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Freakonomics: Doing a U-turn on the gas tax

The gas tax helps pay for our roads; and we’re not collecting as much money as we need. How do we fix it?

The cars we drive today are more fuel-efficient than ever, and that would seem to be great news for everyone. But here’s one downside: transportation budgets are heavily powered by the gas tax.

"And right now, the nation relies extremely heavily on gas taxes for transportation funding," according to Jaime Rall, from the National Conference of State Legislatures. She says that better fuel mileage means less money for roads and bridges. "Advancements in fuel efficiency pose some real problems for transportation budgets."

Plus, the gas tax isn’t a percentage but rather a fixed amount -- which, because no politician wants to raise the gas tax, has been stuck at 18 cents a gallon for 20 years.

So what should be done about it? The most sensible may also be a hard sell: billing drivers based on their mileage.

"At least 18 states have pursued pilot projects," says Rall. "And in the past five years, legislatures in at least 11 states have considered more than 20 proposals to establish or study state level fees of this kind."

Another idea, ready for import from Finland, is to base traffic fines on the driver’s salary. Just a few tickets from a few speeding billionaires could help balance any budget in a hurry!

Kai Ryssdal: Time now for a little bit of Freakonomics Radio -- that moment in the broadcast every couple of weeks where we talk to Stephen Dubner, the co-author of the books and the blog of the same name. It is “the hidden side of everything.” Dubner, how you been, man?

Stephen J. Dubner: Great Kai, thank you. Been thinking about you. You drive a lot out there in California, right?

Ryssdal: It’s L.A. baby. Of course we do!

Dubner: What are you paying for gas these days?

Ryssdal: Oh, a lot! It’s over four bucks a gallon.

Dubner: So people generally don’t like that, even though relatively we pay pretty cheap gas. The good news, however, is M.P.G. -- miles per gallon. We are now at a point where we get more miles per gallon of gas than any time in history, about 24 miles on average for the U.S. car fleet. And that number because of federal regulations is going to go up quite a bit in coming years. So great news, right?

Ryssdal: Great, yes. Now what? With you, it’s always good news, bad news, dude. What do you got?

Dubner: Well, let’s go a little deeper. Fuel economy goes up, which means what? It means that the cost of every mile you drive goes down. So people have an incentive to drive more, which can lead to more congestion, more risk of accident, but there’s an even less obvious problem than those. Where do we think the money to build and maintain our roads all comes from?

Here is Jaime Rall from the National Conference of State Legislatures.

Ryssdal: Okay.

Jamie Rall: And right now, the nation relies extremely heavily on gas taxes for transportation funding and advancements in fuel efficiency pose some real problems for transportation budgets.

Ryssdal: If you follow the logic train here, it’s people are using less gas because cars are more efficient, and then there’s less tax revenues being raised to pay for the road. Right?

Dubner: You got it. Revenues are hurting. But it hurts additionally because the gas tax is such a strange tax. Instead of being a percentage of, you know, whatever, two percent, five percent per gallon, it’s a fixed rate. So the federal rate is 18 cents a gallon. States add their own state taxes on -- again, a fixed rate. But because it’s fixed, unlike, let’s say, a sales tax, you don’t raise more tax revenue when the price of gas goes up. So every year, what happens is gas tax revenues lose purchasing power.

Ryssdal: All right, so this is one of those gotta-ask-it questions even though I know the answer. Why not just raise the gas tax?

Dubner: It would seem logical. Many economists have been lobbying that for years. But politically, for whatever reason, the gas tax is one of these things that’s just a no-go zone.

Ryssdal: All right. So find me the Freakonomics way out of this then.

Dubner: Well, let’s go down a wrong path first, shall we? I hate to pick on politicians, but the governor of Virginia, Robert McDonnell, has an idea that seems like a pretty bright idea, but most economists would say it’s not bright at all. What he wants to do is eliminate the state gas tax in Virginia and make up for those funds by raising the sales tax.

Ryssdal: And that’s a bad idea because...

Dubner: Because a tax is most fair when it hits the people who should pay it, but leaves everyone else alone. Right? But what Gov. McDonnell is doing is flipping that logic.

Ryssdal: All right. So hit me with your plan.

Dubner: Well there is a growing movement -- I don’t know how well this would work -- but the idea is this: to tax drivers the way they probably should be taxed, which is per mile driven. So that way, you’d pay the same amount for the roads whether you’re driving, you know, a gas-guzzler, or an electric car that doesn’t use any gas at all. Here’s Jaime Rall again.

Rall: At least 18 states have pursued pilot projects. And in the past five years, legislatures in at least 11 states have considered more than 20 proposals to establish or study state level fees of this kind.

Ryssdal: Yeah, you know what though? This smacks of Big Brother watching me when I drive, dude. Knowing where I’m going. Right?

Dubner: Yeah, people will not like this idea, in many cases.

Ryssdal: They’ll go nuts!

Dubner: On the other hand, let me just say this: we’ve all gotten used to willingly carrying around a GPS device with us at all times, which is what a smartphone does, right? We’re also getting used to the ideas of electronic tolling where we don’t have to stop at the booth. So I wouldn’t be shocked if we were to see some per-mile taxing in the future. If things get really desperate, if you really need to raise money for roads, we could try what they do in other parts of the world, which is this, Kai: traffic fines that are indexed to how much money you actually earn. So, in Finland for instance, if you get a speeding ticket, you’re fined about 20 percent of one month’s take-home pay. So, you know, the speeding fisherman is going to pay a lot less for his ticket than the speeding high tech boss or radio talk show host, for that matter.

