Friday, January 11, 2013

How to pay for roads?

My colleague in my GMU Econ cohort Zachary posted on his blog today about a proposed change in gasoline tax laws in VA. Effectively, the governor suggests the fixed 17.5 cents per gallon tax on gas be dropped altogether in favor of an increase in the sales tax from 5% to 5.8%, from which gasoline would be excluded. Zachary lays out most of the salient points, such as the fact that this tax is not revenue neutral, would help deal with the issue of the fixed gas tax not being pinned to inflation or anything else, and the like.

While I don't strongly disagree with his over all thesis, I do want to pick apart some of his points, as I think he is letting the perfect be the enemy of the good (or at least not so bad) in his analysis.

1: Lighter cars degrade the road surface less than heavier ones. Interestingly, this isn't always true. The relevant comparison is not just weight, but tire surface on the road per pound. As a result, a car weighing 2,000 pounds with 4 tires that puts 50 square inches of rubber on the road per tire has a factor of 10 lbs per square inch, while a tractor trailer weighing 60,000 pounds with 18 wheels only needs each of its much larger tires to have ~334 square inches of surface area on the road to have the same factor. Sounds like a lot, that that is just an 18.25" square compared to the car's ~7" square. This isn't to say that tractor trailers are always easier on the road than cars, but just that they are not nearly so bad as people think. (Hooray for my supply chain degree becoming suddenly relevant!) So more tractor trailers on the road compared to coupes does not necessarily mean much more road degradation.

2: Pro-cyclical nature of the tax Zachary seems to be suggesting here that the revenue generated would not necessarily increase along with increases in road use. While the magnitude might not always be the same amount, it would seem that only a decrease in prices that mitigates changes in volume such that the total sales dollars stays constant or decreases would matter in this sense. If prices increase while volume stays the same, presumably revenue compared to usage would increase (affected by price changes in maintenance, but more on that shortly.) If prices stay the same and volume increases, total sales dollars would still increase, resulting in more revenue and more usage. The ratio of revenue to costs might go down, but the amount of revenue would still go up. So if say prices are fixed but quantities double, the revenue generated is still doubled. Road degradation might more than double, but it isn't clear that is the case. In light of my previous point, it might not at all.

3: Does the tax adjust for inflation? I think Zachary is a bit harsh here. It does adjust to inflation as defined as an increase in the price level. The current fixed number does absolutely nothing of the sort. Now, he is correct that there is no particularly good reason to assume that the rate of inflation will be the same between the road maintenance and consumer goods industries, and thus the tax does not account for that. True, but the current tax does not account for it either. We are not comparing a perfectly priced tax that takes all relative prices into account to the new tax, but rather a current tax that does not shift at all for inflation or any relative prices to one that at least adjusts to changes in prices in the products it affects. (It does it automatically at that, so the CPI doesn't come into the picture at all.)

4: Fuel Efficiency I think Zachary has it largely right here, except that light vehicles are not necessarily easier on the road. Generally more efficient vehicles have smaller tires. (Think of road racing bikes vs mountain bikes, and why the former have tiny little inch wide tires while the latter have nearly 2-3 inch tires.) So that Prius might not in fact cause more wear on the road than that van per mile. Just saying... pricing the damage from use is really tough. Amish buggies play hell on the roads with their metal shod horse hooves and often metal rimmed wheels, yet they get a total pass on gas taxes.

While I generally agree that gas taxes do generally tax those most who use the roads most, and thus helps internalize the cost, I also don't believe that the funds raised for road work actually go only to it, or that other funds don't get moved towards it. I also think that the current fixed number tax is quite poor even as applied. The fact is that government is very poor at directing the taxes at those who actually use the good, and thus their internalizing measures do very little to affect behaviors. Before reading his post, I had no idea the gas tax in VA was 17.5 cents a gallon. I used less gas as the price went up perhaps, but not because a bureaucrat was tweaking the tax level.

Perhaps a better compromise would be a percentage tax on the price of gas, a sales tax that applies only to gas, at say 5%. That punishes those who use premium has instead of standard, but every tax is randomly punishing. Of course, those who don't own cars but still purchase goods shipped by motor vehicle would not directly pay the tax, but it would still be reflected in the price of their goods assuming the truck drives refueled in state. Then again, unless you live ~100 miles inside state lines, or the shipping/truck depot is inside state lines and thus buying their tax there, you would not be paying anymore necessarily.

All that to say: taxing things accurately is nearly impossible for government, and often private firms as well. Sometimes you have to live with some externalities and go with efficiency. A higher state sales tax and no gas tax might well be the optimal along those lines. I think that Zachary is in this case letting the theoretical perfect tax be the enemy of this change, and not the current tax.

Then again, he doesn't drive as far to school as I do, so maybe I am biased; who wants to pay more in taxes? Maybe I would be more strongly against the change if my personal tax expenditures were shown to up as a result of the change.

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