I commented before on a thread on Ordinary Gentlemen about high speed rail. An oldish post on League of Ordinary Gentlemen got me thinking about recursive taxation. That is to say, taxes that depend on people on the exact sort of behavior that they’re trying to discourage (or stop encouraging).

When I mentioned that I believe that the roads ought to pay for themselves with gasoline taxes and tolls, a fellow by the name of Travis replied:

But that’s a trap, because the fewer gallons of gasoline sold, the higher the fuel tax would have to be in order to cover the costs of maintaining highways.

If gasoline went to $7 a gallon tomorrow and people all of a sudden bought much less of it, it wouldn’t materially affect the costs of maintaining roads and highways. There might be marginally less wear and tear on the roads, but the price of the raw material (asphalt) would increase sharply, as would the cost of operating gasoline-fueled maintenance equipment. Most other costs (policing, plowing, etc.) would be unchanged. Ergo, the tax rate would have to increase in order to continue funding current operations.

Conservatives often point out this sort of thing when there are proposals to tax some unpopular sort of behavior to fund something popular. The quintessential example of this is cigarette taxes to fund education. You tax cigarettes to raise money for education, but when people start quit smoking (which was stated as half the point) the lawmakers start getting antsy because they were depending on that revenue. So suddenly a tax that was supposed to hit smokers now has to be passed on to everyone else. Or you have to raise the cigarette tax again. Then more people quit (presumably — hopefully) and you have to keep doing it. It’s the danger in taxing something you want to discourage. On the one hand, it’s win-win because you get money while discouraging people from doing bad things. But it’s also lose-lose because it proves ineffective at one of its two mutually exclusive goals.

Taxing gasoline to pay for roads is not necessarily the same thing. The stated goal is not so much to take people off the roads but rather to make them pay for the roads. But a lot of people want gasoline taxes to reduce carbon emissions and it does sort of apply there. In either case, though, it’s hard to imagine that the government won’t become accustomed to the money it’s pulling in (unless the tax states that it must be revenue-neutral). And as Travis points out, with pay-for-the-roads taxation in particular, it does really actually need that money to maintain the roads.

Well, it mostly needs that money. While there are a degree of static costs, there’s also some variability. For instance, if people started driving less in response to the tax, we would not be needing to build and expand nearly as many roads as we are now. That’s money in the bank. There would also be some reduction in the wear and tear that the roads take as a result of drivers (but no reduction where the weather is responsible). But we wouldn’t be closing roads altogether and so we would still have to be paying for their maintenance even if fewer people are driving or people are driving less far or less frequently.

However, even in that case, if people are genuinely cutting back on their gasoline consumption, and even if we have to perpetually raise the taxes to close the hole, people will not actually be spending more on gas plus gas taxes. The weekly and monthly expenditures would be relatively constant and would, in fact, go down.

The following is taken from a hypothetical situation I posed in the comments:

If I am driving 55 miles to and from work each day (110 total) and paying $4.00 a gallon, $2.00 of which is going towards taxes, and I’m driving a car that gets 20mpg. I’m paying $110 a week for gas, $55 of which is going towards taxes.

So I decide to move closer to my job. Now I’m only driving 27.5 miles to and from work each day. Now I’m only paying $55.00 per week in gas. Happy day.

Uh oh, the government has a shortfall because too many people did exactly what I did, which is cut gasoline consumption in half. So now the gas tax is $4.00 instead of $2.00 (and gas is now $6 including taxes). My new weekly expenditure goes back up, but not actually to where it was before because while taxes have gone up, the cost of gas excluding taxes has remained constant. Now it’s $82.50. The government is still getting its $55 in taxes, though.

Even so, I decide to get a more fuel efficient car. Now I get 40mpg. I’m actually paying less per week than I ever have before ($41.25).

But once again, too many other people cut down on their consumption and the government is facing a shortfall. So once again the gas tax is doubled ($10/gallon now, $8 to taxes). Far from being right back where I started, I’m now paying $68.75 per week in gas, though the government is back to getting the $55 it needs from me to keep the roads up. Heck, let’s say that instead of purchasing a hybrid I purchased a compact that gets 30mpg. So I haven’t even kept up with the average consumption reduction and am paying more per week in taxes than I ever have before ($73.33)… I am still actually paying less in gas than I was at the outset ($91.67 now).

Now, some people are not going to be able to make the reductions that I (hypothetically) did. Others are going to be able to reduce it by more because they’ll take public transportation or move within walking distance of work or get a motorcycle.

But if reductions are not made then you don’t have to raise the tax. For those that want to ween us off of gasoline consumption, this is not ideal. But if the goal here is to make the roads pay for itself, you’re succeeding.

In the event that people can continue to make reductions, though, you can keep raising the gasoline tax as much as you have to because people will still end up paying less. More per mile, but less per week. You’re giving the same amount to the government(s), but you’re giving less to the oil producers.

This all assumes that the government needs a constant amount. I don’t think this is the case because there would be less demand for new roads, so I think that amount would go down. There will still be some ebb and flow because new roads need to be built to accommodate a growing population, but that growing population will be paying into the till as well.

This all also assumes that gas prices remain constant. That’s a little less likely because gas prices never stay constant. But that doesn’t really factor in all that much anyway because this tax itself should not cause gas prices to go up any more than they otherwise would. If anything, it’d be the opposite because there’d be reduced demand and the producers would have less leverage to control pricing.

