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February 01, 2006

Why The Gas Tax?

Since I'm both in favor of increased taxation and worried about oil usage, it's tricky for me to always be arguing against the gas tax, but nevertheless:

The gas tax is a user fee. Drive more, pay more. Drive a heavy gas guzzler which creates more road wear, pay more. Drive in congested hours when gas mileage is low, pay more. So the gas tax encourages efficiency and environmentally-friendly. Reduce your driving, drive a smaller car, use public transit, avoid peak hours, and you pay less.

It's not quite so easy. Let's say I never drive. I have an allergy to cars. I live two blocks from my office. But I purchase products. I shop. I work for a company that distributes a good. I'm still benefitting from a national highway infrastructure, and yet I'm not paying a cent. When the subject is roads, "user" isn't quite so easily defined.

What continually concerns me about these proposals is that they treat driving as optional. When you tax, say, alcohol, and argue that the user can avoid it by not being such a lush, you're right. I could drink less beer than I do and pay less in alcohol taxes. Not so with driving. If I live in an urban area with a massive public transportation system (which I do), my decreased auto usage isn't evidence of environmental enlightenment, but circumstantial. When I lived in Orange County, my heavy car usage was the direct result of the spatial realities of suburban Southern California.

Were there a way to separate necessary from unnecessary auto usage, I'd be happy to endorse a luxury driving tax. Nail me when I go on a road trip, or to the movies, or to look at the ocean. But we can't do that. And given that wealthier folks can purchase homes nearer to their work and buy newer cars with better fuel technology, the tax is instantly regressive. Occasionally, various advocates suggest augmenting it with some sort of rebate to the poor, but not only do none of the regressive gas taxes currently support that feature, there's no reason or proof that any future one will. So in this context, I see no evidence that raising the gas tax is a better or fairer way to fund infrastructure development than any number of more broad-based, progressive revenue sources.

February 1, 2006 | Permalink


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One thing I like about it is that it does punish you for driving an SUV or reward you for driving a little Toyota hybrid.

But I mean, drive in non-peak hours to avoid paying the tax? That's what the writer is saying in that quote, and it's obviously not possible for people who have to work, and that means that people driving for necessary reasons are being punished and people driving for luxury reasons (such as going to that beach) are being rewarded.

How do you (or other readers) feel about increased city planning? I mean where the government would try to encourage living in cities (where public transit could therefore be effective and useful) and not living in the suburbs? It might be too late to kill the absurd urban sprawl in places like Atlanta, but in developing regions in the midwest or southwest area, discourage people from creating another Atlanta, and encourage another compact place like San Francisco even without the causal geographical factors.

Posted by: Joe | Feb 1, 2006 2:25:54 PM

Which ever way you rig the tax system to discourage gasoline use, you're always going to come up against unfairness and regressivity. But in the long term, we know that fuel prices are going to spike on their own anyhow, and the same people who are going to get hurt the most by the gas tax are going to get hurt the most by the price spike too. Better raise the tax now and start changing consumer behavior -- in the short run, it is horribly unfair to people with long commutes and sparse living environments, in the long run, it will affect consumer behavior from buying more gas-efficient cars to living closer to their work place.

As for increased city planning, I am cautiously for that. But only in conjunctions with a higher gas tax. The preference of Americans for living in sparse suburbs is clear thus the carrot of better city planning alone might not be enough without the stick of increased gas prices.

Posted by: battlepanda | Feb 1, 2006 2:36:44 PM

Punishing car choices can be done through a weight or mpg-based fuel tax at point of purchase. $3,000 tacked on to a Hummer, $2,000 knocked off of a Prius. Much better and more direct.

Posted by: Ezra | Feb 1, 2006 2:38:42 PM

We have that $2,000 discount on some fuel-efficient cars already but NOT the $3,000 penalty on gas guzzlers, right? (I'm just not sure if I'm up on the policy here.)

Posted by: Joe | Feb 1, 2006 2:44:54 PM

I want to say we did have the rebate, but it phased out. In any case, we don't have the fee.

Posted by: Ezra | Feb 1, 2006 2:51:33 PM

We have that $2,000 discount on some fuel-efficient cars already but NOT the $3,000 penalty on gas guzzlers, right?


Posted by: Fred Jones | Feb 1, 2006 2:51:45 PM

Joe, it's not a discount, it's a tax benefit. And there are (or were) two of them. There is a tax credit for buying a hybrid. And there is a Schedule C deduction for buying SUV's for a self-employment business. (That one blew my mind when I was studying Pub 17 to work as a tax preparer last year.)

