An influential highway group has called for replacing the flat tax on gas with a percentage tax, according to the Wall Street Journal. They want to replace the current 18.4 and 24.4 cent taxes on gasoline and diesel, respectively, with more flexible 8.4% and 10.6% tax rates. At current gas prices that would be about a 2-cent increase (at least on the gasoline side of things), and it would at least allow for automatic increases with inflation. It is a bit awkward for road funding to rise and fall with the cost of fuel, but it may be the only politically feasible way to raise the gas tax – to pass it off as an unintended consequence. Of course, there’s the possibility of the price of gas falling, although I don’t know how likely that is over the long-run.
As you can imagine, the political reaction was quite hostile, with Rep. John Mica, who’s on the soon-to-be Republican-controlled House Transportation and Infrastructure Committee, saying that anything that would raise gas prices is a “non-starter.” It’s unfortunate that the gas tax is seen as just another tax and not the explicit cost of the road infrastructure, but it looks like it’s going to be a casualty of the Tea Party’s anti-tax mantra. In any case, the issue will be dealt with after the midterms when hopefully politicians will be a bit more clear-headed. The WSJ suggests that politicians are reluctant to keep borrowing from the general fund for road projects, but I’m afraid that their fear of budget deficits will be overpower by their fear of raising the cost of driving. And as much as I resent Obama and this Congress for refusing to raise the gas tax, it could have been worse – both McCain and Hillary Clinton were in favor of a gas tax holiday during the 2008 election.
Although I am very excited about a higher gas tax, it would be a shame if the amount of money expended on roads and highways actually increased on net. Robert Poole at Reason has argued that we should spend all money collected in user fees on roads, and while it’s true that a lot of fuel tax money goes to mass transit and non-road expenses, there are also massive amounts of money traveling the other way, from general revenues going to the roads. State and federal highways are covered by their user fees, but the local roads that run outside your doorstep and which are in many ways most important are paid for almost entirely out of general revenues. So although it may sound counterintuitive, unless we stop building roads out of local budgets, spending less of the gas tax on highways will actually bring the total amount spent closer to the total amount collected.
A flat tax rate is actually better than a percentage tax here. First, a side benefit of high flat gas taxes is that they make people less vulnerable to oil shocks, since they induce people to reduce their gas consumption, making the same absolute increase in gas prices less painful; a percentage tax has the opposite effect. Europe’s high gas taxes are a primary reason the current recession began later there than in the US. Second, neither the costs nor the externalities of roads have much to do with the market price of gas: roads cost the same to maintain, and the health effects of pollutants are the same.
Like I said, it’s an obtuse way to go about it for sure, but if it’s the only politically palatable way to raise it, I can let the weirdness slide.
As for the European recession stuff, I’ve heard some crazy theories about the economic crisis, but never that one. Do you have some sort of substantiation?
Your arguments are valid, but you obviously know that the main point of switching to a percentage tax is political, not economic. If it were, we’d be calling for a more direct tax on the externalities of driving (VMT?) instead of a gas tax in the first place.
I know it sounds defeatist, but do you think there’s any chance in the U.S. today that congress would regularly increase the flat tax to keep up with inflation? If the answer is no, this seems like the best solution, at least for the time being.
Very true. But alas, tricking myself into believing that some day politicians might look after their constituents’ true longterm interests rather than what’s most politically advantageous for the next election season is the only way that I can keep sane enough to continue to work (/try to work) to influence public policy.
The largest externalities of driving are really externalities of gas consumption: pollution, climate change, military protection of oil sources. Even when it comes to road maintenance, gas taxes are slightly better than VMT taxes, because fuel consumption scales with vehicle weight, and road wear is proportional to the fourth power of the axle load.
I honestly don’t see a switch to a different tax regime cruise through Congress, unless it’s a net tax cut. Tax shifts tend to be gruesomely controversial, sometimes even more so than tax hikes, which fall on everyone.
Why not simply pass a law saying that the gas tax will increase at the same rate as overall in inflation? If there are huge fluctiations in gas prices, then the tax rate is insulated from that. But if overall inflation increases at 2% annually, then so does the amount of tax per gallon.