By: Joe Zender
Representative Earl Blumenauer of Oregon proposed an amendment earlier this year to raise the federal ‘gas tax’ from 18 cents per gallon to 33 cents.[1] While the proposal failed, this 82 percent increase is endemic of the exorbitant gas taxes and increases around the country, both at the federal and state levels. Even as gasoline consumption has leveled off in the U.S., national production of gasoline has increased drastically, leading to lower gas prices.[2][3] Even so, legislatures have moved to increase the burden on each gallon consumed by the taxpayers. The gas tax is now to a point where it unduly burdens businesses, citizens, and even potentially the environment. It should be eliminated and replaced with a more efficient and effective system for funding infrastructure.
The retail cost of a gallon of gasoline across the U.S. on October 1, 2015 was $2.42.[4] At the same time, the average state gasoline tax was 30.29 cents per gallon and the federal tax was 18.4 cents per gallon.[5] That means the total tax burden on a single gallon of gasoline was 48.69 cents. Without any tax, a gallon of gasoline on October 1st would have cost $1.93. This means that the current sales tax on a gallon of gasoline equates to roughly 25%. To put that into perspective, the highest state sales tax rate in the U.S. is a 9.45% tax in Tennessee.[6] There are even five states with no sales tax at all, including Oregon and Delaware.[7] As is fairly evident, the sales tax on gasoline is exorbitant and out of character with the rates other goods are taxed. Because of this wide disparity, revenues cannot be the only objective in mind, as they could be sought in other areas with more regularity and conformity. Some believe that the true objective of gas tax stems from a motivation to protect the environment.[8]
There is no doubt that an increased cost, brought about by high gas taxes, decreases the amount of a product consumed.[9] Basic economics would say that no matter the size of the increased cost, it forces some purchasers out of the market.[10] However, even if the goal of decreasing gasoline consumption has been accomplished, it is likely causing adverse effects beyond merely costing fuel users more money. Akash Chougule, the Deputy Director of Policy for Americans for Prosperity, contends that an “important thing to remember about the gas tax is that increasing it would hit lower- and middle-income families hardest.”[11] For families, their demand for gasoline is fairly inelastic, meaning that as price rises, their demand falls much more slowly. Families still need gasoline to power their vehicles, to get to work and to school, even if the cost increases. For those at lower income levels, the raised cost of gas due to a gas tax means that they spend more money on gasoline as a proportion of their income than do those of higher income. In other words, the gas tax imposes a heavier burden on lower income individuals. It saps up a larger proportion of income of those that least can afford it. Even if the gas tax was motivated by noble intentions such as environmental conservation, it imposes extra burdens on low income individuals and families.
In addition to adversely effecting lower and middle income citizens, the objective of protecting and reducing harm to the environment might not actually be occurring. People and companies have to turn to other means for energy and power when they can no longer afford the typical fuels. For example, Greece recently increased their tax on heating oil and as a consequence its citizens could no longer heat their homes in that manner.[12] Instead of using heating oil, the people of Greece began burning wood and other substances in their homes.[13] Not only did this burning lead to greater air pollution across the entire country in almost every major city, citizens started to illegally cut down trees for their fuel source.[14] So, not only was the air more polluted after the tax, which was meant to raise tax revenues and reduce consumption, major forests around cities like Athens were being cut down. While it isn’t possible to cut down a tree to fuel a car, many companies have created more fuel efficient vehicles and begun to develop purely electric cars. But with the advent of these new vehicles comes new problems. In reality some studies have shown that electric cars are actually worse for the environment than traditional gas consuming vehicles.[15] This is not even considering the additional pollutants required to make the technologies, many of which come in the form of rare earth metals, mined by China in Inner Mongolia.[16] So while it may seem like sound policy to decrease gas consumption through the gas tax and thus prevent environmental degradation, it is very possible that the gas tax actually hurts the environment by promoting more environmentally dangerous behavior and consumption.