Any change to current gas tax structure is going to cause a displacement, and a good one will cause a huge one, because we have a lot of people wasting gas in this country. It may be very inconvenient and unpleasant to turn over a bunch of real estate and make a bunch of people move so that they can equalize their gas consumption, but think of the support you'll get from the realtors and the movers!

Posted by: diddy | Feb 1, 2006 2:53:20 PM

You're parsing too much. No tax (or any economic policy choice) is perfect in every circumstance. Yes, a gasoline tax will affect some more than others, but so does almost any economic event. Look how quickly we have all gotten used to gasoline in the $2-3 range, which would have seemed catastrophic a year ago. If that increase had been a result of taxation rather than oil company profits, at least the country could have benefited through deficit reduction or better funding of government services.

I realize that it's practically a non-starter politically, but a stiff gasoline tax makes emininent sense. It will encourage efficient transport not just by individuals, but by the commercial sector as well. If we had kept our gas taxes as high as the Europeans have, maybe we wouldn't have destroyed our train system and built up living pattterns entirely dependant on cheap road transportation.

Posted by: wvmcl | Feb 1, 2006 3:00:45 PM

Roads and highways should be paid for by a combination of gas taxes and property taxes. Really, the construction and right-of-way cost ought to come out of property taxes, and the maintenance cost ought to be funded by the gas tax.

Many of the ultimate benefits of roads and highways end up in enhanced property values. The property value of a "location" is a by-product of the transportation system, and taxing the property to pay for the design and construction of the transportation system is perfectly sensible. Paying all of it out of the gas tax is actually not efficient, because it discourages marginal uses of the transportation system, which are nevertheless, valuable. For people, who live in crowded cities, like L.A., probably would actually benefit from the congestion-reducing effects of a higher gas tax, but it makes no sense in Utah. But, the gas tax can be easily regionalized and even localized to overcome some of those problem, and, not incidentally, also address some of the equity issues you bring up.

Posted by: Bruce Wilder | Feb 1, 2006 3:01:31 PM

Anyone who has worked in the software business knows that in systems when you fix one thing you often break others. In politics it's called UNINTENDED CONSEQUENCES.

Posted by: Fred Jones | Feb 1, 2006 3:11:36 PM

Assuming a gas tax equivalent to EU gas tax rates, a possible mitigating offset would to grant companies (whether located in suburban areas, or urban areas) a tax deduction for providing bus transit for their employees who are located in non-local-to-the business areas. The subsidy would be based on the average number of employees using the bus transit to/from work. The pickup points can be determined by the company based on the locations where employees can be clustered.

This employer-provided travel pooling would be far cheaper than more mass transit through public entities, since the buses would only run in commute hours, and more acceptable to employees since they would share the ride with fellow employees of their firms. Some companies do this today, and these programs are well accepted and well used.

Posted by: JimPortandOR | Feb 1, 2006 3:21:23 PM

Ezra, in many cases, driving as much as we do is optional. People choose to live out in the exurbs because the extra costs associated with driving are a price people are willing to pay in exchange for a larger plot of land. People choose to buy an SUV over a more fuel-efficient minivan.

Of course, even non-drivers would pay the tax in the form of higher prices for goods because of the added transportation costs.

Posted by: Constantine | Feb 1, 2006 3:23:37 PM

The point of the conversations about energy conservation or alternative energy choices always seems to revolve around one chosen path. This is just wrong-headed. A real energy plan would have many components, each contributing their share to the overall results.

A gas tax, or a gas-guzzler tax, or wind, biomass, nuclear, coal gassification alternative sources each should play a role. This should not be one-size fits all. We need a little of this and a little of that, all worked out into a mutually supportive package.

Within this context of a multi-pronged energy strategy, somewhat higher gas taxes would make real sense. If gasoline prices have to increase for supply-demand reasons, why should the energy companies be the only parties that gain from the increase? Inflate the gas tax, so that the multiplier effect of increases is felt more rapidly - increasing the need for alternative choices. This hurts current inflation of cost of living a lot, but it brings big changes rapidly to consumer choices. If the US had EU-style gas tax rates, SUV's, pickups and gas guzzlers would not be used for work-related commuting today. Prius would be the car of choice for commuting, or mass transit would be selected by far more commuters.

Posted by: JimPortandOR | Feb 1, 2006 3:35:00 PM

actually, you would pay the tax for things you bought that were shipped. they would cost more. it would be a good reason for people to consider buying locally, or not buying useless crap from china at all.

Posted by: jami | Feb 1, 2006 5:02:16 PM

Sounds like you're just being counter-contrarian (is that just rian? :-P), and not thinking of alternatives.

