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 ma
y 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.