Beijing's New Polluter Pays Car Tax - Good Idea?

Tax systems get used for a lot more than raising revenue for the government. They are also often used to help change behavior and to make prices reflect costs of "negative externalities." If you want to discourage something, raise the tax on it. If you want to encourage something, lower the tax or offer a special deduction or tax credit.

One activity we want to discourage today is greenhouse gas emissions, such as CO2 from burning fossil fuels - like the gas in your car. So, despite some elected officials calling for ways to lower the cost of gasoline, we should really be looking to increase the cost because:

• The higher cost will encourage people to drive less or find other ways to use less gasoline.
• What we pay for gas at the pump is not the true cost. When we drive and burn gasoline, we cause air pollution, create GHG emissions that contribute to global warming, wear out roads, and cause congestion. These activities have costs - such as cleaning the air or refurbishing roads.
• When that cost is not included in the price we pay, the government doesn't get the money needed to deal with the problems - the negative externalities of driving.

Beijing seems to have the idea right. It was reported in several news outlets that on August 13, Beijing announced that there would be a much higher sales tax on large cars and a lower tax on smaller cars (see abcnews.go.com)

The US has something similar with the gas guzzler tax enacted in 1978. However, that only applies to new cars so trucks and some heavy SUVs are not covered. You can find a list of covered vehicles from the EPA (here).

A flaw with both approaches is that the tax is only assessed at time of purchase. This doesn't do a good job of tying the tax to the cost of the negative externalities or help modify behavior. Once you've paid the gas guzzler tax, on the purchase of a $350,000 Lamborghini Murcielago, are you going to care how much you drive it every year? On the purchase of an expensive gas guzzling car, is someone even going to notice the up to $7,700 gas guzzler tax tacked onto the price tag? Will it cause someone to not buy the car? Of course, the gas guzzler tax also applies to some less expensive cars and it does seem to have caused carmakers to avoid mass producing cars that are subject to the tax.

Even if you buy the gas guzzler and keep it in your garage without driving it, you owe the tax.
A solution to better encourage less driving of gas guzzlers and discouraging their purchase (and manufacture) would be to have an annual tax on their ownership in addition to a higher gasoline excise tax.

The funds generated from a gas tax increase could be used for environmental research and clean-up, education on how to help the environment, and to provide relief to low-income taxpayers, as well as to some hard hit industries which they retool to use less gasoline. The use of a polluter pays tax to reduce another tax is called a "tax shift."

Another stick to help discourage production of gas guzzlers would be to deny companies the manfucturing deduction for them (IRC Sectoin 199) or impose an excise tax on some part used in these cars.

As federal and some state governments start serious work on reforming their tax systems to make them work better in supporting economic, societal and environmental goals, polluter pays taxes and tax shifts need to be part of that discussion.

Unusual Taxes - Often Not Ideal for Tax Systems

In efforts to either raise new revenue or change behavior, or both, we sometimes see some unusual tax proposals from lawmakers. Here are a few recent examples, some of which were enacted:

New Mexico - 1% excise tax on the sales price of televisions, video games, and video game equipment. The revenues would go into the "leave no child inside fund" to be used for outdoor curriculum programs, transportation for children to have an outdoor experience, to provide "outdoor nature-oriented physical activity programs" for children and similar purposes. This bill, HB 583 was estimated to raise about $1.85 million each year. As the name for the proposed law suggests - Leave No Child Inside, the goal was primarily to change behavior - get kids away from TV and video games and outside. It's unlikely that it would have changed behavior, but it would have provided extra moneys for outdoor education and activities. One of the supporters of the bill was the Rio Grande Sierra Club. This bill died in committee in March 2008.

Issues include:

• Is there really a good reason for this new tax? If there is a need to increase funding for parks so they have more programming for kids, why not use general fund revenues?
• Why single out video games and TV? Other things that keep kids inside include DVDs, games they can access on their computer (even for free), Girl Scout meetings, homework, chores, and much more.
• What about the definitional problems? Issues would certainly arise as to how to what is a video game, how to apply the tax if a video game is purchased online or from out-of-state, and more.

Chicago - a bottled water tax went into effect in 2008. See earlier blog post.

California - oil taxes. In March, a bill - ABX3 9 was proposed and died when it failed to get California's required 2/3 majority vote for a tax increase. This 2-part proposal included a severance tax on oil (not really unusual since many states already have them) and a 2% surtax on oil company taxable income over $10 million. Two unusual aspects - why single out oil companies for a higher income tax - why not other profitable companies? After all, California has a $15 billion budget shortfall. The other unusual item was that all revenue generated would go to the Superintendent of Public Instruction to alleviate budget cuts that are presently causing some K-12 teachers to get layoff notices.

Issues include:

• Earmarking taxes, particularly when there is not connection between oil and funding education. Also, when oil company income drops, so would education funding.
• Singling out one industry for special treatment (here, higher taxes) adds complexity to the law because special definitions are needed to define that industry.
  (See op ed.)

New York City - a congestion tax was proposed in 2007 by Mayor Bloomberg (New York Times story, 4/22/07). This is not an original idea because it is used elsewhere, such as in London. It addresses the problem - if you want to reduce congestion, make it more expensive to enter a location during certain hours. It will encourage people to find other means, such as walking or public transportation - or just waiting to enter when the tax is lower or not imposed. It does raise some administrative challenges, but it doable. We'll see what happens.

European Union - a proposal to tax cars based on how much they pollute (Reuters story, 11/13/07).

Issues include:

• How to measure how much cars pollute? The easy ways, such as by adding the tax on at time of purchase based on the year and make of the car won't work because people drive different amounts annually. People are unlikely to keep good records of how much they drive annually.
• Driving habits can affect pollution. Driving faster uses more gas as does driving with lots of stuff in the trunk.
• Visitors (although most probably drive in from another EU country) cause pollution, but not be taxed (depending on the system for assessing the tax).
• While a good idea, administrative difficulties probably make a tax at the pump a better approach.

There are certainly many others. One from a few years ago was a proposal in Detroit to tax fast food (CNNMoney.com article, 5/9/05). Significant issues include the rationale for such a tax (other than to raise revenue) and the many issues that would arise in trying to define fast food.
Often these unusual taxes arise when lawmakers are desparate for money, a situation that often doesn't lead to changes that are good for a tax system.