If gasoline prices do go up considerably, it would be because of a reduced supply. The primary result of that would be for consumption to go down that much more quickly. I’m skeptical, but reasonable people disagree. If that happens and we’re not ready for it, the condition of our roads will be the least of our problems.

Of course, none of this is to say that the above scenario is ideal. Chances are that there were reasons that I lived as far away from work as I did and that I drove the car I did. My new place closer to work may be more expensive or it may be smaller. The hybrid may cost more to repair. The costs of goods and services that unavoidably require lots of driving in heavy vehicles would go up.

This isn’t even to say that gas taxes are the best way to get drivers to pay or that we should reallocate tax burdens towards drivers and those that directly and indirectly use our roads. In the case of how we tax drivers, I tend to prefer the gas tax to toll roads and GPS-mileage taxation because the logistics on the former can get very cumbersome and the latter is an unwelcome government intrusion that would be ripe for exploitation. But there is a good counterargument in that if the goal is to charge drivers then it shouldn’t matter as much if they are driving a hybrid of an SUV (yeah, the latter cause more wear on the roads, but I doubt they do twice the damage) if one is indifferent to environmental concerns and does not see a need to reduce carbon consumption. In any event, the above argument-counterargument about recursive taxation would apply to toll roads and GPS stamps as well. On whether or not we should push the transportation tax burdens on those that most frequently use them, but such taxes often tend to be regressive and perhaps it is best for everyone to pay for the roads with more progressive income and property taxes.

Though I’m not sold, all of those arguments make sense. I’m really not writing this to sell anybody on tax burdens and driving, but rather to point out that the recursive taxation argument is not a good one.


Category: Road

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7 Responses to Recursive Taxation At The Pump

  1. Kirk says:

    For what it’s worth, a Florida municipality did have to raise its rates for water because people were using less of it. As for cigarette and gas taxes though, the idea that the money goes to specific purposes is mostly a lie. Governments are masterful at taking money ostensibly for a noble purpose, then tossing it into a general fund.

  2. Peter says:

    If gasoline taxed were significantly increased, most people would still use just about as much gasoline as they always did. They’d cut back on spending on everything else in order to pay for the higher gasoline costs. Gasoline is a remarkably price-inelastic commodity.

  3. trumwill says:

    Kirk, most of all money goes through a general fund, even when ostensibly dedicated to something or another. It’s sort of like how Clancy and I plan to use her sign-on bonus to get a car. In one sense, it’s really just going into our bank account with the other money and then a different amount is coming out to pay for a car, but we justify one through the other.

  4. trumwill says:

    Peter, I agree, actually. I said in the comment thread of the TLoOG post that I didn’t think that usage would fall nearly as much as people think. There are limits to the inelasticity, though. I think that one of the reasons that behavior hasn’t changed in the past is that people recognize that gas prices fluctuate. If government policy were to essentially say that gas prices are going up and would not be coming back down, you’d start to see a gradual shift. Not as major as the one above, though. I used it for illustration purposes.

  5. web says:

    Having recently moved and in the process cut my commute down, I’d definitely say it helps a little bit not spending as much on gas (though, being in Colosse and having the things I do on a regular basis in other places, it doesn’t cut down as much as one would hope).

    “Sin Taxes”, in general, are something I think are a bad idea on the very basis you mentioned. Even if they were not to be “dedicated to X”, they do affect the general funds enough that the “sin” in question becoming less popular causes a tax shortfall.

    I’d say that maybe gas taxes should be per-dollar rather than per-gallon, but that would then remove any incentive for our government to do what it can to keep the price of gas down. Although, stupid decisions recently (the switch to ethanol from MTBE, not closing the Enron loophole properly, etc) have made it look like they’re pretty inept on that score anyways.

    Regarding water – did you hear about the family who got sued by their city for replacing their lawn with a drought-resistant plant variety to cut down on their water use?

  6. trumwill says:

    “Sin Taxes”, in general, are something I think are a bad idea on the very basis you mentioned. Even if they were not to be “dedicated to X”, they do affect the general funds enough that the “sin” in question becoming less popular causes a tax shortfall.

    I don’t think that makes them a bad idea as much as it makes it something that needs to be accounted for. If there is a plan in place to immediately or annually raise the tax in the event that a hole needs to be plugged (as in the case above), it’s not so much a problem. They pay a lot more per gallon, but they don’t (in the aggregate) pay more per month.

    If you’re looking to discourage driving for environmental reasons, you can simply return the money back to the citizenry on an equal basis. People that take the bus will be rewarded and those that drive trucks punished.

    The same applies to water. If the goal is to reduce consumption (as opposed to make money), you can simply push the money back to the people on an equal basis. Those that use more water will be punished and those that use less will have their usage subsidized.

    Sin taxes for discouraging sins are a pretty good idea. Sin taxes for raising revenue are problematic. Unless there is a provision in place to raise the taxes as required to hit the targets.

    Unfortunately, politicians don’t like to talk about that. No matter how much you explain “Even if you account for the raising gasoline taxes you won’t actually be spending more on gas on the whole,” the other side will just scream “TAX INCREASE!” in repetition.

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