The Gas Tax Revisited: A Guest Post

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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.

INSERT DESCRIPTIONEric A. Morris

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.


B K Ray

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.

PaulK

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.

Mark B

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.

Valpey

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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PaulK

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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Henry V

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.

Daniel

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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Mike

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!

Bobby G

The last sentence in the post is written as a half-joke, I imagine, but is a key, often-overlooked fact about domestic economic policy: it is not impossible for taxpayers to escape taxes completely by leaving the country. If a country makes it economically rational to leave the country (by imposing high enough taxes so that the cost of moving abroad becomes cheaper than paying taxes), people will do so!

It's an important concern when, say, increasing taxes on the rich is seen as an acceptable solution to a desire to increase government spending. If we squeeze too hard, the wealthy will leave the country, and instead of getting an additional 5% of their income (made up number), we'll lose the 50-60% they're already paying (not made up). It's a dangerous game, and one that the media never talks about... I hope at least the politicians think about it every once in a while.

Adam

I think PaulK is wrong in assuming that poor people live farther from their work. Mansions don't exactly get built in mixed use zones next to factories and office buildings. As a generalization, rich people commute to the suburbs.

People who have specialized employment skills are less likely to find their equally specialized job right in their neighborhood. Bank tellers, fast food workers, and janitors are less likely to commute 100 miles to a nearby state than CEOs are.

MikeM

What about freight, though? Wouldn't this tax raise the cost of all consumer goods? Can we exempt diesel fuel or something?

David MacLean

We need an increase in the gas tax now, before prices start rising again. An increase of 20 cents every two months to a ceiling of $1 dollar additional tax should be imposed beginning in January. The tax should be directly invested in Obama's recovery plan for alternative energy (40%), mass transit (20%), fuel efficiency incentives to the industry (10%). and 10% to states for local infrastructure. Ten (10) percent could be returned to small businesses with less than 500,000 gross as a tax credit against 5% of their itemized deductable mileage costs. Obama has said we will all need to sacrifice. Thsi will make us better off by checking demand , fostering transportation alternatives and reinvesting in America.

David MacLean

silby

Very well put. Seems to me the logical conclusion would be increase in resources allocated to public transportation.

Tim

Well, this will seem odd coming from a car dealer, but I have reached the conclusion that we SHOULD have an additional federal gas tax, preferably one that would float, generating more revenue as the price falls, and tapering off as the price reaches painful levels.

Here's why: in all the debate about big 3 rescue, one oftens hears bromides recited about Detroit not building fuel efficient vehicles. What Detroit builds, in fact, is what it thinks people will BUY, and big stuff IS what Americans wanted to buy until gas prices spiked. Hybrid sales amounted to a mere 2.5% of light vehicle sales YTD through July 2008, which is an unbeleivable- but absolute- fact. Stated preference vs. expressed preference rears its ugly head.

A gas tax, ironically, would assure Detroit that demand for more fuel efficient vehicles exist and remain in time for them to make the neccessary investments to retool, etc., while also generating considerable revenue that could be used to offset the costs of bailing them out.

People so often forget that a government mandate to BUILD more fuel efficient vehicles does not mean that people will acutally BUY them- (I wonder if we could talk the government into buying them if the public doesn't?)

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KarenS

Higher fuel prices = higher prices for everything that has to be moved from point A to point B. Which means higher food prices. Which means that a fuel tax is, indeed, a regressive tax.

PaulK

@Adam, note that I said middle and lower-middle income and not poor. The very poor are more likely to live in high density areas and take menial jobs near where they live (or have to take a bus). The middle income are more likely to have families and so more likely to live in neighborhoods, which are generally not where the jobs are. Public transportation is very hit and miss and certainly has not kept up well during the housing boom times; worse, most suburbs and exurbs are not well designed for public transportation since the layout does not make it easy to get to a central spot. Urban areas use grids and high density housing to make the access to central public transport spots easier.
I am not saying wealthy CEOs do not have commutes, but I am saying that they are not likely disproportionately taxed, as the author suggested.

Bobby G

PaulK brings up some very good points in post #5. However, I still feel like a relatively small increase in gas taxes would net more positive rammifications than negative ones, if only in the structure to reduce incentives to consume gasoline. Sure, it wouldn't be a perfectly-indexed externality-internalizing move, but I'm fairly confident that, across the board, the overall externality could do with some small internalizing.

As for the earlier mention of low- and middle-class workers being hit harder by an increased gas tax, I'm not exactly sure that is a bad thing. After all, from the perspective of a utilitarian trying to reduce gas consumption and pollution and traffic congestion, aren't these people thus the largest part of the problem? Shouldn't we be encouraging an incentive change the strongest for that demographic? At the very least, even if they are affected the most, wouldn't that promote carpooling, if a more preferable alternative transportation is not available? I don't see why they should be exempt from such a tax. If they're a part of the problem, why can't they be part of the solution?

I think in the end the free market can easily solve any of the second-hand incentive changes brought on by a small increase in gas-tax. I also think what another poster said has some merit: a good time to do this would be today, when gas prices are at almost "unbelievable" lows.

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Gary

BobbyG,

That's a brilliant idea in theory... but the in order to avoid US taxation, you must relinquish US Citizenship (since a US citizen must pay US income taxes, regardless of where their income is earned, or what country they call home). Additionally, other countries make it rather difficult to obtain citizenship, though it can be obtained quickly from a few sketchier nations. The State Department generally will not allow you to relinquish citizenship if you're not a citizen of a foreign nation (so as to prevent people from being citizens of no country, and thus, have no where to deport them to).

Of course, you could just leave the country and stop paying the taxes, but then, if you ever come back, you're guilty of tax evasion... which isn't a desirable situation either.

Its not as easy as just moving to the Caymans because they have no income tax... this or course only applies to the very wealthy. For those in the lower income brackets, moving turns out not to matter as much, because of the foreign source income rules in place...

In summary... the costs of NOT paying US taxes are quite high... so you'd have to have a boatload of income to make it worth your while.

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Curt Shannon

Funny that this topic is coming up again now. Almost 30 years ago John Anderson, an independent presidential candidate, had the audacity to suggest 50-cent tax hike for gasoline to help wean us off foreign oil. Here's what he said, according to a newspaper article from 1979:

"... Higher gasoline taxes in this country are unavoidable. We have no choice. Either we tax ourselves by means of a gasoline tax, or OPEC will tax us in the form of higher and higher prices for crude oil."

Anderson started off pulling Perot-like numbers in pre-election polls, but tallied only 7% in November. The gas tax proposal was thought to be a major reason for him losing support. Personally, I thought it was a great idea then and is a great idea now - it's a shame we've lost 30 years wandering in the desert.

Daniel

Actually, for someone moving to a zero-tax area like the Caymans or Dubai, it would be easy to legally structure the compensation package so that the person would face almost no US income taxation. A standard foreign deduction (around $100,000), a very generous expense account, a company car, free housing and such can reduce US income taxes on $300,000 annual income to almost zero.

If the Democrats uncap Social Security and raise income taxes to 40%, someone living in California or New York would face potential marginal income tax of 65%. No matter how much one loves the Silicon Valley and Manhattan, it would be very tempting for many highly-compensated employees to ask their companies to relocate them to their Dubai offices and rearrange their compensation package. It would be more difficult to attract foreign talent to the US, as well.

So yes, higher income taxes in the US can and WILL drive some (or many, if taxes get high enouch) highly compensated employees abroad. The only question is, how badly will it damage the domestic economy?

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