Just off the top of my head, why not allow deductions (or tax credits) at a flat rate for each mile of a commute? It would keep the incentive for fuel efficient cars, while helping people out who have to buy a lot of gas to get to work.

And jami is right that the cost of shipping would be passed along to the consumer.

Posted by: Drew Miller | Feb 1, 2006 5:07:51 PM

Raising the gas tax (better yet, instituting a carbon/pollution tax) simply accounts for the negative externalities of burning fuels. Pricing externalities is the simplest form of planning, since normal price signals start to work again. The answer to natural regressivity in staples like food and fuel is not direct subisidy. That simply encourages overconsumption and broken price signalling.

If some members of our society have trouble affording staples, the proper answer is programs that get them the money. Once they have it, let them decide whether to commute 100 miles a day or save the time, money and fuel by moving.

Markets only work if you let them.

I'm open to arguments that current gas taxes already price its negative externalities. I haven't seen the scholarship. "Won't someone please think of the children!" arguments do nothing for me.

I can't believe Fred is right about something for a change.

Posted by: wcw | Feb 1, 2006 5:41:27 PM

Too nuanced guys. Way too complicated. Regressive taxes aren't the end of the world. The added complications are really really not worth the attempt to make it progressive or somehow distinguish "neccesary" from "luxury" driving. Even aside from the tax idea, how do you define the difference? (in specific concrete terms)

Raising minimum wage will push up prices a little. So will adding a gas tax. Adding a decent gas tax will create incentives for everyone to carpool, drive less, live closer to work and get more efficient cars. Get progressivity in overall taxes elsewhere, through income taxes or EIC or whatever.

Every loophole, complication, deduction and nuance in the tax code only hurts the people who can't afford to pay tax accountants to find them. Just think of the deduction for large vehicles (intended for farms and such) going to large SUVs for people in totally unrealted fields.

Posted by: Tito | Feb 1, 2006 5:49:22 PM

15 posts and only 1 passing mention of this as a political non-starter?

In conversations with the people around you who aren't necessarily politically aware, what is the most recent thing you discussed in relation to petrol. For me, it was the large 4Q windfall profits reaped by the oil companies. Starting to talk about a gas tax in this climate seems to me like politcal suicide. For one, you'll never get a conservative on record as supporting it. So now you look like the tax-happy liberals who simply want to increase the amount normal 'Mericans pay for gas. I for one would like to start winning elections sometime in my lifetime.

What sort of tax are we talking about, anyway? If the goal is to change behavior, then we obviously are talking about significant increases. 2x? 3x? Its easy to say that 3 dollars a gallon came easy last summer. But there is a difference between a 40 dollar fillup and a 3 figure dollar fillup and American's pyshce' would handle the latter, I can ensure you. What sort of phase in and time lengths are on the table? What sort of proposals bring some of that money back into the people's hands?

Regarding mass transit, I understand the need to encourage it, but some people don't want to take the 6am train into Boston, when they can leave 2 hours later and still get there at the same time and not have to be surrounding by smelly douchebags.

Ok, yes, I'm venting. But I just don't see extremely high, government-enforced gas taxes as politically viable.

Posted by: Adrock | Feb 1, 2006 6:05:38 PM

If you want to discourage gas consumption, nothing will ever beat a gas tax.

Here is the politically palatable way to do it.

We create an "Oil Freedom Fund", financed by a slowly and steadily rising incremental gas tax (the slow and steady aspect gives people time to adjust). All the money that goes into the fund is sent right back to all adult citizens, in equal amounts, once a quarter.

If you use the average amount of gas as other citizens, you come out ahead in this plan. This is because businesses and citizens use gas, but only citizens are paid out of the fund. Sure, the businesses that can will pass along the increase, but not all can (and all will have increased incentive to find more gas-efficient ways to operate). If you use less than others, you come out way ahead. I am guessing most poor people are in this category.

The wonderful thing about this plan is that it creates many winners -- and if you are not winning at first, you can make changes that will make you a winner. This is the aspect that makes it saleable. Many Americans would be glad to have an opportunity to be winners in the Oil Freedom Fund (and, its patriotic, to boot).

Posted by: EdSez | Feb 1, 2006 6:49:58 PM

Sounds like a free ride on the back of business. That would be great if business were the enemy. However, 'business' is just capital invested by investors. Yours is a plan to favor one class at the expense of another using the full force of government.
Your scheme would also steal capital and capital is what is required to create goods, services, and yes, jobs. Making capital more scarce will only drive up interest rates and make our economy less efficient. But hey, who cares as long as you get a ride off of someone else?

