Choosing Between Bad Options: Gasoline Tax Vs. Sales Tax

Governor McDonnell of Virginia has proposed a new infrastructure funding plan.  The Governor’s plan, while having plenty of particulars, most notably would eliminate the state gasoline per-gallon tax and replace it with an increase in the sales tax [which would not apply to gasoline].   Virginia would be the only state in the union without a gasoline tax and its sales tax would still be lower than any of its neighboring states.  But is it a good idea?  Of course, it’s not privatization or tolls roads.  But on the margin, does a sales tax make any more or less economic sense than a gasoline tax for funding the maintenance of roads?

McDonnell uses the following argument.  The proliferation of fuel efficient vehicles makes the number of gallons of gasoline sold an unreliable corollary to road use/degradation/maintenance costs.  He argues that total consumer sales, and sales tax revenue, is pro-cyclical and that road use increases with the business cycle and economic activity.  It tax revenues would also increase with inflation.  Currently, there is a 17.5 cents tax per gallon of gasoline which does not adjust for inflation or to any index.  The sales tax would increase from 5% to 5.8%.

I’ll not examine the magnitudes here.  There is plenty that we can say about the economic wisdom of the plan otherwise.  The plan is not revenue neutral – it’s a tax increase.  It increases the tax revenues and funding for road maintenance – but this need not cause greater inefficiencies in the economy [if the one tax is less costly to administer than the other] and doesn’t much affect the economic logic differently than would a revenue  neutral plan.

A good payment structure, tax or otherwise, would be one in which the consumers of the roads are also the people who pay for the roads so that they can equate marginal costs and benefits.  So who uses the roads?  Obviously, people who drive use the roads.  But, people who don’t own cars use the roads too.  Everybody that buys anything, online or in stores, uses the roads through the cartage of the myriad of products which they purchase.  Those products only get to the doorstep and the store shelves by traveling on the roads.  Also, people who drive through the state and who do not shop or live in Virginia use the roads.  We can mention a little bit about magnitudes of use.  People who drive more miles contribute to more road degradation and so do vehicles which are heavier.  So the marginal cost, in terms of road maintenance, of a semi truck is greater than that of a moped.

Under the current plan, who pays for the roads?  Right now, purchasers of gasoline pay for the roads through the gasoline tax.  So people who travel greater distances and drive heavier vehicles pay more than others.  The tax is very (not completely) encompassing to charge the users.  Drivers pay it.  And semis pay more for their increased wear through their increased fuel consumption.  People who do not own cars also pay it in the price of the items that they purchase which is marginally more due to the cost of transportation, and the gasoline tax, to the distributor.  People who drive through the state and stop to purchase gasoline pay it too.

Who doesn’t pay for the roads?  People who drive cars which do not require gasoline don’t pay for their direct use of the road.  There is an argument to be made that electric car owners have higher incomes and that they pay for more of the roads through their higher purchases elsewhere.  But that higher contribution pays for the higher use through the transportation of goods.  Electric car owners aren’t bearing the cost of their direct wear on the roads.  People who drive through Virginia but do not purchase gasoline don’t pay for roads either.

Under the proposed plan who would pay for the roads?  With a sales tax, everyone who purchases goods and services pays for roads.

Under the new plan, who wouldn’t pay for roads?  People who purchase items online will not pay for the roads that they use because, depending on the website, they can avoid the sales tax.  People who drive on the roads directly don’t pay for their road degradation either.  And the heavier the vehicle and further it travels, the more it is contributing to the need for road maintenance without bearing the cost of it.  Additionally, people who travel through Virginia and do not purchase goods besides gasoline won’t contribute to the maintenance of their road consumption.

First we can start with the governor’s reasoning and then add our own.

Procyclicality of the sales tax.  When consumers pay more for goods, sales tax revenues increase.  This isn’t the same as the revenues increasing with increased road use.  It is possible that prices rise faster than quantities sold such that Virginians pay for more roads than they are using.  Price increases do not reflect more intensive road use – quantity increases do.  It is similarly possible, and more probable, that quantities increase by a greater proportion than do prices such that road wear increases by more than the increase in revenues.  The claim that total sales (in dollars) are correlated strongly with road use need not be the case.

The sales tax adjusts for inflation.  This is almost true.  Inflation of consumer goods would contribute to increased revenues for transportation funding in order for the state to afford infrastructure supplies.  But are the price changes of the two baskets of goods, consumer goods and road maintenance goods, the same?  Doubtful.  Productivity of the different industries are not highly correlated and so the relative prices of goods are not either.  The logic of adjusting funding for infrastructure based on changes in CPI is delusive.

Increasingly fuel efficient vehicles.  It is true that average fuel efficiency is increasing.  This does not in the least affect the correlation between fuel consumption and road use.  Of course, drivers will travel more miles per gallon of gasoline burned, but the fact that gasoline is still the primary propellant remains fundamental.  The correlation between miles driven and gallons burned is unaffected – the actual level of fuel efficiency only changes the wear on the road per gallon of gasoline consumed.  It is true that vehicles which do not utilize gasoline for propulsion would avoid the gas tax on their own travel, but this is a miniscule proportion of the vehicles on the road.  Additionally, such vehicles are light and travel fewer miles given their limited range.  And this is not going to change anytime soon.  Fuel efficiency or not, gasoline is the primary means of propulsion of automobiles for the foreseeable future.

As mentioned above, the sales tax would not tax the most intensive users of roads.  People who purchase light-weight, small, and expensive items would place little strain on roads and yet pay a greater share of the maintenance through the higher value of their goods.  Similarly, people who purchase cheap, voluminous, and heavy goods would place a bulk of the strain on the roads and yet pay less for it.  This is the opposite of people internalizing the cost of their own actions.

Other schemes for funding road maintenance could be tried.  There could be a tax on tires, a tax on odometer readings, greater registration fees, etc.  But these have there own [major] problems and are not on the legislative agenda right now.  The most efficient option, privatization, is not on the table either.

If the state insists on managing the roads system, then paying for the maintenance via a sales tax is horrible for incentives when compared to the per-gallon tax on fuel.  The relation of sales tax revenues to road maintenance costs is poor and it doesn’t tax the people who actually cause the necessity of maintenance.  The per gallon fuel tax does in fact tax the users.  It is true that road maintenance cost per gallon sold is increasing, but this implies that the price of gasoline should reflect as much (This is not an argument about externalities.  We are taking as given the involuntary government nature of the roads).  Increased funding for road maintenance, relative to gallons of gas sold, is necessary only because of the greater fuel efficiency.  So rather than have a fixed flat tax, why not simply adjust the tax annually according to an index of vehicle MPG?  The gasoline tax would remain flat and change with the increasing demands on the roads.  Additionally, the creation of a rule would impose a credible commitment on the state legislature to abstain from arbitrary tax changes for political or other short term interests.  Or if that’s too difficult, maybe the legislature could simply respond directly to increased road degradation and adjust the tax itself each time (can you say public choice problems?).

Governor McDonnell’s plan, besides being a tax increase, promotes more driving, faster road degradation, and less cost borne by the people who most contribute to that degradation.  It’s a bad idea.

[Addendum: In case there is any ambiguity.  The proposed tax is a bad idea IN RELATION to the status quo.  This post is a weighing poor alternatives.]


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