Giving Up on Gas Tax

I spent the weekend visiting Northwestern for graduate school, and ended up having an interesting chat with a professor about the gas tax and various other policy implications for the United States. The conversation started mostly because of Iowa's recent gas tax hike.

He argued that we would eventually have to give up a gas tax and move towards a mileage tax. Infrastructure needs are going to continue get worse as roads and bridges continue to decay. In the blue paper, the DoT talked about how the flat gas tax rate had led to decreased funding due to inflation and rising fuel efficiency. The short term solution is to simply raise the gas tax, but the real question is what to do when electric or hydrogen fuel cell vehicles become more common place. One of the primary income sources for infrastructure maintenance and investment will disappear.

Portland, Oregon (ever the trail-blazer) has decided to start a pilot project to examine the effectiveness of and issues with a mileage tax. Every time one of the people in this pilot project stop to fill up their car, it checks the odometer and charges you based on how many miles you have traveled since your last fill up. This pilot study had voluntary engagement, so to get any volunteers, the study put $300 in an account from which the mileage tax was drawn. In order to get somewhat realistic results, the study participants were allowed to keep any extra money in the account.

So far, the study has noticeably changed behavior and it looks like such a policy would generate a decent amount of money. People are also decently happy, although that would surely change when the people don't get an extra $300 from the government from which to draw. I worry that the transparency of the tax in its current form would cause issue in a general rollout that the gas tax does not. This would switch the experience from being a sales tax where the price is just in your receipt to the experience of sitting and looking at your pay stub that explicitly shows money being taken out of your pay check for taxes.

Another issue that I always try to talk about is the regressive nature of many of these taxes. While the U.S. is strange in that low income areas tend to be in the center of a city (as opposed to places like Cape Town or Paris where low income areas are on the outskirts), mileage taxes punish people who live in the countryside and small towns in flyover states the most. So what to do? Well, the easiest choice would be to let people file these on taxes so that if they are in the 25 % income bracket or below they would get some money back. To keep it from creating completely ridiculous economic incentives to keep incomes low, a variable amount of mileage tax could be subsidized based on your income.

So now we have a policy that can keep roads in good conditions even if electric vehicles become common place that also addresses income. Sure, nothing in the tax code is ever simple. Personally, I am waiting to see the end result of the pilot project, but given the difficulties of pushing through any tax increase it may be best to focus attention on a mileage tax.