An End to the Gas Tax?

(Photo: Beatrice Murch)

When you are a transportation professor, it is your privilege to hear a lot of zany ideas. I have heard about a scheme to create a fleet of intercontinental freight zeppelins (actually, this may not be quite as zany as it sounds). Fifty years after The Jetsons, there are still dogged advocates of flying cars. The most common thing I hear is that we should attack congestion by building monorails down the medians of the freeways. I have no idea how the monorail has bewitched our citizenry (too many trips to Disneyland?), or what precisely is so offensive about the idea of trains that run on two rails, but it’s amazing how beloved the monorail is, so much so that an episode of the Simpsons parodied it. Monorail! Monorail!

Because I love hearing people’s ideas and have no desire to be rude, I engage in an exacting regimen of meditation, yoga, and deep breathing so I can exhibit the equanimity of a lama when hearing goofy ideas. But occasionally something comes up that none of my mantras or self-hypnosis can handle.

To my mind, Governor Bob McDonnell has fashioned one such idea. He is proposing eliminating the state’s gas tax.

At the same time, his proposal calls for funding transportation by raising the sales tax from 5 to 5.8 percent. According to McDonnell, this will be revenue neutral to start, though by 2018 the sales tax hike should bring in $180m more dollars. More money would be raised by increasing the vehicle registration fee by $15 and levying a $100 fee on drivers of hybrids and other alternative-fuel vehicles. He would also increase the share of sales taxes dedicated to transportation.

To be fair, let’s look at the pluses. As I’ve written, the gas tax is a dying source of revenue because it is almost never indexed to inflation, is very rarely raised for fear of the wrath of voters, and will be eviscerated by coming improvements in fuel economy and alternate fuels. Something will have to be done to pay for transportation, and a shift to the use of sales taxes would put highway finance on a more dependable base.

Politically, the idea has one major merit: voters have consistently demonstrated greater antipathy to raising the gas tax than the sales tax. In fact, when sales tax hikes are pitched as being dedicated to popular transportation projects, voters across the country have approved them at the ballot box. It’s unclear why voters seem to prefer higher sales taxes over gas taxes: perhaps it’s because a half cent sales tax increase just sounds like less than a five cent gas tax increase, although of course this may not be true since the former falls on a much broader base. In any event, McDonnell’s proposal may be a politically feasible way to raise badly needed transportation funds.

The downsides of this? What’s the length limit for a readable blog piece?

McDonnell proposes to decouple use of the transportation system from taxation to pay for it. In essence, this means raising taxes on those who drive little—or not at all—to subsidize those who drive a lot. This is a disturbing idea from an equity perspective, since unsurprisingly the wealthy are far more likely to own cars and drive lots of miles than the poor. The very poorest, of course, are unlikely to even own autos. Moreover, since the wealthy are able to save more of their income than the poor, sales taxes are regressive, with low-income individuals actually paying a higher share of their income than the better-off.

This proposal is also troubling from the perspective of economic efficiency. The obvious reason is that it no longer provides a behavioral signal to discourage driving. Don’t get me wrong, auto travel has tremendous individual benefits, but as I’ve written in the past, collectively we overindulge in it because drivers create all sorts of costs that are borne by society and for which they don’t directly pay (e.g. pollution, congestion, much of the cost of accidents, and road damage). Slap a few curves on a graph, and it’s easy to see that society would be better off if we factored these into the price of driving.

Ian Parry and Kenneth Small wrote a paper a few years ago where they attempted to calculate what America’s optimal gas tax should be, given these externality problems. They conclude that, in 2000 dollars, each gallon of gas consumed in the U.S. creates 24 cents in pollution costs (even using a very conservative estimate for the cost of CO2 emissions), 32 cents in congestion costs, and 27 cents in accident costs not borne by the driver. The authors conclude U.S. gas taxes should be about $1/gallon, more than twice what they are now.

It should be noted that the gas tax is not the ideal way to address these externalities; as Parry and Small point out, it is a blunt instrument for dealing with congestion since it does not fall on those who create the most congestion by driving on the most congested roads. Direct tolling on the most in-demand facilities would work better. Moreover, some of the positive effects on road wear, accidents, and congestion would be lost because consumers can and do respond to increased gas taxes not only by driving less but by driving more fuel-efficient vehicles.

This brings us to the most curious aspect of McDonnell’s proposal. It is true that more fuel-efficient vehicles, particularly those which run on alternate power sources like electricity, are eroding the gas tax take and will do so dramatically in the near future. From the perspective of the environment, it is not a bad thing that people are driving greener cars. However, a Nissan Leaf driver is out there creating congestion and accidents and wearing out the roads, without paying for it, and perhaps he should in some form.

