car pool, etc. Likewise, people who travel underutilized roads should get a tax break on the congestion tax part.
    That is the problem with these types of broad stroke use taxes – they do not really do what you are looking for. Toll roads likely cover congestion charges. You could add a registration fee based on pollution index of the vehicle times miles driven in that year (although to be fair, stop/go driving has different values, lots of cold starts means worse pollution). Another registration fee on number of accidents in the last year. Another registration fee on number of times stalled on a major commute area (at commute time, etc).

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  6. Henry V says:

    A small point: Do we want the same per-mile tax rate that we had in 1950? I would suspect that the per mile externality is lower now that in 1950 with respect to emissions (maybe not congestion).

    It doesn’t seem like a relevant comparison.

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  7. Daniel says:

    Raise the taxes by $1/gallon and fully rebate them (would work to almost $500 per each American, including children). The tax, even rebated, would help crash the crude oil prices to $30-35/barrel short term (and would prevent oil from rallying in 2009-10 as the global economy recovers), so that the final increase in gasoline prices will be far smaller than $1.

    Even a family of 4 (with a $2000 rebate) would likely benefit from the tax+rebate scheme. The only people who will get hurt will be single men driving pickup trucks and such. Does the Democratic party care about their votes?

    It will also help us start weaning ourselves off our oil addiction and force American automakers (as a condition of the federal bailout) to abandon non-hybrid cars entirely by the end of the next decade. I’m serious. I hope 100% of all new cars made and sold in the US in 2019 will be hybrids (or even full electric, if new battery technologies prove viable).

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  8. Mike says:

    My problem with the Gas tax is that you’re trusting the government to figure out all of these “externalities” and put a price on it. I don’t trust the government with anything, but even if it did, they’re surely not smart enough to get it right. More taxes are always bad. I’d rather get rid of any subsides in the oil business and let the prices reflect that. It’s silly to have subsidies and taxes on the same thing.

    Another note that people often don’t think of: The profit per gallon of gas by the “big evil oil companies” is about 10 cents per gallon. Federal gas tax alone is 18.4 cents and the states vary from about 10 to 30 cents. So the government made makes from gas than big oil does from all of those “windfall profits” that everyone is unhappy about. More taxes will skew that even more!

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