Tax policy and the social costs of driving

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Article Highlights

  • gas taxes aren't perfect for externalities of driving - different fees are needed in urban areas

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  • Is the gas tax too low? Economics say (maybe) yes

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  • As gas tax is less related to amount a car drives, different approach needed in transp. policy

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In recent years, proposals to increase federal and state gasoline taxes or to replace them with other types of driving-related levies have drawn attention. The 2010 Bowles-Simpson plan included a phased-in 15-cent-per-gallon increase in the federal gasoline tax, currently 18.4 cents per gallon. Last year, bills were introduced in several states, including Washington, South Carolina, and Utah, to raise gasoline taxes at the state level, and the Information Technology and Innovation Foundation has proposed to increase the federal tax by 35 cents per gallon and then index it for inflation. Rep. Earl Blumenauer, D-Ore., recently introduced a bill to increase the federal gasoline and diesel tax by 15 cents per gallon over the next three years and then index it for inflation. Acknowledging that his plan would be unpopular, Blumenauer said it was necessary because the current tax will be insufficient to pay for road infrastructure, its primary purpose.

Covering the costs that drivers impose on the roads is not the only reason that higher gasoline taxes or other driving-related levies may be appropriate. Higher taxes on driving can also help correct the negative effects, or externalities, that an individual’s driving and fuel consumption inflict on the rest of society. In addition to environmental externalities such as air pollution, driving imposes other externalities such as congestion and accidents that are not internalized by individual drivers. An increase in driving-related taxes provides a better way to address those externalities than some of the regulations currently used.

Economists prefer to address an externality through a Pigovian tax, which is meant to equalize the private social costs of the activity with the long-run marginal social costs in order to encourage a more socially optimal level of the activity. Although creating a direct link between drivers and paying for road infrastructure is the central purpose of the gasoline tax in the United States, the tax can also serve as a Pigovian tax that addresses some of the social costs of driving and gasoline consumption. Other types of driving-related taxes are needed to address some of the externalities of driving (such as congestion), which are not closely linked to the amount of gasoline used. Increasing the gasoline tax and other driving-related taxes while repealing inefficient regulations can encourage more optimal transportation decisions by Americans.

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