Minnesota state Sen. Dick Day’s proposal for an additional 5 cents per gallon gas tax is a good idea. As an economist, I wish the Owatonna Republican had stopped there and not gone on to propose $125 and $75 taxes on purchases of new and used cars. That is not a good idea.
I understand the senator’s predicament, however. He recognizes that Minnesota should spend more on transportation. The Legislature is narrowly divided between the two parties. The governor is caught by an irresponsible campaign pledge opposing any tax increases.
Politics is the art of achieving what is possible — not what gets the highest marks from economists. Day knows he needs a proposal that will garner enough support in both parties and both houses of the Legislature to pass with a strong majority — one large enough that the governor will hesitate to veto.
With those political realities recognized, economists must point out some problems. The gas tax, while not perfect, is a workable one. It is reasonably efficient in terms of revenue produced versus cost to society, and it is reasonably fair.
In contrast, ad hoc excise taxes, such as the proposed charges on auto purchases, usually are bad taxes. They are not very efficient and they are not very fair.
Experience and economic research shows that lump-sum taxes like these tend to have what economists call a high “excess burden.” That is, for the revenue raised, they tend to reduce consumption in the private sector by a lot.
A tax takes money from households or firms and gives it to government. This isn’t the only cost of the tax, however. The private sector uses resources to collect and remit the tax and the government has to administer it.
Moreover, any tax creates incentives for people to do things that would not make sense if the tax did not exist. These entirely rational responses that end up wasting resources are a hidden cost of a tax.
The “excess burden” is the amount by which the sum of all these costs to society of a tax exceeds the revenues it produces for government. Again, it tends to be high for taxes such as those proposed.
In addition, such taxes tend to be regressive. They hit poor people proportionately harder than they do the wealthy. On a new $45,000 mega-SUV, a tax of $125 is a quarter of a percent. Even $75 additional on a $1,200 beater that a college student buys to get around represents 6.25 percent, a rate 25 times as high.
Day deserves our thanks for getting the ball into play. Now other members of both parties need to join in. We would be better off if we raised the fuel tax by a greater amount and simply dropped the new purchase tax. If money has to come from sources other than the gas tax, a dedicated 0.5 percent sales tax on vehicles would be fairer and more efficient than flat sums that do not vary with value.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.