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.

Dealing with the Decline in Gas Tax Revenues Due to the Decline in Driving

The Department of Transportion announced today that we drove 9.6 billion fewer vehicle-miles traveled (VMT) in May 2008 compared to May 2007. While that is good for reducing carbon emissions, it is bad for the Highway Trust Fund. When we use less gasoline, less gasoline excise taxes are collected.

According to Transportation Secretary Mary E. Peters: "By driving less and using more fuel-efficient vehicles, Americans are showing us that the highways of tomorrow cannot be supported solely by the federal gas tax."

Our current federal gasoline excise tax is 18.4 cents per gallon. It is not adjusted for inflation. It has been known for some time that adjustments would eventually need to be made in the rate or HTF funding approach as MPG of cars increased. Various studies have been done to get an idea of the problem and possible solutions to provide more funds for the HTF to maintain and build roads.

In December 2007, the National Surface Transportation Policy and Revenue Study Commission released its study of transportation funding issues and possible solutions. This lengthy report provides background on transportion and highway funding challenges and the results: roads in disrepair, increased congestion, economic losses due to problems of moving goods, and increased safety concerns. The report also looks at existing programs, funding problems and makes recommendations for preventing negative balances in the HTF. The Commission ended in July 2008.

Chapter 5 of the report lays out various recommendations. Some interesting ones include:

• Have the revenues from the gas guzzler tax be directed to transportation projects.
• Have any gas tax exemptions funded by the General Fund.
• Have custom fees related to transportation go to HTF

A few observations:

1. Carrots versus sticks: It is interesting that higher gas prices led to a drop in consumption. Several state governments have greenhouse gas emission reduction goals, why didn't they just raise their gasoline excise taxes and generate some needed funds while also helping their state to meet GHG emission reduction targets as a way to help meet their goal?

• How should governments determine when a carrot - such as an income tax credit for purchase of a hybrid fuel car is warranted rather than incentivizing behavior with an added cost, such as a higher gasoline excise tax? Couldn't the federal government have encouraged people to buy hybrids by raising the gasoline excise tax rather than giving away tax credits - and done some good for the federal budget? Of course, there are other costs of higher gas taxes.
• A problem with incentives is that they can sometimes fund activity that would have occurred anyway. For example, today most hybrid cars have waiting lists - even those without a tax credit.
• Sticks, such as higher taxes, are hard to implement as evidenced by some policymakers wanting to provide some type of relief for today's high gas prices. There are alternatives to high gas prices - driving less, using public transportation, making sure cars are in good operating condition and not carrying "stuff" that doesn't need to be transported around continually.

2. Several states have suggested or studied an alternative to tax per gallon - tax per mile traveled. Of course, that is much harder to measure and collect relative to paying per gallon at the pump, but not impossible.

• Research Triangle
• Oregon Mileage Fee Concept (2007 final report)
• California DMV Director (2004)

3. The gas guzzler tax could be expanded so that it also covers SUVs and the mileage rates modified to cover more "low" MPG cars.

Given tight budgets and plenty of other needs for general fund revenues, other options will need to be found for funding transportation and transit projects, particularly in light of declining gasoline excise tax collections.

What do you think?