But not only does McDonnell’s proposal add a surcharge for hybrids and EVs, it eliminates the state gas tax simultaneously. How would this affect a light-driving Prius owner versus a Range Rover driver who logs twice the miles? By my back-of-the-envelope calculation, the Prius owner’s savings in sales taxes on gas are dwarfed by the annual hybrid fee. In fact, the thirsty Range Rover would have to be driven about 90,000 miles a year to make it balance out. Do we really want to be implementing a tax policy that forces the Prius owner to pay for the Range Rover’s travel?

So what’s the solution? Most transportation experts agree we should be looking at “first-best” policies like tolling of congested facilities, or a general tax on miles traveled. I have some doubts about the political feasibility of these, particularly the latter: if we have trouble getting the public to accept small gas tax increases, will we be any more successful at persuading them to agree to new and more invasive forms of pricing? Also, both of these methods will cost far more to administer than the gas tax, which is extremely simple and cost-effective to collect.

This brings us to the most sensible idea from my perspective. Perhaps sales taxes or other forms of general revenue may be the future of transportation spending. But for now, while the gas tax may be in terminal decline, there is no reason for us to practice euthanasia. Let’s hike, not lower, it while we explore new forms of finance. This doesn’t seem unreasonable since Virginia, for example, it is bringing in 45 percent less in real terms than it was when the gas tax was last increased 27 years ago.

Ultimately, doesn’t it make more sense to tax things we don’t want—like excessive driving and poor fuel-economy—as opposed to taxing general spending, which, given current economic conditions, we’re trying to promote with ultra-low interest rates?

Bob McDonnell, have pity. Please retract this proposal and stay away from the other governors at the annual Governor’s Association cookout. Let’s follow in the path of that well-known leftie communist sympathizer Ronald Reagan, who saw the gas tax not as a tax but as a user’s fee and signed an increase into law. And please free me to focus my patience on tolerating other daft proposals like crisscrossing our cities with networks of subterranean toll tunnels—oh wait, that’s my daft proposal, and it might not be as daft as it seems. More on it in another post.

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  1. Ken says:

    A couple thoughts:
    1) On trains (mentioned by others), in the Chicago area, at least, the trains during rush hour to/from the city are packed. It’s only off-peak Metra (Chicago area commuter train system) and longer routes via Amtrak that aren’t at a high utilization rate, so the per-passenger cost isn’t being supplemented by society in the form of other taxes.

    In the Northeast/East Coast, where large cities are closer to one another, not only are commuter systems such as D.C.’s Metro packed during peak hours, but so are the Amtrak routes to other cities.

    2) Since part of the analysis in the article alludes to how palatable a tax is (how easily it can be passed into law or not passed), and since it makes sense to reduce congestion by taxing the most trafficked roads more than the lesser traveled ones, why not rely more on the I-Pass or EZ-Pass systems. These systems exist in the more metropolitan areas, where congestion, pollution, etc. are higher, and the road ‘users’ are less likely to be opposed to a ‘toll’ increase than to a ‘tax’ increase, and psychologically, I would think it would be even easier to implement on these automated toll systems than in cases where coins actually need to be tossed into a toll booth bucket, or where a tax is shown being added onto a sales receipt or a tax being taken out of a paycheck.

    By increasing the tolls, where automated ‘PASS’ systems are in place, there’s no increase in congestion, there’s still an incentive to reduce congestion and pollution, yet the incentive is still there for the Prius/hybrid buyer/owner who wants to pollute less (he/she isn’t paying the same flat $100 ‘use fee’ or whatever as the Range Rover driver.) Sure, the RR driver is still contributing more to pollution and more to the wear/tear on the roads, but so long as the gas tax is retained, his/her ‘use tax’ of gas/roads will be higher than someone driving a more efficient vehicle (resulting in the purchase of less gas and paying of less in gas tax.)

    Even in Virginia, they have EZ-Pass. It’s in the areas that are most congested (The Beltway), where the motorists are most able to handle the fee increase and who are going to benefit most from well-maintained roads. I’m not sure why their Gov. McDonnell doesn’t propose a toll rate hike instead of any kind of tax or fee. People don’t feel them as much, since they’re automated tolls, and the money can go directly back into the transportation system.

    Ah… but there’s the catch. By pitching this sales tax increase as a ‘revenue neutral’ killing of the gas tax, he can somehow come off looking like he eliminated taxes and run as the guy who killed the gas tax (even though he raised the sales tax), while also forcing the poor to pay a larger share as % of income, and while also having more flexibility in the state budget later to spend that sales tax revenue on pet projects, since it won’t be silo-ed directly into Transportation budget items.

