Tuesday, May 10, 2005

To Tax or Not To Tax
Today's Wall Street Journal website includes an op-ed concerning a proposal in Oregon to change the way vehicles are taxed for their use of public roads. Road taxes are currently collected principally in the form of the state and local taxes we pay on gasoline and diesel fuel. These vary from state to state, and, as Oregon has realized, from vehicle to vehicle as a function of fuel economy. Gas-thrifty cars such as hybrids pay much less in the way of road taxes than thirstier big sedans and SUVs, and a hydrogen fuel cell car would pay none at all. How can the federal and state governments reconcile their desires to use these taxes to promote fuel efficiency, while still raising the funds needed for road construction and repair?

Here are just a few of the competing issues:

  • Heavier vehicles wear out roads faster and should pay more.
  • Ultra-fuel-efficient cars need incentives to compensate for their higher purchase prices.
  • Geo-Greens assert that all of us should pay European levels of fuel taxes to discourage consumption and reduce greenhouse gas emissions.
  • Low-income drivers pay a disproportionate share of their earnings in fuel taxes.
  • States need to raise more general revenue funds to cover growing budget deficits

These are legitimate policy concerns, but it's hard to see how they can all be managed without a major change in the way we assess fuel taxes. Oregon's idea of using technology--in this case global positioning systems--to tailor the tax to the user's circumstances is attractive, notwithstanding the Journal's legitimate concerns about the accompanying loss of privacy. In changing the system, however, we should avoid adding to the complexity of the income tax system or creating an auditing nightmare. These criteria point in the direction of a pay-as-you-go approach, similar to that which Oregon is considering or the one already in effect in Singapore. What these systems give up in simplicity they can make up in fairness, by assessing taxes based on miles driven in a given state, rather than at the point of fuel sale, which may be out-of-state.

This is a complex issue and unlikely to be resolved soon, but it's important to realize that we have many new tools available for implementing creative solutions, including not just GPS, but also technologies such as ExxonMobil's Speedpass for communicating with the gas pump. But before we get to implementation, we need a stronger consensus on the fundamental purposes for which we collect these taxes. Achieving that will take longer than figuring out how to put the result into effect.

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