"Quite often the obvious answer is the correct one."

Oregon's Mileage Tax: A Truly Bad Idea

By Mike Moffatt
About.com
Copyright 2008

I try not to editorialize when I comment on public policy proposals. I try to give my readers the pros and cons of any potential new law and leave it up to the reader to form their own opinion with the new information they have. But some policy proposals are so outrageously ill-conceived they defy all description. Oregon's "mileage tax" is one such proposal.

The idea, as described in Eric Pryne's article "Oregon to test mileage tax as replacement for gas tax" can be summarized in a few key points:

1. As consumers buy more fuel efficient cars, they'll use less gasoline.
2. States collect taxes from gasoline, so if less gasoline is sold, the state will collect less tax revenue, all else being equal.
3. States can ill afford a drop in revenue as those funds pay for road repairs.
4. Thus we must find a new way to tax drivers to make up for this lost revenue.

Thus the Oregon government is considering a system where Oregon drivers get taxed for every mile they drive within the state. In the interest of fairness, the Oregon government does not want to tax drivers for miles they put on their cars outside of the state. Thus the tax collector cannot simply look at the odometer of a car and collect revenue accordingly. Instead the Oregon government would like to add a GPS (Global Positioning System) to every car that would track what percentage of a cars miles were driven in Oregon. Such a system could add up to $225 to the cost of a new car.

When examining any tax, there are two criteria you can use to determine the impact that tax will have:

The Net Amount of Revenue Collected

This impact is straight forward. Once you pay for all the expenses related to collecting the tax revenue, how much money will you have left over? Under this criteria, this new tax looks like a loser. Expensive new technology will have to every new car in the State as well as every new gas pump. If 100,000 new cars are sold each year in Oregon, $23 million dollars will be spent in specialized GPS devices. While the government may require that the individual consumer pick up the tab, this is still lost revenue for the government. Instead of requiring the consumer to buy a $225 device, the state could add a $225 tax to every new car sold, thus having the money flow to the State and not to the GPS manufacturer.

The Distortions Caused by Taxation

Taxes are distortionary in the sense that they alter behavior. High income taxes are known to cause employees to work less and high capital gains taxes are a deterrent to investing in the stock market. These distortions are not always negative; often governments will introduce new taxes because of the distortions they cause. High taxes on cigarettes are often promoted as a way to discourage youth from picking up the habit.

The distortions caused by gasoline taxes are threefold.

1. High gasoline taxes reduce the amount people drive
2. High gasoline taxes increase the marginal cost of goods shipped by truck
3. High gasoline taxes cause people to buy more fuel efficient cars

The first effect is ambiguous. If I'm stuck in rush hour traffic, I'd like to see less cars around me, but at the same time, high gasoline taxes may discourage me from taking trips I'd otherwise embark on. The second effect is most certainly negative. As a Canadian who loves orange juice, I certainly don't want to see a rise in the shipping cost of Florida oranges. As for the third effect, a good argument can be made that this is a positive distortion. Fuel efficient cars give off less pollution than non-fuel efficient cars. Since the air is a public good, we will see far more air pollution than is socially optimal unless governments find a way for individuals to pay for the costs of their pollution. The gas tax is one way of doing so.

When we consider these distortions, we see that the mileage tax is a poor substitute for the gas tax. It has all the negative features of the gas tax, such as decreasing the number of trips taken and increasing the marginal costs of products shipped via truck. It, however, does not have the positive impact of causing consumers to buy less polluting cars. Any proposal that has less benefits but just as many drawbacks as existing methods can hardly be seen as a positive change.

Conclusion

In the summary of the mileage tax, we saw that "if less gasoline is sold, the state will collect less tax revenue, all else being equal." However, this is absolutely no reason for "all else to be equal". If revenues are falling, why not simply raise the gas tax? The ability of consumers to buy gas from other jurisdictions, as well as the price elasticity of demand for gasoline will limit the amount the Oregon government can raise the tax, but it appears to be a far better option than this ill-advised scheme. Raising the rate of taxation in order to combat declining revenues is the obvious answer to Oregon's problem. Quite often the obvious answer is the correct one.

© 2008 About.com: economics.about.com

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