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  2. NikolasM says:

    I think the author of this author missed one extra point in this whole ridiculous proposal and that is not only does the Governor propose eliminating the gas tax, but that the increased sales tax does not apply to gasoline. Out of state drivers passing through the state would only contribute to the state’s coffers if they stop to shop or eat, but not if they just stop for a fuel up. They get to use our roads for free essentially.
    It is braindead pandering to everyone who does not live in the economic engine of Northern Virginia that funds everybody else (only 21 cents of every dollar sent to Richmond goes back to NoVA).

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  3. Griffin E says:

    Brake pad tax.

    Those who drive in the most congested areas are the greatest consumers of brake pads, but unlike tires, if you burn through your brake pad, that annoying squealing sound will become a grinding sound–most people don’t ignore the grinding sound. Even if you do, it doesn’t impose the same externality that tire blow outs do it just means you have to replace your pads and your rotor which is a mistake people never make more than once.

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    • James says:

      I like! Nearly free ride for me, because a) I have a hybrid, so regenerative braking means I seldom use the friction brakes; and b) I tend to plan my driving so I don’t brake all that much – e.g. if I see that the light up ahead has turned red, I take my foot off the gas and coast up to it, instead of charging up and stomping on the brakes at the last second/

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  4. Dan Lombardi says:

    The gas tax may not be the fairest regarding income level, as poor people may drive older, less efficient cars, and can’t afford the premium for a hybrid or a new, fuel-efficient vehicle. A better solution is a graduated sales tax, and registration fees based on the value of the vehicle. If you can afford a new Mercedes, expect to pay maybe a 30% tax, and maybe $1,000 per year for registration. If you buy a used 2007 Chevy Malibu, the tax may be only 5% and a $100 annual registration fee. For cars under $7,500, there may be no tax and a $20 registration fee. For those who can afford a new Mercedes, they can always opt instead for a nice Toyota Camry instead and pay far less in taxes. Give people more control over their taxes. Someone would need to crunch the numbers on this to see if how it could be a net gain for taxes, and what impact it could have on the auto industry.

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    • Dave says:

      Gas taxes and tire taxes as they have been discussed are good ways to send the right signals to the market by making the cost of driving to the consumer a closer approximation of the real costs of the activity. This FIXES market distortions (like current distortion to drive too much). The idea that we should pay for road care by sucking it out of rich people is silly. It doesn’t send the right signals to the market because most of the people driving aren’t the ones paying for it.

      Perhaps soaking the rich isn’t ALWAYS the best answer

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    • James says:

      It’s actually quite simple to find fuel-efficient older vehicles at a modest price, as for example Hondas, Toyotas, Geo Metros and the like from the mid-80s on. So if poor people (or us more prosperous folks who chose not to waste money on new cars) drive inefficient older cars, it’s because they choose the older Suburban or Expedition instead of the equal-cost Metro or Civic.

      And in the practice what you preach department, let me note that my main vehicle is a 13 year old Honda Insight, still averaging over 70 mpg.

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  5. Keith K. says:

    Or the roads could be totally privatised and the owners could figure out the best way to charge consumers for their use.

    Even if your precious roads JUST MUST be owned by the state, the truth is that the best way to pay for roads is with user fees. Gas taxes are a bad proxy of user fees, but the move to a sales tax would be even worse because it would completely divorce road payments from actual road use. Central planning did not work for the Soviets and it does not work now.

    The best system would be GPS’s mounted in the vehicle that actually tracked where the thing drove and allocated money to the owners of the road for wear. You could account for different vehicle types with either different GPS models or by just having them encode a different signal based on weight class. The Germans have been using this with freight vehicles for over 5 years and its worked quite well for them if I am not mistaken.

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    • Seminymous Coward says:

      I am deeply confused by the politics of anyone who wants to privatize all roads but put mandatory tracking devices in all street-legal vehicles. Am I correct in understanding that you want government to get out of the road business and into the business of allocating funds between private road owners based on police-state-style constant position monitoring?

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  6. TTR says:

    “I have heard about a scheme to create a fleet of intercontinental freight zeppelins (actually, this may not be quite as zany as it sounds)”

    This did actually get to the stage of a half-size prototype being built in Germany. Makes very good sense in Europe for transporting large indivisible loads across countries with narrow roads, historic towns etc and in sparsely-populated areas with poor road and rail networks (lots of Africa, for example) or to islands with no shipping service/port facilities.

    Equally important is the potential role in disaster relief as they can carry modularised hospitals and other facilities to anywhere that can provide a mooring mast – the crane can be incorporated into the balloon.

    Not as fast as airplanes – but a heck of a lot cheaper.

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  7. Terry Howard says:

    Has any one thought of pricing cars like cell phones. Let the oil cos. Subsidize the cost of the car for a contract to buy gas from a single gas company at inflated prices. It would be interesting to study the consequences of a scheme like that.

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