The gas tax: A Pigovian tax or roadway maintenance fund?

June 26, 2013 at 3:55 pm

Is the gas tax a way to discourage driving fuel-inefficient vehicles, or a way to charge drivers for the roads they use? Jodi Beggs at the blog Economists do it with Models, and also the guide to economics, has an interesting take on what two state legislatures are attempting to do to fix how their roads are funded.

What happens when the gasoline tax works too well and people start buying hybrid vehicles? If you’re a Virginia lawmaker, you likely think that the solution is to place a tax on hybrid cars. The reasoning behind this seems to be that hybrid car owners are escaping the gas tax to some degree and need to make up the payment somewhere else.

State budgets are suffering financially in many ways, one of which is road maintenance. The problem is that the gas tax, currently 18.4 cents per gallon, has not been raised since 1993 when the average cost of a gallon of gas in the US was $1.07. At that time, the gas tax was 17% of the cost of a gallon of gas. Today, the average cost of a gallon in the US is $3.54 and the federal gas tax is therefore only 5% of the total cost of a gallon of gas. To keep with the 17% rate, the federal gas tax would have to be about 60 cents per gallon*.

The problem is that the gas tax is now also generating less revenue due to more fuel-efficient cars. The way the gas tax is set up is to generate revenue for roadway use by those who use the roads – drivers. It is likely that the easiest way to charge drivers for the roads they use was to place an excise tax on the item that cars require – gasoline.

What happened is that drivers are now buying hybrid and fully-electric vehicles that use far less gasoline, and gas tax revenue is even less effective as a result. The gas tax is used as a way to make drivers pay for the roads they use with their cars. The problem is that gasoline was never the problem – it was just a common component of operating all vehicles. Now, cars can run on different energy sources besides gasoline. The problem was never gas, it was the car. It was just easier to tax drivers for road use based on how much gasoline they bought.

Beggs poses that the gas tax is a Pigovian tax designed to “punish” the sin of gasoline use, which generates never externalities such as pollution. However, the real sin is car use, not gasoline use, which is why the gas tax needs to be replaced with a more comprehensive road usage fee.

Car use generates negative externalities. It leads to distorted and inefficient land use, increases energy consumption, creates dangerous roads, causes injuries and fatalities, and creates an unhealthy population.  Those reasons are often cited by livable streets advocates as reason for taxes on car use, which are to punish the negative externalities of car use and route the tax revenue to sources of active transportation – sidewalk improvements, bike lanes, public transportation investment, and the like. One of the most direct relationships between the tax and the revenue, though, should be to use the revenue to pay for roadway maintenance.

For example, a Prius does not weigh any less than other cars of a similar size. It does not take up any less room when parked or sitting in traffic, and its driver is still producing the same negative externalities of car use that all other cars around it are producing. One exception is gasoline, which does cause pollution, and many hybrid cars’ engines shut off when idle and do produce less pollution. The other negative externalities still remain. The Prius is still driving on public roads, leaking fuels and oils into the water supply, causing injuries and deaths to other road users, and wearing down the roadway. Prius drivers are just paying a lot less gas taxes to do so.

You could argue that this is a perk drivers of hybrid cars should enjoy since they pollute less. Some research has shown that hybrid drivers actually end up driving more because of their fuel savings – like eating two “50% less fat” snacks instead of just one. Environmentalists may cheer for hybrid cars, but the production of cars, the detrimental effects of batteries, and the aforementioned negative externalities of all car use don’t do much for the environment or general quality of life, of which some aspects were discussed on this blog.

This is reason for a more comprehensive road-use tax, and some fixes have been proposed. A vehicle-miles traveled (VMT) tax would place a value on the number of miles driven, with incentives to not travel during peak times, hopefully equalizing the distribution of traffic and avoiding too many jams. A per-mile fee would be set, charging drivers equally for the amount of wear and tear on the road. Heavier cars could be charged more per mile to operate.

What has been proposed in state legislatures in Virginia and North Carolina is to add a purchase tax onto buyers of more fuel-efficient vehicles. The tax would theoretically offset the lower gas tax revenue obtained from drivers of more fuel-efficient vehicles. While the motivation behind the legislators proposing the “hybrid tax” may not look logical, it actually makes sense, to a certain extent. Of course, their motivation could be big oil campaign donations and a general disdain for all-things-green. Even so, the problem of decreased gas tax revenue and how to pay for roads drivers use remains unsolved.

A fairer way of having drivers pay for roads is to assess a vehicle-miles traveled tax. Whether this is done by GPS tracking or a simple odometer check (by an entity like your electric company reading an electric meter) with a per-mile fee is up to American’s tolerance of privacy invasion. The gas tax was designed to pay for road construction and maintenance – not to discourage driving. It is now evident that reducing gasoline usage is also important – but economists should stop confusing the gas tax for a Pigovian tax. Taxing hybrid car purchases may be the wrong, knee-jerk way to approach the problem, but the roadway maintenance revenue problem still exists.

The more a person uses a road, the more they should pay for its maintenance and initial construction cost – that’s what user fees are for. The common denominator of car use – gasoline – is no longer the only way to power a car, and a replacement for the gas tax must be found. We must also discourage all forms of driving, especially those taken in fuel-inefficient vehicles, and encourage people to use alternatives or to combine their car trips for the betterment of everyone in society. These are different goals and must be addressed through different means.

*These figures may be slightly distorted as the prices I found did not indicate if state and local gas taxes were accounted for.