15 August 2005

Excise Taxes

CNN has a summary of world gasoline prices. Japan and Western Europe range from about $4 a gallon to $6.48 in Amsterdam at a time when gas prices in the United States range from about $2.10 to $2.60 a gallon. The source notes that in many places up to 75% of the price at the pump is tax. Meanwhile, a few oil producing nations (Nigeria, Venezula and many in the Middle East) subsidize gasoline prices.

The United States has relatively low gasoline taxes, and all but about 2.86 cents per gallon of gasoline tax revenues go towards roads, and road still require large general fund appropriations over and above gas taxes to be built and maintained. Indeed, President Bush made a point at the signing of this year's transportation bill to state that spending on highways was increasing despite the fact that gas taxes were kept constant. According to Wikipedia: "The U.S. federal gasoline tax as of 2005 was 18.4 cents per U.S. gallon, and the gasoline taxes in the various states range from 10 cents to 33 cents, averaging about 22 cents per U.S. gallon." Thus, a little less than 20% of the cost of gasoline in the United States goes towards gas taxes and the percentage declines as the price of gasoline increases. (Ethanol receives preferred treatment). About half of road construction and maintenance costs come from gas taxes in the United States. Thus, the combined federal, state and local subsidy is about 40-44 cents a gallon, which is about two cents of mile in a typical sedan.

The basic argument against increasing gas taxes is that they are regressive. The poor pay a larger share of their income for gas taxes than the rich. The basic argument for increasing gas taxes is an environmental one. Gas taxes serve as a user's fees. If drivers pay the full cost, including not just road and highway costs, but also for the externalities like health costs caused by uninsured motorists and pollution associated with cars, they will drive and pollute less.

On balance, I think the user's fee argument wins. While we shouldn't excessively penalize gasoline useage, we should at least not subsidize the highway system. Emissions issues can be addressed directly, with tighter emissions controls and perhaps with penalty taxes for high emissions vehicles. A mandatory no fault insurance system can be enforced strictly and prevent people from burdening the health care system, although a few cents of gas tax to cover people who don't get insurance and require charity care wouldn't be unreasonable. Another 50 cents a gallon would end highway subsidies without creating European and Japanese style penalties. It would provide an appropriate nudge towards fuel efficiency, energy independence and the inevitable reduced supply and increased demand that are headed our way, without being draconian. Yes, it would push gas prices to from $2.60 to $3.10 a gallon (although the ideal way to do it would be to phase them in as the current surge in gas prices subsides), but that would be livable and still internationally competitive.

Likewise the argument for taxing tobacco heavily because it has so many public health consequences is reasonable.

On the other hand, alcohol taxes, which are highly regressive, serve a far more dupious purpose. Alcohol has health benefits as well as health costs. The 3% federal tax on phone services also seems unnecessary.

1 comment:

Bernardo Mahabir said...

Excellent, that was really well explained and helpful