Ryssdal: Yeah, ba dum boom. One cautions though, that this is America my friend. Not Finland.

Dubner: That’s true -- not yet, Kai. Check in with me in a couple of weeks. We’ll see if we’re all looking a bit more Finnish around the ears.

Ryssdal: Steven Dubner, Freakonomics.com is the website. We’ll see you in a couple of weeks.

Dubner: Thanks for having me, Kai.

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The reason why people are more afraid of the government tracking our location, instead of companies, is that companies can't arrest us.
Fax taxes are a great way to pay for roads; the vehicles that use more gas, also do more damage to the roads. Even people who don't drive get utility from the fact that that we have a functioning transportation infrastructure. We should eliminate subsidies to fuel efficient vehicles before we start taxing per mile.

Given you want to tax roads based on usage we should first define usage. Are we taxing the utility you get from using roads, or taxing you for the amount of road life your driving uses up (the damage you do to the road). My opinion is tax the later. Damage to roads is exponentially related to vehicle weight, almost all deterioration is caused by trucking. Fuel efficient vehicles do almost no damage.

A gas tax is a much better approximation of usage than a mileage tax if you are taxing usage and not derived value.

While it is true that more fuel efficient cars have eroded the value of the gas tax, the tax has also not been raised in 20 years to account for inflation. Because it's called a tax, rather than a user fee, it's stuck in this ridiculous national debate about whether we should cut taxes or spending without evaluating the merits of particular programs. I happen to think that the gas tax would be a bargain even if it was raised substantially. Between our two vehicles averaging 30 mpg, my wife and I average 25000 miles per year, which comes out to 833 gallons of gas. In our state of Maryland, where the combined Federal and State tax is $0.42/gallon, that's a mere $350/year for driving on excellent roads and superhighways without having to bother with tolls. I spend 8 times that amount just on my auto insurance!

Thanks Dubner for bringing this up. We have an infrastructure crisis in the making. And pay by the mile is the right solution. Ireland is already doing this on some of it's major roads (and it works well). It is electronic and automatic.

Pay by the mile ... why is this such a hard sell? It's so simple; the users of a service (in this case the road) should be the ones to pay for it, based on actual use (which is what mileage measures). What is objectionable, or difficult, about this? It's a free market concept.

And yes we should peg it to inflation to avoid later need for adjustment; but it makes no sense at all to link it to the price or amount of gas, since this no longer in any way reflects actual usage of the roads. Perhaps vehicle weight should enter the equation (particularly for large trucks), but the true total cost of building and maintaining the roads is effectively the same no matter how efficient our vehicles are.

I was going to point out that Dubner completely left out of the equation the wear and tear that lighter more fuel efficient cars put on the road. If we are talking about use taxes, then that should be part of the equation.

I work for a state transportation department. Large trucks cause most of the wear on roads (and even now, pay more per vehicle in taxes, fees, & fines than any other class of vehicle). Differences in the weight of passenger vehicles, however, are insignificant (in terms of additional maintenance cost incurred) compared to the total cost of building and maintaining roads and bridges.

Here's my thought: every year, I need to get my car inspected. What if as part of that, the odometer reading was recorded on the inspection sticker. Each year, when I get my car inspected, I would have to pay my mileage tax. Personally, I think it should be a factor of mileage and vehicle weight so that heavier vehicles (which cause more ware on the roads) would have to pay more. Those buying fuel efficient vehicles would still save on the fuel itself, but even people driving electric cars using no fuel would help pay to maintain the roads.

There are a couple issues I already acknowledge. First, you'd have to make sure I couldn't just get the car inspected in another state and register it in my home state, though this could be solved with some sort of "inspection number" that I need to provide with my annual registration. The second problem, but something that would be a problem with any new plan, is managing the transition from the old plan to the new one.

Taxing per mile driven removes an important incentive to purchase a more fuel efficient vehicle, which has so many other benefits. Less emissions, less trade deficit, and as someone else posted, fuel efficient vehicles mean less wear on roads. Smaller vehicles require less resources to build. Taking away incentives to upgrade to more fuel efficient vehicles also dampens the automotive industry which is only beginning to rebound from the economic downturn. I favor the suggestion that gas tax be a percentage of wholesale price of gas sold rather than cents per gallon consumed.

Encouraging environmentally sustainable behavior is certainly laudable, but it's a whole different issue from paying for roads and bridges. There are other ways to encourage good behavior, and I would hope decisions of this sort would be made based on more than just a small tax difference. But the real point here is that gas taxes are not working; and if we reexamine the whole issue from scratch, they don't really make much sense.

The solution is so simple and is right in the text of your story: Make the gas tax a percentage of the price of fuel. This way as inflation pushes up the cost of gas, the revenue collected to support the roads will go up too, without having to make any cowardly politicians raise the tax explicitly. And the problem isn't efficiency, high gas milage cars do so with new materials that save weight and thus wear and tear on the roads. If they think raising the gas tax is going to make them unpopular, imagine how much of a skunk they will be if they want to add a new tax on us, one that penalizes drivers of efficient cars because is charges a Prius driver the same as a Hummer per mile. The other benefit of the gas tax is that it allows use to directly bear the costs of their driving so they can make more informed decisions whereas a deferred tax like mileage is out of sight and out of mind until tax day.

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