A Mileage Tax or a Gas Tax?

Our fair Governor has proposed a mileage tax on top of a gas tax hike to address the lacuna in transportation funding.  This raises the question of which is better and what do they accomplish.

If you are proposing Pigovian taxes, then both make sense but address very different things.  Driving a car imposes external costs through the impact on the environment, through the wear and tear on the roads and through the time cost of congestion.

A mileage tax addresses the wear and tear issue.  People who drive will be assessed a tax that is equivalent to the cost of the road wear they are responsible for.  This has the benefit of being fair and providing a direct source of funds to maintain the roads and is a disincentive to drive once the external cost is made internal through the tax (and also taking into account the cars weight, etc. - of course how will they deal with studded tires and chains?).  The implementation is costly however, having a GPS in each car has got to be expensive as well as the cost of reading them and imposing a tax.  Perhaps we could just do a mileage charge - not as accurate but simple.

The mileage tax does not address the congestion issue, but with the GPS it could, one assumes.  If you drive on certain congested roads at certain rush-hour times, you could be charged more. This would provide the same Pigovian incentives to avoid driving during rush-hour or in congested areas.   The GPS could also determine how much tax should go to municipalities, counties, and the state depending on which roads you drove on.  But doing these things would seem to be an enormous computing challenge and one that would be enormously expensive.  It is an interesting idea, however.

The gas tax is Pigovian in addressing the environmental impact of the amount of carbon emitted which is exactly related to the gas used.  If the primary goal is to address this than this is the appropriate tax.  

It is clear that each tax is also a poor way to address the other issue, to wit: a gas tax is not a good way to address wear and tear because a Prius could do a lot of wear and tear with little gas and a Mustang could do little wear and tear with a lot of gas; and a mileage tax doesn't work, for the very same reason, as a way to address environmental impact.

Both taxes could be implemented, but since the gas tax is good for the environmental impact side and, though imperfectly, does address the wear and tear side as well, and is basically zero extra administrative cost, it seems like the clear winner.  However, if the GPS system could be done very cheaply and has the added congestion and differential tax components, it might be worth pursuing.  Perhaps it is politics but I don't see what's wrong with a healthy increase in the gas tax - besides the GPS monitors will just serve as a constant reminder of the government's taxation which will fuel the anti-tax sentiment latent in almost everyone.

Note: One thing I failed to mention is that the milage tax is imperfect in that non-Oregon registered cars that drive in Oregon (for example, Vancouver commuters) would get off scott-free.  At least a simple gas tax would catch some of them and would work both ways (Oregon drivers in Washington would pay for Washington's roads only when they buy gas in Washington).

Soda Taxes: Sin Taxes or Pigovian Taxes?

Over the weekend, Greg Mankiw used his Economic View column in The New York Times to address the ides of taxing soft drinks.   He argues that they are sin taxes and not Pigovian taxes because they are designed to save users from themselves, but do not reconcile the market price with the social cost of the activity because the net cost to society is not likely to be positive.  Soda is like cigarettes, he argues, and cigarettes impose social costs through some secondhand smoke effects and from smokers themselves who get diseases that are costly to treat, but they also cause users to die much younger saving society lots of money in social security payments foregone and the like.

Here is Mankiw:

One argument for specific taxes is that consuming certain products has an adverse impact on bystanders. Economists call these effects negative externalities.

Taxes on gasoline can be justified along these lines. Whenever you go out for a drive, you are to some degree committing an antisocial act. You make the roads more congested, increasing the commuting time of your neighbors. You increase the likelihood that other drivers will end up in accidents. And the gasoline you burn adds to pollution, including the greenhouse gases thought to cause global climate change.

Many economists advocate gasoline taxes so that drivers will internalize these negative externalities. That is, by raising the price of gasoline, a tax would induce consumers to take into account the harm they cause after making their purchases. One prominent study added up all the externalities associated with driving and concluded that the optimal gasoline tax is over $2 a gallon, about five times the current level (combining the federal and a typical state’s levies) and about the tax rate in many European countries.

Applying that logic to other consumer goods, however, is not as straightforward. Consider cigarettes. They are among the economy’s most heavily taxed products, as governments try to discourage people from smoking. Yet the case for such a policy cannot rely on a conventional externality argument.

When a person sits at home and smokes two packs a day, the main adverse impact is on his or her own health. And even if second-hand smoke is a concern, that problem is most naturally addressed within the household, not at the state or federal level.

Sometimes, advocates of “sin” taxes contend that consumers of certain products impose adverse budgetary externalities on the rest of us — that if the consumption induces, say, smoking- or obesity-related illness, it raises health care costs, which we all pay for through higher taxes or insurance premiums.

Yet this argument has a flip side: If consumers of these products die earlier, they will also collect less in pension payments, including Social Security. Economists have run the numbers for smoking and often find that these savings may more than offset the budgetary costs. In other words, smokers have little net financial impact on the rest of us.