Posted by: Fred Jones | Feb 1, 2006 9:00:40 PM

For once Fred is blowing everyone out of the water.
It isn't hard to look smart when all you have to do is cite observed patterns : that's why true conservatism logs cause and effect patterns, incorporating them into planning.
Since I haven't seen too much of that as late, don't get smug, Fred.
Nice comment, as usual, Jim.

Posted by: opit | Feb 1, 2006 11:52:00 PM

Yours is a plan to favor one class at the expense of another

And? This isn't necessarily wrong on principle. What EdSez is trying to do it take the regressivity out of the system and come up with a scheme that people would actually vote for. I, on the other hand, think it's ok if the system remains somewhat regressive.

The more complicated the scheme, the more "unintended consequences" we face. Therefore, best to keep it simple and deal with fewer consequences. Raise gas taxes and be done with it. What you're missing, Fred, is that many of the "unintended consequences" that a gas tax would create are actually the precisely consequences one hopes for. Force everyone (people and businesses) to invest more of their own money in staving off the costs of driving and shipping.

Interestingly, Jim's solution solves Adrock's problem. The more alternatives that are available, the more politically palatable it becomes to create disincentives against using petroleum. Peak-time toll pricing would help, as well.

Posted by: Constantine | Feb 2, 2006 9:06:50 AM

"I'm still benefitting from a national highway infrastructure, and yet I'm not paying a cent."

Yes, you are. Businesses pass along their costs - including gasoline costs, as they are embedded into the distribution of the product - to the final customer.

This is economics 099.

Posted by: RW | Feb 2, 2006 9:35:14 AM

One point that is often overlooked. Gas (or more generally) carbon taxes, regardless of morality, are the least EFFECTIVE way to lower energy use. The key is that there is low elasticity in energy demand in response to price changes. The key is that energy demand is more affected by capital investment than by short run behavior. That is more efficient cars cut demand more than reducing optional driving. Insulation saves more than turning down thermostats (unless people start turning them down far enough to harm their health.)

Won't raising the price of energy cut demand in the long run by encouraging such capital investments? It will, but to be an effective and efficient means price raises would have to result in people making capital investments equal to a high percentage of the NPV of energy saved; unfortunately this does not happen; both individuals and businesses demand much higher paybacks for energy saving investments than they do for comparable investments elsewhere. There are a number of reasons for this - split incentives (someone other than you may end up reaping the benefits of your energy saving investment), uneven access to capital (a homeowner may demand a higher rate of return than an electric company because they may more for a loan than an electric company does and also use up limited credit they may need for other purposes). There are transaction costs, and (for businesses) major flaws in the ability of accounting systems to capture flow costs.

So what would encourage efficiency? Well to the extent we want to use tax policy, taxes on energy wasting capital investments, and subsidies for efficiency measures. (I.E. gas guzzler taxes applied beyond the area of automobiles.)

But beyond that, you need a great deal more than tax policy. You need regulation and public spending. For example new homes in Washington State generally have R38 insulation. Why? Because that is the regulatory minimum for new homes. It would cost only $500 to increase this to R50 (DOE considers optimum of this State) at building time, but builders typically only put in the minumum. Increasing that requirement would save more energy than a new tax break for insulation, and homebuyers would recover their additional costs within a year or two, and save thereafter.

Similarly, rail transit will get built only through public spending; no combination of price signals is likely to produce it. In point of fact energy efficiency behaves suspiciously like a public good in spite of not being one in the classic sense. Regulation and public works provide it at lower costs for the most part than market signals no matter how tweaked.

Posted by: Gar Lipow | Feb 2, 2006 1:47:18 PM

I don't contest that a gas-tax would be regressive, but the notion that it doesn't effect the non-driving public is just wrong. You'll pay a premium in food prices, which have to be trucked long distances, and whose costs of production will have increased.

Despite its regressivity, the gas tax will be incredibly effective at its goal of decreasing gasoline consumption. It may hurt the poor now, but benefit the environment and society in the long run. Not only will it encourage the general public to opt out of 'luxury' consumption of gasoline, but it will encourage industry, especially trucking, to use more efficient resources.

One thing though, that people tend to forget is the absolute political infeasability of a gas-tax. This thing, no matter how progressive one tries to make it, will never pass Congress.

It seems like there is time for a shift in the debate. Let's quit worrying about the gas-tax and spend some time thinking about how subsidies to households and firms that use cleaner technology can be dolled out effeciently and equitably. That sounds like a bettter message.

Posted by: Tristan Reed | Feb 2, 2006 2:34:37 PM

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