In addition to the foolhardiness of the decision to implement a gas tax, the way in which it is instituted is also significantly flawed. Given the competitive nature of the gasoline industry and its tax structure, the gas tax is inefficient in the short run and the entire tax is passed off to the consumers in the long run.[17] With gas stations placed in such close proximity to each other, their prices are in near perfect local competition.[18] At the same time, the gas tax is a per unit tax. In this situation, economic theory would say that in the short run the burden of the tax is shared between the seller and the consumer.[19] When the per unit tax is implemented, it pushes the market out of equilibrium. The amount buyers are willing to pay exceeds the amount sellers get to keep by the amount of the per unit tax.[20] This difference is also called the tax revenue. The reduction in buyer and seller surplus isn’t totally encompassed by the tax revenue however, as there is a deadweight loss in the market.[21] A deadweight loss is an inefficiency in the market that takes place when the market is out of equilibrium. Because both the seller and buyer see a reduction in surplus, which is the benefit parties get when they sell or buy a product for a more beneficial price than they would accept, they share the burden of the tax in the short run.[22]
However, in perfect competition, which is present in the retail gasoline industry, the long run consequences of a per unit tax are different than the short run ones. In the long run, firms in the industry will exit, as those that cannot make an economic profit under the tax regime leave the market.[23] As the marketplace becomes more concentrated and companies begin to produce less because of the increased marginal cost placed on them by the tax, the supply decreases.[24] As the supply available decreases, the retail price of the good increases. Eventually, the burden of the tax is placed entirely onto the consumer after firms that cannot make an economic profit exit the industry.[25] In foolishly implementing a per unit tax, such as the gas tax, the government creates inefficiencies in the market and deadweight loss in the short term and burdens the consumer with the entire tax in the long run.
As we have seen, the gas tax in the long run is entirely passed onto the consumers and currently the effective tax rate on a gallon of gas is around 25%. The question thus arises as to the legality of such an exorbitant tax. In Memphis Gaslight Co. v. Taxing Dist. of Shelby Cty., the U.S. Supreme Court stated that the U.S. Constitution does not protect property from unjust or oppressive taxation by states, as such matters are left to state laws and constitutions.[26] In Kirtland v. Hotchkiss, the Supreme Court stated that it could offer no relief to taxation if it “neither trench upon Federal authority nor violate any right recognized or secured by the Constitution of the United States.”[27] This means that there is little basis to declare the gas tax illegal, at least state implemented gas taxes. M’Culloch v. State describes the only course of protection against oppressive taxation.[28] Judicial remedies are not protection from the abuse of taxation, the only protection is through the structure of the government itself.[29] As the legislature places taxes upon its constituents, they act upon the goodwill of the people and which, according to the court in M’Culloch, would serve as a sufficient security against erroneous and oppressive taxation.[30] However, the decision in M’Culloch was written in 1819, when the 15th Congress of 227 congressmen represented less than 10 million people.[31] The effectiveness of goodwill of the public to prevent excessive taxation is clearly weaker today as evidenced by a 25% effective tax rate on gasoline that is allowed to survive under this system.
If the gas tax were to be discontinued or placed on moratorium, one concern would be who would receive the benefits of this tax reduction. A study of gas tax moratoriums show that 70% of the gas tax reductions are passed on to the consumer at the retail level.[32] A moratorium on the gas tax would just be a short term elimination of the tax, so it could be expected that in the short run, after the gas tax was removed 70% of those savings would be passed onto the consumers. As the economics is the same as discussed above, in the long run, without the gas tax, more firms would enter the market, leading to less concentration and a greater supply. With a greater supply the price would fall at equilibrium to the level it would be without the tax in place. The surplus that was encompassed by the tax revenue and the deadweight loss when the tax was in place, would be shifted back to the consumers and the suppliers. Additionally, without the tax, the deadweight loss would be removed, eliminating inefficiencies in the market.
On October 1st the federal gasoline tax celebrated its 20th anniversary. Twenty years of an exorbitant tax that creates inefficiencies in the market, has little oversight by the both the judiciary and the public, and most effects those who can least afford it. Twenty years of a tax that was foolishly implemented and often does not serve one of its stated means, which was to protect the environment. The government claims that this tax is needed and around the country legislatures continue to institute more gasoline taxes.[33] Some alternatives have been proposed, such as per mile taxes, but they have serious privacy and implementation concerns.[34] In practicality, much of the gas tax goes to repairing roads and bridges but it is a burden on people and the economy. It should be reduced or eliminated, in order to mitigate the damages it does and a better system should be put into place to maintain the infrastructure, such as privatization which is much more efficient and effective.[35] Regardless of the exact solution, the gas tax needs to go and the problems it causes with it.
[1] Matt Hurley, Congress Blocks Lawmaker’s Gas Tax Hike Proposal, Heartland, (Dec. 11, 2015), http://news.heartland.org/newspaper-article/2015/12/11/congress-blocks-lawmakers-gas-tax-hike-proposal.