It may seem grisly to consider the budgetary savings of an early death as a “benefit” to society. But when analyzing policy, economists are nothing if not cold-blooded. If one uses budgetary costs to justify taxing particular consumption goods, the accounting needs to be honest and complete.

He ends with this thought:

...To what extent should we use the power of the state to protect us from ourselves? If we go down that route, where do we stop?

Taxing soda may encourage better nutrition and benefit our future selves. But so could taxing candy, ice cream and fried foods. Subsidizing broccoli, gym memberships and dental floss comes next. Taxing mindless television shows and subsidizing serious literature cannot be far behind.

David Leonhardt takes issue with the idea that soda taxes are not Pigovian. He argues that the health implications of soda are not like cigarettes, people are not likely to die much younger but are much more to have to live life with diseases with long-term and costly implications:

The link between sugary drinks and obesity is stronger than the link between any other kind of food and obesity, as Kelly Brownell, the Yale obesity researcher says. Calorie intake from these drinks — most of which have no nutritional benefit — has increased almost threefold since the late 1970s. The increase accounts for about half the total per-capita rise in calorie consumption over the same period.

Obesity, in turn, causes a very different pattern of illnesses than tobacco does. Obesity has caused a sharp increase in costly chronic diseases, like diabetes, but is much less likely to cause rapidly fatal diseases, like lung cancer. An article in Health Affairs estimated the annual cost of obesity to be $147 billion and growing. That translates into $1,250 per household, mostly in taxes and insurance premiums.

A soda tax obviously would not solve the obesity epidemic. But it appears to be one of the most promising responses, given the central role that sugary drinks play in the epidemic and the fact that they have no nutritional benefit. A tax would also help reverse the big decline in the price of soda over the last few decades, at the same that the price of fruit and vegetables has been rising. Finally, as with a gasoline tax, a soda tax would help cover the broader costs that the product imposes on taxpayers.

I am of two minds in this: I am weary of too much government involvement in markets to try and correct all market failures and I am enough of a libertarian to believe that people should be able to make their own choices when the costs and benefits are largely private.  That is to say that, like Mankiw, I am not a fan of sin taxes.  But if childhood obesity really is an epidemic that has serious potential cost consequences then Pigovian taxes are justified. In fact, I think Mankiw would agree with this premise, but he obviously does not agree that soda has a large societal net cost (or is not yet convinced).

Regardless, the recent push for soda taxes is clearly more about balancing budgets than fixing a market failure.

UPDATE: Greg Mankiw responds to Leonhardt.

Studded Tires, Biking and Pigovian Taxes

A few comments in the blog and through e-mail have prompted me to clarify a few things about my take on the issue and Pigovian taxes in general.

First, let's be clear - a tax on studded tires would NOT BE a new tax. The tax is already there - it is imposed on all of us to pay for the damage studded tires do to our roads. The specific Pigovian tax would do two things: it would assess the tax on the people who engage in the activity that creates the social cost and, more importantly perhaps, it would DISCOURAGE that same activity. This is why such taxes are efficient: in the end only those who really need studded tires will use them and they will pay for the additional wear and tear to the roads.  As a result we should see less of the activity that has negative external costs.

Also in the comments the issue of bikes arose.  As I have stated before, it is likely that biking creates a net social benefit, not a net social cost.   Improved health, lower emissions, less congestion and less wear and tear on the roadways could reasonably be expected from increased biking, so by the same principle we should be subsidizing bike riding.  Which we do of course by investing money in bike paths, bike lanes, bike boulevards, etc.  The Pigovian principle suggests that these are entirely appropriate expenditures.

And finally, Jeff in the comments wonders why such a tax would be considered a 'liberal' fix to the problem.  He thinks of it as a 'conservative' response - just as a number of conservative economists, most notably Greg Mankiw, have repeatedly endorsed Pigovian taxes, this preserves the choice of studded tires for those who really want or need them but it places the responsibility of paying for the added wear and tear on the very user themselves and returns efficiency to the market.  It is a market based response that preserves individual liberty but requires individual responsibility.

To me it is just the right economic response.    

Economist's Notebook: Pigovian Taxes and Studded Tires

The always entertaining (and bike commuting - isn't that oh so Portland?) commuter columnist for The Oregonian, Joseph Rose, has touched on another of the numerous third rails of Oregon politics: studded tires (self-serve gas is another - but once the economy recovers, I am back on my high horse about it).  He wonders whether, given the extreme wear and tear the tires impose on roads, these tires should be banned in Oregon and he reports on a real effort to have such a ban enacted.  Apparently Minnesota and Wisconsin have bans in place. [I lived for many years in Wisconsin and never though much about studded or even winter tires as most folks just drive more slowly and carefully to account for the weather.  I was always amused to come to Oregon for my winter break and hear the clickety-clack of studs on dry pavement.]

Rose reports that the studs do $40 million dollars of annual damage statewide and you can see the effects on the highways. There was a time when I was an undergrad at Lewis & Clark that I could drive back to campus from downtown on I-5 and not steer.  My little VW Rabbit would just track up the curves in the ruts (I was young and poor and delighted in the cheap amusements).  Besides, rubber snow tires are almost as good without the extra wear and tear so there is little reason to allow them.

In fact he has a poll that asks that question: should studded tires be banned in Oregon? [At last looks like about 3 to 1 in favor of a ban]

But to an economist the optimal solution is obvious and it is not a ban.  There are probably some folks out there for whom studded tires are very, very useful (or at least they think they are) and for those folks a ban would be a real hardship, but for most folks they aren't really doing that much.  But given the added wear and tear the impose on roads it is efficient to include in the price of the tires the cost of the added damage to roadways.  Given the $40 million figure mentioned above, it is clear that there are estimates of the actual monetary damage they do.  Now, if they are reducing accidents you have to factor this in as well, but my guess is that this is probably actual outweighed by the additional accidents on wet roads on which studded tires are much worse.

Regardless, the true net additional cost of studded tires is not that hard to estimate.  A Pigovian tax that adds to the purchase price of tires the external costs they impose will return efficiency to the market.  Only those who really do value the tires will buy them after the tax is imposed, and the taxes they pay will provide revenue to fix rutted roads more quickly.

There you go, problem solved.  You are all welcome.

Eco-nomics: Carbon Tax

Why do most economists favor a carbon tax as a way to address the harmful consequences of carbon emissions? Efficiency.

Here is a smart and succinct defense of carbon taxes over cap-and-trade by Ted gayer of the Brookings Institution, it was his testimony before the U.S. Senate Committee on Energy and Natural Resources on December. It is all about the incentives... [HT: Greg Mankiw]

1202 Carbon Tax Gayer

That said, cap-and-trade is a heck of a lot better than nothing, and a pretty good second best: I am not that convinced that the incentives problem Gayer talks about is going to be that important (the plant a tree so you can say you saved a tree - you are still creating one more tree which in this case stands for carbon reduction). Here is Paul Krugman's defense of cap-and-trade:

A tax puts a price on emissions, leading to less pollution. Cap and trade puts a quantitative limit on emissions, but from the point of view of any individual, emitting requires that you buy more permits (or forgo the sale of permits, if you have an excess), so the incentives are the same as if you faced a tax. Contrary to what Hansen seems to believe, the incentives for individual action to reduce emissions are the same under the two systems.

This is true even if some emitters are “grandfathered” with free allocations of permits, as will surely be the case. They still have an incentive to cut their emissions, so that they can sell their excess permits to others.

The only difference is the nature of uncertainty over the aggregate outcome. If you use a tax, you know what the price of emissions will be, but you don’t know the quantity of emissions; if you use a cap, you know the quantity but not the price. Yes, this means that if some people do more than expected to reduce emissions, they’ll just free up permits for others — which worries Hansen. But it also means that if some people do less to reduce emissions than expected, someone else will have to make up the shortfall. It’s symmetric; there’s no reason to emphasize only one side of the story.

The key is reduced carbon emissions, cap-and-trade gets you there and appears to be the only thing politically feasible. The world is getting warmer as we speak, it is time to act.

Oh, and one last thing, if we are really going to address this problem, the wealthy countries are going to have to help out emerging economies.

Gas Tax

The Oregonian focuses today on the gas tax. A gas tax is the right idea, but tying it to road improvements is dumb for two reasons. First, as we have just seen, dedicated funds tie government's hands (well, maybe not so much - see the Cultural Trust - but this just illustrates the point) and make government less effective and efficient. Second, a gas tax is an appropriate tax to address carbon emissions, less so for road wear and tear, so tying it to road maintenance and construction is, well, inappropriate.

I am sure there are lots of political reasons that this makes sense, but sometimes I wonder why legislative leaders don't try and act more boldly. How about instituting a 5% gas tax that goes into the general fund? This is a lot yes, and some mechanism for helping out less wealthy rural residents (who have to drive more) will have to be figured out, but it is a lot less than the $1 a gallon tax James Hansen recommends. Besides, look at the Measure 57 fiasco from the last election: Democrats were so worried about 61 they pushed 57 and now we have a costly mandate in a time when we are cutting essential services (like courts). We now know that 61 would have likely failed on its own.

Oregon wants to be serious about growing a green economy? Let's start be being the first to seriously address the carbon issue. Oh and hey, this is a perfect time to let drivers pump their own. Prices will fall and Dems can show that they are not always 'big government' proponents.

Oregon's Gas Tax: 90 Years Ago Today

On this very day in 1919, Oregon became the first state in the union to impose a per-gallon gas tax. [HT: Greg Mankiw]

Given the cost associated with the release of carbon into the atmosphere, it is time to consider a new gas tax that aligns the price of a gallon of gas with its true costs, both private and social. It is certainly better than a beer tax!