[2] U.S. Energy Information Administration, Product Supplied (Nov. 30, 2015), http://www.eia.gov/dnav/pet/pet_cons_psup_a_EPM0F_VPP_mbbl_a.htm.
[3] U.S. Energy Information Administration, Crude Oil Production (Nov. 30, 2015), https://www.eia.gov/dnav/pet/pet_crd_crpdn_adc_mbbl_a.htm.
[4] U.S. Energy Information Administration, Gasoline and Diesel Fuel Update (Dec. 21, 2015), http://www.eia.gov/petroleum/gasdiesel/.
[5] American Petroleum Institute, State Motor Fuel Tax (Oct. 31, 2015), http://www.api.org/~/media/Files/Statistics/State-Motor-Fuel-Excise-Tax-Update-October-2015.pdf.
[6] Tax Foundation, State and Local Sales Tax Rate in 2015 (April 8, 2015), http://taxfoundation.org/article/state-and-local-sales-tax-rates-2015.
[7] Id.
[8] Thomas Sterner, Fuel taxes: An important instrument for climate policy, Energy Policy, June 2007, at 3194-3202.
[9] Justin Marion and Erich Muehlegger, Fuel Tax Incidence and Supply Conditions, Journal of Public Economics, October 2011, at 1202-12.
[10] Id.
[11] Matt Hurley, Congress Blocks Lawmaker’s Gas Tax Hike Proposal, Heartland, (Dec. 11, 2015), http://news.heartland.org/newspaper-article/2015/12/11/congress-blocks-lawmakers-gas-tax-hike-proposal.
[12] Constantinos A. Balaras, Tax Adds Fuel to Fire, ASHRAE, April 2013, at 70.
[13] Id.
[14] Id.
[15] Stephen P. Holland, Environmental Benefits from Driving Electric Vehicles?, The National Bureau of Economic Research, June 2015.
[16] U.S. Geological Survey, Rare Earth Elements – Critical Resources for High Technology (2012), http://pubs.usgs.gov/fs/2002/fs087-02/fs087-02.pdf.
[17] Stephen J. Entin, Tax Incidence, Tax Burden, and Tax Shifting: Who Really Pays the Tax?, Heritage Foundation, (Nov. 5, 2004), http://www.heritage.org/research/reports/2004/11/tax-incidence-tax-burden-and-tax-shifting-who-really-pays-the-tax/.
[18] Organisation for Economic Co-operation and Development, Competition in Road Fuel (2013), http://www.oecd.org/competition/CompetitionInRoadFuel.pdf.
[19] EconPort, Lecture on the Effects of a Per Unit Tax (2006), http://www.econport.org/econport/request?page=web_experiments_modules_taxes_lecture.
[20] Id.
[21] Id.
[22] Id.
[23] Stephen J. Entin, Tax Incidence, Tax Burden, and Tax Shifting: Who Really Pays the Tax?, Heritage Foundation, (Nov. 5, 2004), http://www.heritage.org/research/reports/2004/11/tax-incidence-tax-burden-and-tax-shifting-who-really-pays-the-tax/.
[24] Id.
[25] Id.
[26] Memphis Gaslight Co. v. Taxing Dist. of Shelby Cty., 109 U.S. 398, 400 (1883).
[27] Kirtland v. Hotchkiss, 100 U.S. 491, 495 (1879).
[28] M’Culloch v. State, 17 U.S. 316, 428 (1819).
[29] Id.
[30] Id.
[31] U.S. Census Bureau, Population: 1790 to 1990 (April 1, 1990), http://www.census.gov/population/www/censusdata/files/table-4.pdf.
[32] Joseph J. Doyle Jr. and Krislert Samphantharak, $2.00 gas! Studying the Effects of a Gas Tax Moratorium, Journal of Public Economics, August 2013, at 79-80.
[33] Samantha Marcus, N.J. Gas Tax Referendum Speeds Through Assembly Panel, True Jersey, (Dec. 17, 2015), http://www.nj.com/politics/index.ssf/2015/12/nj_gas_tax_referendum_wins_unanimous_support_from.html.
[34] Matt Hurley, Congress Blocks Lawmaker’s Gas Tax Hike Proposal, Heartland, (Dec. 11, 2015), http://news.heartland.org/newspaper-article/2015/12/11/congress-blocks-lawmakers-gas-tax-hike-proposal.
[35] Laurent A. H. Carnis, Why Pr. Bullock Is Not Entirely Right and Pr. Tullock Is Completely Wrong: The Case for Road Privatization, Ludwig von Mises Institute, Libertarian Papers, June 2009, at 28.